CPMI Professional Development, Inc

PROPERTY INSURANCE FUNDAMENTALS

by

CPMI Professional Development, Inc.

Copyright January 2020 First printed 1999

CPMI Professional Development, Inc., 691 W. Spring Creek Pl. #150 Springville, UT 84663e-mail: [email protected] Phone: 815-271-8200 Website: www.cpmipro.com

This textbook and the material herein are intended for the exclusive use of participants in the training programsof CPMI Professional Development, Inc. and are to be used in preparation for state insurance producer exams

and continuing education courses. Reproduction of this material for or distribution to individuals in a way not inkeeping with the sales and rental agreements of CPMI Professional Development, Inc. is strictly prohibited.

The proper use of the video and textbook program should be sufficient in aiding the student to pass the producerexam. Final results on the exam, however, will depend on the background and effort that each individual brings

to it, and therefore no guarantees can be given based on the content of this course alone.

This material is designed for educational purposes only and is not intended as financial or legal advice. If legalor other professional advice is required, the services of a competent professional should be sought.

Any reproduction of this textbook or any portion of it without the written permission of CPMI ProfessionalDevelopment, Inc. is strictly prohibited and will be prosecuted to the full extent of the law.

CPMI Professional Development, Inc. 2

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TABLE OF CONTENTSStudying for the State Insurance Producer Licensing Exam....................................................9Tips for Taking the Insurance Licensing Exam....9

Learning the Material Using the Text, Video, and Audio Resources......................9Answering the Review Questions and Taking the Practice Exams.......................10

Before Taking the Insurance Licensing Exam....11Section I – General Insurance Concepts..................12

Risk Management Key Terms.......................12Insurance..................................................12Indemnity.................................................12Loss..........................................................12Insurable Interest......................................12Risk..........................................................12Negligence................................................13Self-Insurance...........................................13Applicant..................................................13Insurer......................................................13Insured......................................................13Agent/Producer.........................................13Policy Owner............................................13Binder.......................................................13Certificate of Insurance.............................13Endorsement.............................................13Waiver and Estoppel.................................13Accident...................................................14Occurrence...............................................14Exposure...................................................14Hazard......................................................14Peril..........................................................14Maslow's Hierarchy of Needs...................14National Association of Insurance Commissioners (NAIC)............................14Tort...........................................................15Co-Insurance............................................15Deposit Premium......................................15Burglary....................................................15Robbery....................................................15Larceny.....................................................15Theft.........................................................15Mysterious Disappearance........................15Liability....................................................15Actual Cash Value....................................15

Personal Lines vs. Commercial Lines............15Methods of Handling Risk.............................15

Avoidance.................................................15Retention..................................................16Sharing.....................................................16Reduction.................................................16Transfer....................................................16

Elements of Insurable Risks..........................16Adverse Selection..........................................16Reinsurance...................................................16Indemnity/Pay on Behalf Of..........................17Limits of Liability..........................................17Deductible.....................................................17

Insurers...............................................................17Types of Insurers...........................................17

Multi-Line Insurance Companies.............17Stock Companies......................................17Mutual Companies....................................17Reciprocal Companies..............................17Risk Retention Groups..............................17Purchasing Groups....................................17Risk Retention Groups (RRG) vs. Purchasing Groups (PG)...........................18Fraternal Benefit Societies........................18Syndicate Insurers (Lloyd's Associations) 18Surplus/Excess Lines Insurers..................18Private vs. Government Insurers...............18

Admitted vs. Non-Admitted Insurers.............19Admitted Insurer/Authorized Insurer........19Non-Admitted Insurer/Non-Authorized Insurer......................................................19

Domestic, Foreign, and Alien Insurers..........19Domestic Insurer......................................19Foreign Insurer.........................................19Alien Insurer.............................................19

Financial Solvency Status (Independent Rating Services)........................................................19Marketing (Distribution Systems)..................19

Types of Agents/Marketing Systems........19Producers and General Rules of Agency.............20

Insurer as Principal........................................20Producer/Insurer Relationship.......................20

Agency Agreement/Contract....................20Insurance Agent vs. Broker......................20Professionalism and Ethical Conduct.......20Fiduciary...................................................20Captive Insurance Companies..................21

Authority and Powers of Producers...............21Law of Agency.........................................21Express Directive......................................21Implied Directive......................................21Apparent Directive...................................21

Responsibilities to the Applicant and Insured21Common Situations for Errors and Omissions.................................................21

Contracts.............................................................22Elements of a Legal Contract.........................22

1. Offer and Acceptance...........................22


2. Consideration........................................223. Competent Parties.................................224. Legal purpose.......................................22Mutual Agreement....................................22

Characteristics of an Insurance Contract........22Two Party Contracts.................................22Third Party Contracts................................23Contract of Adhesion................................23Aleatory Contract.....................................23Personal Contract......................................23Unilateral Contract...................................23Conditional Contract.................................23Contract of Indemnity...............................23

Legal Interpretations Affecting Contracts......23Ambiguities in a Contract of Adhesion.....23Reasonable Expectations..........................23Utmost Good Faith...................................23Representations/Misrepresentations..........23Warranties................................................23Concealment.............................................24Fraud........................................................24

Unfair Marketing Practices............................24Misrepresentation.....................................24Unfair Policy Replacement.......................24Discrimination..........................................24Rebating...................................................24Redlining..................................................25Boycotting................................................25Intimidation..............................................25Monopoly in the Insurance Business........25Misappropriation of Funds.......................25False Financial Statements.......................25

Section I – General Insurance Concepts Review Questions............................................................26

Section II – Property Insurance Concepts................29Principles and Concepts......................................29

Insurable Interest...........................................29Underwriting.................................................29

Function....................................................29Sources of Underwriting Information:......29Rating Types.............................................29Loss Ratio.................................................29

Rates..............................................................29Types of Rates..........................................29Loss Costs................................................30Components/Premium Determination.......30

Hazards..........................................................30Physical....................................................30Moral........................................................30Morale......................................................30Legal.........................................................30

Causes of Loss (Perils)..................................30

Named Perils vs. Open-Perils........................30Named Peril Policies................................30Open-Peril Policies...................................30

Direct and Indirect Losses.............................30Direct Loss...............................................30Consequential or Indirect Losses..............30

Liability.........................................................31Absolute/Strict Liability...........................31Vicarious Liability....................................31

Proximate Cause............................................31Blanket vs. Specific Insurance.......................31Basic Types of Construction..........................31

Basic Types of Construction.....................31Classifications of Construction.................31

Loss Valuation...............................................32Sentimental Value....................................32Resale Value.............................................32Actual Cash Value (ACV)........................32Replacement Cost.....................................32Functional Replacement Cost...................32Guaranteed Replacement Cost..................32Market Value............................................32Agreed Value............................................32Stated Amount..........................................32Valued Policy...........................................32Limit of Liability......................................32Fire Legal Liability...................................32

Policy Structure..................................................33(D-I-C-E).......................................................33Declarations and Definitions.........................33Insuring Agreement or Clause.......................33Conditions.....................................................33Exclusions and Endorsements........................33Additional/Supplementary Coverage.............33

Common Policy Provisions................................33Policy Period.................................................33Policy Territory.............................................33Deductibles....................................................33Other Insurance.............................................34

Non-Concurrency.....................................34Primary and Excess..................................34Handling of Claims: Pro Rata vs. Contribution by Equal Shares...................34Pro Rata....................................................34Contribution by Equal Shares...................34

Policy Limits.................................................34Restoration/Non-Reduction of Limits............34Co-Insurance.................................................34Vacancy or Unoccupancy..............................35Named Insured Provisions.............................35

Insured's Duties After Loss (Claims Handling):.................................................35


Appraisal and Arbitration.........................35Assignment...............................................35Abandonment...........................................35

Insurer Provisions..........................................35Duty to Defend.........................................35Liberalization Clause................................35Subrogation..............................................35Salvage.....................................................36Claim Settlement Options.........................36

Third Party Provisions...................................36Standard Mortgagee Clause......................36Loss Payable Clause.................................36No Benefit to the Bailee...........................36

Personal Property Lines......................................36State and Federal Laws, Regulations and RequiredProvisions...........................................................36

State Property and Casualty Insurance Guaranty Association....................................36Standard Fire Policy......................................37Cancellation and Non-Renewal.....................37

Private Residence.....................................37Commercial..............................................37Basic Property Insurance-Death of Named Insured......................................................37

Negligence.....................................................37Elements of a Negligent Act.....................37Four (4) Basic Categories of Individuals that Cannot Be Held Negligent.................38Defenses Against Negligence...................38Common Law Defenses............................38

Binders..........................................................38Insurance Consultation Services Exemption..39

Fair Credit Reporting Act...................................39Use of Credit Information..............................39

How Long Can Negative Information Stay on a Credit Report?...................................39

Fraud and False Statements................................40Those with Felony Records......................40Those Permitting/Complicit in These Actions.....................................................40Penalties...................................................40

Privacy Protection...............................................40Terrorism Risk Insurance Act (TRIA)................40

Purpose.....................................................40Definitions................................................40Requirement for Terrorism Risk Coverage to be Offered.............................................41Effect on Workers Compensation.............41

Extension Act of 2005...................................41Re-Authorization Act of 2007.......................42The Terrorism Risk Insurance Program Re-Authorization Act (TRIPRA) of 2015............42

Minimum Threshold and Certification.....42Program Trigger.......................................42

Section III – Dwelling Policy (DP)..........................44Characteristics and Purpose................................44

Eligibility..................................................44Coverage Forms: Perils Insured Against and Property Covered................................................44

Definitions................................................44Standard Fire Policy Perils............................44Extended Coverage Perils..............................44Basic Form (DP-1).........................................45Broad Form (DP-2)........................................45Special Form (DP-3)......................................45

General Exclusions.............................................46Conditions..........................................................46Selected Endorsements.......................................47

Special Provisions for States..........................47Automatic Increase in Insurance....................47Broad Theft Coverage....................................47Dwelling Under Construction........................47

Personal Liability Supplement............................47Ordinance or Law...............................................47Section III – Dwelling Policy (DP) Review Questions............................................................48

Section IV – Homeowners’ Policy...........................49Purpose...............................................................49Coverage Forms..................................................49

HO-1..............................................................49HO-2 – HO-8.................................................49

Broad Form/HO-2 (Named Peril).............49Special Form/HO-3 (Special Peril)/Open-Peril).........................................................49Homeowners Contents/Tenant/Renter’s Coverage/HO-4.........................................50Comprehensive Form/HO-5 (Special Peril/Open-Peril)...............................................50Condominium Unit Owner Form/HO-6....50

Market Value/ Modified Coverage Form HO-8.......................................................................50

Property and Liability Coverages.......................51Coverage A-Dwelling....................................51Coverage B-Other Structures.........................51Coverage C-Personal Property.......................51Coverage D-Loss of Use................................51Coverage E-Personal Liability.......................51Coverage F-Medical Payments to Others......51Additional Coverages....................................51

Perils Insured Against.........................................52Broad Form/HO-2, Named Perils.............52Special Form/HO-3, Special Perils/Open-Peril..........................................................52Homeowners Contents/Tenant/Renter's


Coverage/HO-4.........................................53Comprehensive Form/HO-5 (Special Peril/Open-Peril)...............................................53Condominium Unit Owner Form/HO-6....53

Additional Homeowners’ Notes..........................53Pair and Sets Clause.................................53Additional/Supplemental Coverages.........53

Exclusions..........................................................53Conditions..........................................................54

Personal Property Replacement Cost.............54Homeowners’ -2, -3, -5, and -8 Policies. . .54

Selected Endorsements.......................................56Special Provisions for States..........................56Limited Fungi, Wet or Dry Rot, or Bacteria Coverage........................................................56Permitted Incidental Occupancies/Business Pursuits..........................................................56Earthquake.....................................................56Scheduled Personal Property/Personal Article Floater............................................................56Home Day Care.............................................56

Windstorm or Hail....................................57Special Additional Amount of Insurance forCoverage A...............................................57Identity Fraud Expense Coverage.............57Functional Replacement Cost...................57Property Remediation for Escaped Fuel and Limited Lead and Escaped Liquid Fuel Liability....................................................57

Mobile Home Policies........................................57Restrictions on Mobile Home Policy Coverage...................................................57

Section IV – Homeowners’ Policy Review Questions............................................................58

Section V – Commercial Package Policy.................60Introduction........................................................60

Insurance Services Office (ISO)...............60Components of a Commercial Policy.................60

Common Policy Declarations........................61Interline Endorsements..................................61One or More Coverage Parts.........................61

Commercial Property..........................................61Commercial Property Conditions Form.........61Commercial Coverage Forms........................61

Building and Personal Property................61Condominium Association.......................62Condominium Commercial Unit-Owners. 62Builders Risk............................................62Business Income.......................................62Legal Liability..........................................62Extra Expense...........................................62

Causes of Loss Forms: Basic, Broad, and

Special...........................................................63Selected Commercial Property Endorsements.......................................................................63

Ordinance or Law.....................................63Spoilage....................................................63Peak Season Limit of Insurance................63Value Reporting Form..............................63Earthquake................................................64

Commercial Inland Marine.................................64Nationwide Marine Definition.......................64Commercial Inland Marine Conditions Form 64Inland Marine Coverage Forms.....................64

Accounts Receivable................................64Bailee's Customer.....................................64Commercial Articles.................................64Commercial Contractor's Equipment Floater..................................................................64Electronic Data Processing (EDP)............64Equipment Dealers...................................64Installation Floater....................................65Jeweler's Block.........................................65Signs.........................................................65Camera and Musical Instrument Dealers Form.........................................................65Valuable Papers and Records...................65

Transportation Coverages..............................65Common Carrier Cargo Liability..............65Motor Truck Cargo Forms........................66Transit Coverage Forms...........................66Released Bills of Lading...........................66

Equipment Breakdown Coverage.......................66Parts of an Equipment Breakdown Policy 66Coverages.................................................66

Covered Property...........................................66Conditions.....................................................67

Periodic Inspection and the Suspension Provision...................................................67

Equipment Breakdown Protection Coverage Form..............................................................67Selected Endorsements..................................67

Business Income – Report of Values........67Actual Cash Value....................................67

Farm Coverage...................................................68Farm Property Coverage Forms.....................68Coverage A....................................................68Coverage B....................................................68Coverage C....................................................68Coverage D....................................................68Coverage E....................................................68Coverage F....................................................68Coverage G....................................................68Coverage H....................................................68


Coverage I.....................................................68Coverage J.....................................................68Mobile Agricultural Machinery and EquipmentCoverage Form..............................................68Livestock Coverage Form..............................68Definitions.....................................................69Causes of Loss (Basic, Broad and Special)....69Conditions.....................................................69

Loss Conditions........................................69Exclusions.....................................................70Limits............................................................72Additional Coverages....................................72

Farm Umbrella Coverage.........................72Section V – Commercial Package Policy Review Questions............................................................73

Section VI – Business Owners Policy (BOP)..........75Characteristics and Purpose................................75

Eligible Businesses........................................75Ineligible Businesses.....................................75

Business Owners Policy (Section I) – Property. .76Coverages......................................................76Exclusions.....................................................76Deductibles....................................................76Loss Conditions.............................................76General Conditions........................................77Optional Coverages.......................................77

BOP Additional Coverages.......................77BOP Extended Coverages.........................77

Business Owners Policy (Section II) - Liability..78Business Liability..........................................78Medical Expenses..........................................78Conditions.....................................................78Exclusions.....................................................78

BOP Standard Form Exclusions...............78BOP Special Form Exclusions..................78

Definitions.....................................................78Business Owners Policy (Section III) – Common Policy Conditions...............................................79

BOP Cause of Loss Form and Coverages. 79BOP Additional Coverages.......................79BOP Extended Coverages.........................79

Selected Endorsements..................................79State Changes...........................................79Protective Safeguards...............................79Utility Services-Direct Damage Replacement Cost Coverage.....................79Utility Services-Time Element Coverage. 79

BOP Eligible Wholesale/Distributor Risks....79

BOP Eligible Processing or Service Businesses.......................................................................80Restaurants....................................................80Small Contractors..........................................80

Section VI – Business Owners Policy (BOP) Review Questions...............................................82

Section VII – Other Coverages and Options............83Aviation Insurance..............................................83

Aircraft Hull..................................................83Aircraft Liability............................................83

Ocean Marine Insurance.....................................83Major Coverages...........................................83

Hull Insurance..........................................83Cargo Insurance........................................83Freight Insurance......................................83

National Flood Insurance Program.....................83“Write Your Own” vs. Government Flood Insurance Policies..........................................83Eligibility.......................................................84

Flood Plain Determination and NFIP Qualification.............................................84Eligible Properties....................................84Non-Eligible Properties............................84

Coverages......................................................84Limits............................................................84

Other Policies.....................................................85Boatowners....................................................85Difference in Conditions................................85

Residual Markets (Including FAIR Plans)..........85Joint Underwriting/Joint Reinsurance Pool....85

Mine Subsidence Insurance................................86Federal Crop Insurance and the Risk Management Agency (RMA)...................................................86

Risk Management Agency (RMA)................86Section VII – Other Coverages and Options Review Questions...............................................87Practice Exam.....................................................88Answers to Review Questions............................94

Section I – General Insurance Concepts........94Section II – Property Insurance Concepts......95Section III – Dwelling Policy (DP)................95Section IV – Homeowners’ Policy.................96Section V – Commercial Package Policy.......96Section VI – Business Owners Policy (BOP) 97Section VII – Other Coverages and Options. .97

Answers to Practice Exam..................................98Property Puzzle Clues.......................................103Alphabetical Index............................................106


STUDYING FOR THE STATE INSURANCE PRODUCER LICENSING EXAMThe material needed to study for the insuranceproducer exam is divided into two sections: (1)Insurance Fundamentals and (2) State Law. Theinsurance fundamentals information is covered inthis textbook. The video and audio seminars (ifavailable) reinforce the insurance fundamentalsinformation. The state law information is in theseparate state law textbook. Regardless of yourstate, the state licensing exam requires that youthoroughly learn the material in these textbooks.There is no substitute for study.

It is recommended that you study at least 20 hoursper line of insurance you plan to get licensed in. Forexample, if you are studying for both Life andHealth, you would likely want to study for at least40 hours. Your individual needs may be more orless than what is recommended. We have found thatthe best way for you to learn this material is tofollow the steps listed below:

1. Study the material in this text, as well as thematerial in your State Law textDILIGENTLY. You must know the

material.2. Take the section review quizzes, practice

exam, and several tests in the ExamAdvantage online questions. If you scorepoorly, review and study the material in thetext again.

3. Take the certified Course Completion Examin the online Exam Advantage section (ifrequired in your state).

CPMI Professional Development, Inc. appreciatesthat you chose our course to aid in your study ofProperty Insurance Fundamentals. We also offerfundamental courses for the following:

1. Life Insurance2. Accident and Health Insurance3. Casualty Insurance

CPMI offers continuing education courses that youwill want to use as you progress in your career.Visit our website for a complete list of other coursesat: www.cpmipro.com

TIPS FOR TAKING THE INSURANCE LICENSING EXAM

Congratulations on choosing CPMI ProfessionalDevelopment, Inc. to help you pass the statelicensing exam! The insurance fundamentals andstate-specific textbooks contain the information youwill need to pass the licensing exam. Our video andaudio seminars are also available to enhance yourlearning experience, and the Exam Advantageonline testing helps review the material and lets youknow if you are ready to take the state exam.

This study program is not designed to be acomprehensive course in insurance. It is designed togive you the basic information you need to pass thestate licensing exam. The exam is not easy, but notethat you can, and should, pass the exam the firsttime you take it if you study and have a good graspon the material. The information in this course iscondensed and addresses the information you willneed to know for the exam without a lot of extramaterial, but you must know it well. What followsare tips to help prepare you for your state exam.

Learning the Material Using the Text, Video, and Audio Resources

1. Decide that you will pass the exam the firsttime you take it.

2. If you have the video, take notes whilewatching the seminar. Watch the programstraight through the first time so that youcan follow the flow of the information.

3. If you have the audio CDs, listen to themmultiple times to help the memorizationprocess.

4. Read and reread the text multiple times,section by section, to make sure youunderstand the material.

5. Repetition is important. Studies show thatadults generally learn best when they dividetheir study time into manageable chunks.Take a 10 minute break after reading eachsection of the material. Study diligentlyover the course of several days.


Answering the Review Questions and Taking the Practice Exams

1. Answer the review questions after the endof each section. If you get any of the reviewquestions wrong, review that section of thetext.

2. When you take the practice exam at the endof the text, try to answer questions withoutlooking at the text. If you don't know theanswer, turn to the text. When you gothrough the exam additional times, try notto turn to the text.

3. Go with your first instinct. Often times, thefirst answer you choose for a question is thecorrect one – if you are taking an educatedguess. Statistically, you are more likely tochange a correct answer to an incorrect oneif you go back and change your initialanswers.

4. Try not to spend too much time onquestions that you absolutely don't knowthe answer to. Choose your best guess.Eliminate whatever might be obviouslywrong, and move on to those questions youdo know. Remember, you are allowedabout 45 wrong answers on the state exam.

5. Read the questions carefully. It can help toreword the questions to make sure youunderstand what is being asked.

About half of the questions on the exam arerelatively straight forward facts. For example:

The concept of restoring someone to the samefinancial position in which they were before a lossis called:

A. InsuranceB. Indemnity *C. RiskD. Hazard

About a quarter of the questions require somedeductive reasoning. For example:

J and R insure their building for $140,000 under aBuilding and Personal Property Coverage Form.AB Bank holds a $70,000 mortgage on the building.When the building is destroyed by a propane gasexplosion, the insurance company discovers that thebuilding was used to store hot air balloons andtanks, when J and R had told them at time of theapplication that the building would be used to storeoffice furniture and files. How much will the insurerpay?

A. $70,000 to J and R and $70,000 to the bankB. $70,000 to J and R, nothing to the bankC. Nothing to J and R, $70,000 to the bank *D. Nothing. Premiums will be refunded to J

and R.

Other questions are asked in the negative. Watch forthis type of question:

Which of the following statements about thesubrogation clause is NOT correct?

A. It exists in many insurance contracts.B. It prevents double collection for a loss by

an insured.C. It allows larger claim payments than are

possible without it. *D. It places the ultimate burden of loss on an

at-fault third party.

There is temptation to mark the first answerperceived as correct, which is A. What the questionis asking, though, is for the answer which is notcorrect about the subrogation clause. Be sure to readeach question carefully and understand what thequestion is really asking. Make sure you answer thequestion that is asked. For example:

Which of the following is not an unfair claimspractice?

A. Attempting to settle a claim on the basis ofan altered application

B. Rebating *C. Failure to affirm or deny coverage within a

reasonable period of timeD. Requiring the submission of a preliminary

claim report

(Rebating is an Unfair Trade Practice, not an UnfairClaims Practice.)


Which one of the following is not covered by BodilyInjury and Property Damage in the CommercialGeneral Liability policy?

A. Premises and OperationsB. Contingent LiabilityC. Manufactures and ContractorsD. A customer falls down some stairs on the

company's premises and breaks a leg. *

(This is covered by Medical Expense Coverage, notby Bodily Injury and Property Damage.)

BEFORE TAKING THE INSURANCE LICENSING EXAM

The day before the exam, make sure you have yourprelicense course completion certificate (if requiredby your state) in an easily accessible place to takewith you to the exam. Also, be sure to bring twoforms of ID with you to the test center, with at leastone being a picture ID. Familiarize yourself withhow to get to the exam site so you will not bescrambling before you need to leave for the exam.

Get a good night's rest the night before the exam.Studies also show that a meal with protein helpspeople stay more alert. Avoid candy or a meal highin sugar or fat before the exam, as they tend to makeyour mind less alert.

Eat a light meal before going to the test. Do not eatmany carbohydrates, as they tend to make you tired.

Arrive at the exam site 15-30 minutes before yourexam is scheduled to begin so you will be restedand at ease. Arriving late can make you nervous, orit may cause you to miss your exam completely.

You may not take certain items into the test. Youwill need to put coats, purses, cell phones, books,any calculators, and some types of watches into alocker before entering the test center. Anything thatmight have answers in it or cover answers thatmight be written on your person should not be takento the exam site.

When you get to the cubicle to take your test, therewill be a computer and material for notes. Take afew minutes to clear your mind, and write downsome information with which you have somedifficulty. This will help to recall information whileyou are taking the test. You will need to turn any

material on which you wrote notes into the examproctor upon finishing the test and leaving thefacility. Do not take any notes with you from thetesting center.

When you start the test program, you will have theopportunity to take a review program that will showyou how to operate the testing program. You canmark questions for review at the end of your test,review all questions, or close the exam. Once youclose the exam, whether to finish or move on toanother test, you will not be able to return to theclosed test. If taking more than one exam, you willbe given the opportunity to pause the program andtake a restroom break. You may not look at anymaterials to review test information, and you maynot take any information into the restroom with you.

There will be monitors who walk around thefacility. Don’t let this make you nervous; themonitors are verifying everyone is taking the examwithout assistance. There may also be mirrorsaround the facility, so the monitors can better viewtest takers’ work spaces. Don’t let this make younervous either.

As you leave the test center, you will be given yourtest results. If you did not pass the test, or any partof it, ascertain what your score was and schedule asecond attempt within a few days. This will allowyou to review the study material without forgettingwhat you had already learned prior to your firstattempt at the state exam.

When you pass the test, CONGRATULATIONS!You will now be able to apply for your insuranceproducer license per your state's requirements.


Section I – General Insurance Concepts

Risk Management Key Terms

InsuranceInsurance is a contract that binds the insurer toindemnify (compensate) the insured againstspecified types of loss in return for money(premiums). Insurance is designed to protect thefinancial well-being of an individual, company, orother entity against the financial risks associatedwith unexpected loss. In exchange for the premiumpayments from the insured, the insurer agrees to paythe policyholder upon the occurrence of specificevents. In most instances, the insured pays for aportion of each loss in the form of a policydeductible, and the insurer pays for the balance ofthe loss up to the policy limit of insurance.

Law of Large NumbersThe Law of Large Numbers is a theory that statesthat it is more likely to predict a particular outcomeas the number of units in a group increases. Thebigger the observed sample, the more accurate thepredicted results will be. It is the scientificallycalculated pooling, growth, and distribution ofmoney to satisfy two (2) different objectives:

1. The paying of benefits to survivors ofsomeone who dies while covered

2. The providing of distribution of benefits bylump sum or with guaranteed lifetimepayments

Insurance ratings are based on the Law of LargeNumbers. For example, an insurer is more likely topredict the number and types of auto insuranceclaims as the number of auto insurancepolicyholders increases.

IndemnityIndemnity is the underlying principle of insurance,which is restoring an insured to the same financialposition that existed before a loss occurred.

LossLoss is the source of a claim for damages under aninsurance policy. Losses cause a financial loss to theinsured due to loss of property, a liability fromsomething the insured did to someone else, or theloss due to the loss of a loved one, or losses due to

medical problems. Loss arises from the occurrenceof an event that is insured by a policy.

Direct Physical LossA direct physical loss is a loss in which damageoccurs as the result of an occurrence without anintervening cause, such as hail damage to the roofof a house.

Intervening CauseAn intervening cause is an event that interrupts thechain of causation by providing an independentcause of the final result.

Indirect or Consequential LossAn indirect or consequential loss is a loss in whichdamage occurs as the result of a direct loss, such asthe insured's increase in expenses when required tostay in a hotel because a hail-damaged home cannotbe lived in.

Insurable InterestInsurable interest is the concept that insurance canonly be purchased when the applicant has a potentialfor financial loss – if the insured person died, or ifthe insured items were destroyed or not in theirpossession. In Property and Casualty insurance,insurable interest must be present at the time of loss,as well as at the time of application. In Lifeinsurance, insurable interest is only required at thetime of application.

RiskRisk has two (2) meanings: (1) The property orparty that is insured, and (2) The uncertainty of loss.

Pure RiskA pure risk is a situation that only involves thechance for loss, or no loss, such as propertyownership.

Speculative RisksSpeculative risks are situations that involves thechance for either a loss or a gain, such as gambling.

Relationship Between Risk and PremiumThere is a direct correlation between risk andpremium. The greater the risk, either in value or inpotential for a loss or claim, the greater thepremium will be.


NegligenceNegligence is conduct that is culpable because itmisses the standard required by law of a reasonableperson in protecting others or the interests of othersagainst risky or harmful acts of other people. It is:

1. The failure to do something that areasonable person would do OR

2. Doing something that a reasonable personwould not do

Self-InsuranceSelf-Insurance refers to making financialpreparations to meet risks by setting aside sufficientfunds in advance to meet estimated losses, ratherthan purchasing an insurance policy.

ApplicantThe individual who applies for insurance is theapplicant.

InsurerInsurer is another name for an insurance company.

InsuredAn insured person is:

1. Any member of the insured household whois a relative or is under 21 years of age.

2. A child or parent living with the insured,regardless of their age.

3. Any other member of the insured householdwho is under the age of 21.

There are three (3) types of insureds:1. Named Insured: This is the person(s)

listed as an insured in the Declarationspage.

2. First Named Insured: This is the firstinsured listed and the person to whom theinsurer sends correspondence such asrenewal notices or policy changes.

3. Additional Insured: This is the individualor entity who, other than the named insured,qualifies as an insured under the policy.This is especially the case if there is aspecific interest involved, such as amortgage or a business arrangement.

Note: The definition of Insured has been expandedunder the Homeowners’ policy to include “otherpersons under the age of 21 and in your care or thecare of a resident of your household who is yourrelative.”

Agent / Producer An individual who is state-licensed to solicit andsell insurance for one or more insurance companiesis either an agent or a producer. He/she must beauthorized by an insurer (known as the principal) toact on its behalf.

Policy OwnerThe policy owner is the person who:

1. Applies for a policy.2. Takes responsibility for premium payment.3. Has the right to cash values, dividends, and

policy proceeds.4. Has the ability to change beneficiaries and

other policy particulars.

BinderA binder is a written or oral contract made by anagent that puts a policy immediately but temporarilyinto effect for a specified period of time, from thetime initially bound until accepted or canceled bythe insurance company, that includes all the termsof and endorsements to the policy. The minimumthat an agent needs in order to put a binder intoeffect is the insured's promise to pay the premiumwithin a certain time frame. All policy terms andconditions are in force until a policy is issued orcoverage is declined by the insurer on whom thebinder was written. Agents must be careful not toexceed their binding authority, as the company isliable for the entire risk until reviewed and acceptedor canceled by the insurer.

Certificate of InsuranceA document issued by an insurance company/brokerthat is used to verify the existence of insurancecoverage under specific conditions granted to listedindividuals is known as a certificate of insurance.

EndorsementAn attachment to a document that amends or adds toit is known as an endorsement. Typically, it is anadded provision to an insurance policy. Also referredto as a "rider."

Waiver and Estoppel WaiverThe voluntary abandonment of a known or legalright or advantage is a waiver.


Waiver of RightsA waiver of rights is the intentional relinquishmentof a known right. The insured would need to sign aform if they are relinquishing their rights in a policyor claim settlement.

EstoppelThe idea that once a fact has been admitted to betrue by a previous action it can no longer be deniedto be true is known as estoppel.

AccidentAn accident is an unforeseen and unintended eventthat is identifiable as to time and place.

OccurrenceAn event, including continuous and repeatedexposure to conditions, which results in bodilyinjury or property damage neither expected norintended from the standpoint of the insured isknown as occurrence.

ExposureExposure is the condition of being at risk forfinancial loss due to hazards or unforeseen events.

HazardA hazard is a condition that increases the chancefor loss or the severity of loss. There are four (4)types:

1. Physical – Physical hazards are created bythe use, condition, or occupancy of property,such as damaged steps or worn auto tires.

2. Moral – Moral hazards are created by theinsured's habits, such as dishonesty orcriminal activity. It is a situation in whichone party gets involved in a risky eventknowing that it is protected against the riskand the other party will incur the cost.

3. Morale – Morale hazards are created bythe attitudes of the insured, such asindifference because the insured knowshe/she is insured. An example would be notmaking sure doors and windows are lockedbefore leaving home. If anything is stolen,the insured doesn’t worry because it’sinsured. While a Moral hazard describes aconscious change in behavior to try tobenefit from an event that occurs, a Moralehazard describes an unconscious change ina person's behavior when he/she is insured.

4. Legal – Legal hazards are created whenlegal authority in a certain situation isunclear or unsettled. These can arise fromchanges in the law or from court rulings. Anexample would be a change in the buildingcode requiring new construction to usedifferent materials.

PerilPeril is the cause of a loss or the event insuredagainst. Examples: fire, lightning, theft, etc.

1. A Named Peril Policy is a policy that onlyprovides insurance for perils that arespecifically listed or named in the policy.

2. An Open-Perils Policy is a policy thatprovides insurance for all perils exceptthose specifically excluded in the policy.

Maslow's Hierarchy of NeedsThe five (5) primary needs that every individualstrives to satisfy (in ascending order) are:

1. Physiological Needs2. Security3. Affiliation4. Esteem5. Self-Actualization

This hierarchy of needs is important for theinsurance producer to know because customers needto have one level of need met before worrying aboutthe next. For instance, customers usually need tohave the physiological need for food and shelter metbefore you would approach them about buying lifeinsurance for charitable causes.

National Association of Insurance Commissioners (NAIC)All state insurance directors or commissioners aremembers of the National Association of InsuranceCommissioners, also known as the NAIC. Thegroup has no official legislative powers.

The NAIC tries to standardize insurance lawsthroughout the country by recommending modellegislation in each commissioner’s home state.

Individually the commissioners or directors do notmake any laws, they enforce insurance laws in theirown states. They do this by determining the types ofpolicies that can be sold in their state, bydetermining the amounts of surplus that insurers


must maintain, by investigating complaints ofagents and insurance companies, and by examiningagents and insurers.

TortIn common law jurisdictions, a tort is a civil wrongthat unfairly causes someone else to suffer loss orharm resulting in legal liability for the person whocommits the tortious act. Although crimes may betorts, the cause of legal action is not necessarily acrime, as the harm may be due to negligence whichdoes not amount to criminal negligence. Thevictims of the harm can recover their loss asdamages in a lawsuit. In order to prevail, theplaintiff in the lawsuit must show that the actions,or lack thereof, was the legally recognizable causeof the harm. A person may be found not guilty in acriminal case, but can still be found guilty or legallyliable in a lawsuit.

Co-InsuranceCo-insurance is another cost containment feature ina Property (usually commercial) insurance policy.The co-insurance clause requires a specified amountof insurance based on the value of the insuredproperty. If the insured insures the property for lessthan this amount, he or she must share in apercentage of a loss to the same percent that theproperty is underinsured at the time of the loss. Itencourages insuring of property to the properamount.

Deposit PremiumA deposit premium is an initial or provisionalpremium required by an insurer that is based onestimated information and is subject to an audit todetermine the actual risk amount and a premiumadjustment after the end of the policy period. Afteradjustment, the premium becomes the final premium.This is most often used in Workers Compensationand Liability insurance.

BurglaryBurglary is breaking and entering (into a building,safe, etc.) with felonious intent and with visiblesigns of forced entry – for example: a brokenwindow, jimmied door, or blown safe. (Study tip:Burglary. Building. Both start with B.)

RobberyRobbery is the taking of personal property ofanother by force or fear of force.

LarcenyLarceny is the taking or removal of another'spersonal property with the intent to permanentlydeprive them of it. This could be burglary orrobbery, but if property is taken without force, fearof force, or breaking and entering, it is still larceny.Walking into someone's house through an unlockeddoor and picking up jewelry is an example oflarceny.

TheftTheft is the unlawful taking of the property ofanother, including burglary, robbery and larceny.

Mysterious DisappearanceMysterious disappearance means that personalproperty is missing, but there is no provable causefor its disappearance; the property might have beenlost or stolen.

LiabilityLiability is a legally enforceable debt or obligation.

Actual Cash ValueThe replacement cost at the time of loss, minusdeprecation, is known as actual cash value.

Personal Lines vs. CommercialLines

Property insurance and Casualty insurance can befurther divided into Personal and Commercial lines.Personal lines includes Homeowners’, Personal Autoinsurance, and other related things owned byindividuals. Commercial lines includes BusinessProperty and Liabilities (a loss caused by thebusiness to others), Commercial Auto (Trucking,Business Auto) owned by businesses, and alsoincludes Commercial Crime coverages.

Methods of Handling RiskWhen managing risk, an insured may choose toavoid, retain, transfer, share, or reduce risk.

AvoidanceAvoidance is refraining from engaging in activitythat might give rise to risk, such as not owning ordriving a car to avoid the risk of car accidents.


RetentionRetention is assuming responsibility for loss. Inthis case, the individual will be totally responsiblefor paying losses. Retention is the most commonmethod of handling risk, typically in the form ofdeductibles or choosing not to purchase insurance.

SharingSharing is spreading risk among several entities ora large number of people, such as by insurancecompanies or physicians.

ReductionReduction decreases the chance for loss byremoving or reducing hazards that might cause anaccident to happen, such as wearing safety gogglesor installing safety railings around a dangerous area.

TransferTransfer means shifting the risk for loss from oneparty (the insured) to another (the insurer), eitherthrough the purchase of an insurance policy orissuance of another contractual agreement (e.g., holdharmless agreement).

Elements of Insurable Risks

To be considered insurable, a risk must:1. Be accidental and due to chance.2. Be measurable with respect to value.3. Be predictable.4. Be one unit in a large enough pool of units

that the law of large numbers allows for theaccurate prediction of loss.

5. Not be catastrophic in nature.6. Generate a rate that is reasonable and

affordable.

Pure risks are insurable; speculative risks are notinsurable.

Adverse Selection

Adverse selection is the tendency of persons whopresent a greater-than-average degree of risk for lossto apply for, or continue, insurance to a greater

extent than persons with average or less-than-average degree of risk for loss. Normal risks mayseek insurance elsewhere, possibly at a lower cost.If a person becomes sick, he/she may be unable toget insurance elsewhere and are, therefore, morelikely to maintain the current coverage.

Reinsurance

Reinsurance is insurance sold and purchasedbetween two (2) insurance companies for the purposeof transferring and sharing risk, usually catastrophicrisk or losses in excess of a specific amount (e.g.,$500,000 or $10,000,000).

ReinsurerA reinsurer is the insurer selling reinsurance toceding insurers.

Ceding InsurerA ceding insurer is the insurer buying reinsurancefrom a reinsurer. The ceding insurer issues primarypolicies of insurance to individuals and/orbusinesses.

Reinsurance Contract or TreatyTwo (2) types of reinsurance contracts are sold:

1. Facultative Reinsurance: The cedinginsurer offers individual risks to thereinsurer, and the reinsurer may choose toaccept or reject each individual risk.

2. Treaty Reinsurance: The reinsurer writescoverage for one or more lines of insuranceissued by the ceding insurer based on termsstated in the reinsurance contract. Treatyreinsurance continues in force unlesscanceled by one of the parties of the treaty,and the reinsurer cannot reject individualrisks.

The following types of reinsurance apply primarilyto Property and Casualty insurance, but are thesubject of all licensing exams:

1. Excess of Loss Reinsurance: The reinsureronly pays for losses that exceed a certaindollar amount (e.g., $500,000).

2. Proportional Reinsurance: the reinsureronly pays a share of every reinsured loss(e.g., 90%).


Indemnity/Pay on Behalf OfIndemnity can be thought of as pure and simpleprotection from a loss by being reimbursed or paid asum to make you whole after you incurred a cost orexperienced a loss.

On Behalf Of refers to someone else beside theperson experiencing the loss paying for that lost orcost in your stead. It is paid for you instead of youpaying for it directly.

An example might be where your insurancecompany makes a payment to the an entity that youwere financially responsible to. This indemnifiesthem on your behalf rather than you paying themdirectly for it yourself.

Limits of Liability

Limits of Liability means the maximum amount theinsurer will pay for loss or damage covered by aninsurance policy.

Deductible

A deductible is the monetary amount an insuredmust pay before the insurer will begin making losspayment. A deductible is a form of risk-sharing andcost containment. Most forms of insurance containstandard deductible amounts (e.g., $500) and theinsured may choose higher or lower deductibles. Asa deductible increases (e.g., the insured pays formore of the loss), the policy premium decreases.

INSURERS

Types of Insurers

Multi-Line Insurance Companies Multi-line insurance companies are insurers thatwrite more than one (1) line of insurance.

Stock CompaniesInsurers organized under the laws of the state inwhich they are incorporated that are owned byshareholders who elect officers and directors andshare in profits through stock growth and dividendsare called stock companies.

Mutual CompaniesCompanies of this type have no capital stock andare owned by policyholders who share profitsthrough dividends and who can attend and vote atcompany meetings. Mutual insurers are furtherdivided into the following:

1. Assessment Mutual Insurers share lossesamong group members. In a pureassessment group, no premium is paid inadvance, but losses are assessed to eachmember as they occur. In an advancepremium assessment group, premiums arepaid at the beginning of each assessmentperiod and any claims are paid from thesepremiums. If there are more claims than

premiums paid in, then additionalassessments are levied against eachmember. If money is left at the end of theperiod, then the money is returned to thegroup members.

2. Non-Assessable Mutual Insurers charge afixed premium and the policyholders cannotbe assessed further. Reserves and surplusare maintained to provide payment of allclaims.

Reciprocal CompaniesGroups that exchange insurance on each other arereciprocal companies.

1. Members appoint and empower anattorney-in-fact that legally bindsmembers to insure each other.

2. Members share in any profits through lowerpremiums, or in any losses by assessments.

3. Insured members are called subscribers.

Risk Retention GroupsA mutual insurance company that insures people inthe same profession or business is known as a riskretention group.

Purchasing GroupsA purchasing group is not an insurance company.Rather, a purchasing group can be any group of


persons with similar or related liability risks whoform an organization whose purpose is to purchasecommercial liability insurance on a group basis. Nospecific requirements are imposed regarding thelegal structure of a purchasing group. In the case ofa trade association, a simple resolution of the boardauthorizing the organization's officers to makearrangements to purchase commercial liabilityinsurance on a group basis would be sufficient toestablish the purchasing group. Members of apurchasing group must be in similar or relatedbusinesses which exposes them to similar or relatedliability risks.

Risk Retention Groups (RRG) vs. Purchasing Groups (PG)Both risk retention groups (RRGs) andpurchasing groups (PGs), require members to behomogeneous, (i.e., engaged in similar businessesor activities that expose them to similar liabilities).

The primary difference between RRGs and PGs isthat RRGs retain risk while PGs do not. PGspurchase insurance from an insurer, who issues thepolicies and serves as the risk bearer. RRGs, asinsurers, issue policies to their members and bearrisk. Another key difference between the two (2)entities is that RRGs typically require members tocapitalize the company whereas PGs require nocapital.

Fraternal Benefit SocietiesMembership is based on religious, ethnic, ornational lines, and noted primarily for social andcharitable functions. Fraternal Benefit Societies,also called Fraternals, are societies, orders, orsupreme lodges, with no capital stock that may ormay not be incorporated. Fraternal BenefitSocieties:

1. Are conducted solely for the benefit ofmembers and their beneficiaries, and are notfor profit.

2. Operate on a lodge system with ritualisticform of work.

3. Have a representative form of government.4. Provide benefits in accordance with their

charter.5. Started offering Life insurance for the

benefit of their poorer members on anassessment basis, but have expanded tooperate the same as other insurers today,though they still offer insurance only tomembers or their families.

Syndicate Insurers ( Lloyd's Associations ) Syndicate insurers are not true insurancecompanies.

1. They provide a place for members to meetand transact the business of insuranceindividually or as groups through asyndicate manager.

2. They provide assistance in gatheringunderwriting information and handlingclaims and disputes among syndicatemembers.

3. Members are individually and wholly liablefor all risks they accept, with no limitationson liability. This lack of liability limits isActual Cash Value

4. Replacement cost at time of loss minusdepreciation is the primary reasonsyndicates are not widespread today.

5. An example of this is Lloyd's of London.

Surplus/ Excess Lines Insurers These types of insurers provide insurance notoffered through admitted insurers.

1. The full amount or type of insurance mustnot be available through admitted insurers.

2. Financial consideration cannot be adeciding factor.

3. While a surplus/excess lines insurer isselling insurance in a state, if the coverageis offered by an admitted insurer, the non-admitted insurer must stop selling insurancein the state, or apply to become an admittedinsurer.

Private vs. Government Insurers While private insurers offer coverage for morecommon risks, there are some situations that areunacceptable to them. If there is the potential forspecial, great, or catastrophic risks, thosepossibilities are usually indemnified by State andFederal Government insurers.

The State or Federal Government sometimes covercertain types of insurance that private insurerscannot or will not insure. Insurers in each state arerequired to participate in shared or involuntarymarkets. These markets provide coverage for high-risk insurance applicants that do not meet normalunderwriting standards.

Some states require that these high-risk applicants


be assigned to individual insurers on apredetermined basis while others require that lossesfrom these individuals be shared.

1. Property insurance FAIR plans provideinsurance to property owners in inner-cityand high-risk areas who are unable to obtaininsurance through normal market channelsbecause of property location or othersituations over which they have no control.If turned down in the normal market, theproperty owner may apply for insurancethrough the state's FAIR plan that followsits own guidelines to insure the property.

2. Examples of Federal Government insuranceinclude Social Security, Medicare, Floodinsurance, and Federal Crop andcCrimeinsurance. State governments sometimesoffer competitive funds that compete withprivate insurers, or monopolistic funds thatwill not allow insurers to compete in certainareas. One such example of this is that somestates (North Dakota, Ohio, Washington,and Wyoming) provide WorkersCompensation insurance benefits.

Admitted vs. Non-AdmittedInsurers

Admitted Insurer /Authorized Insurer An insurer authorized by a state's insurancedepartment to transact business in that state isknown as an admitted insurer or an authorizedinsurer.

Non-Admitted Insurer /Non- A uthorized InsurerInsurance companies not authorized to transactbusiness in a state because they either didn't seekadmission to the state or failed to comply with staterequirements are known as non-admitted insurersor non-authorized insurers.

Domestic, Foreign, and AlienInsurers

Domestic InsurerDomestic insurers are insurers that transactbusiness in the state where they are chartered.

Foreign InsurerA foreign insurer is an insurer transacting businessin a state but that is chartered under the laws of adifferent state or one of the U.S. territories.

Alien InsurerAn alien insurer is an insurer organized under thelaws of a jurisdiction outside of the United States orits territories.

Financial Solvency Status(Independent Rating Services)

Independent evaluation services provideinformation on companies such as financialstrength, management caliber, and efficiency ofoperation.

1. They publish guides which analyze almostall Property and Liability business insurers.

2. They review underwriting results,management, adequacy of reserves forliabilities that are not discharged, adequacyof policyholder reserves to absorb shocklosses, and soundness of investments.

If properly used, these rating services help avoiddelinquent insurance companies. Ratings should bechecked over a period of years to verify trends forthe companies. A.M. Best and Weiss Research aretwo (2) companies that have guides availablethrough most public libraries.

Marketing (Distribution Systems)

Types of Agents/ Marketing Systems Exclusive/Captive Agents or ProducersAgents appointed by an insurer to represent thecompany by selling and servicing policies on itsbehalf, representing only one company, are knownas exclusive/captive agents or producers.

Independent Agents or BrokersIndependent agents or brokers are agents thatrepresent several insurers and can, therefore, offervarious premiums to the customer.

Nonresident AgentAn agent authorized to write business in a stateother than the one in which he or she lives is anonresident agent.


Direct WriterA direct writer is an insurer that deals directly withthe insured through a salaried representative orcaptive/exclusive agent rather than throughindependent brokers.

Direct Mail/Direct ResponseDirect mail and direct response policies aremarketed from the company's home office ratherthan through agents. Marketing is done throughdirect mail, internet, newspapers, magazines, radio,or TV.

PRODUCERS AND GENERAL RULES OF AGENCY

Insurer as PrincipalInsurance companies are principals of theinsurance agent, which means that the insurerempowers the agent to act as a representative of theprincipal (the company). Legally, the acts of theagent are considered to be the acts of the principal,so the agents' acts extend the insurance company'sliability.

Producer/Insurer RelationshipAgency Agreement/ContractThe relationship between the insurer and theproducer is defined in the agency agreement. Thiscontract details the responsibilities of both parties.In return for commission or salary paid by thecompany, and the authority to represent the insurerin conducting business on the company's behalf, theproducer:

1. Is first and foremost the representative ofthe insurance company and has an ethicalobligation to follow the rules of the insurer,to submit applications only for those risksthat the insurer deems appropriate, and toservice the policies of company customers.He or she is paid commission or salary bythe company and is given authority torepresent the company in conductingbusiness on the company's behalf.

2. Acts as the representative go-between forthe company and the insured, with primaryresponsibility to the company as theprincipal, while treating the customer in afair and ethical manner.

3. Provides correct information to thecustomer about policy coverages.

4. Processes any requests for or cancellationsof coverage in a timely fashion.

5. Has no authority beyond that which theinsurer gives him or her.

Insurance Agent vs. BrokerSuperficially, an insurance agent and a brokerlook identical as both of them are selling insurancepolicies. The main difference between the two (2)entities lies in the relation these persons have withthe insurer and the insured. An insurance agent isdesignated by the insurance company to sell itsproducts by convincing people to buy thecompany's policies, whereas a broker worksindependently and matches the needs of a clientwith the products available with any of theinsurance companies. Both need a license to carryout their business in a state and both getcommission from the company.

Professionalism and Ethical ConductWhen acting as representatives of their companies,agents are expected to have and exhibit professionalcompetence that can be shown through:

1. A broad education and background.2. Strong insurance-specific knowledge and

continued education in the insurance field.3. Membership in professional societies and

associations.4. Ethical behavior, including honesty,

integrity, acting in good faith, and theknowledge of and obedience to insuranceindustry regulations and codes.

5. Concern over customers’ welfare over one’sown.

FiduciaryAn individual who holds a position of public trustand confidence is a fiduciary. Insurance agents arefiduciaries to both the companies they represent andtheir clients. As fiduciaries, agents are expected tobe professional and to act ethically.

Financial Responsibilities1. Money received in return for an insurance

policy or binding of insurance coverage is


held in a fiduciary capacity and may not beused by the agent for any other purpose.

2. Many states require producers to maintain aPremium Fund Trust Account (PFTA) ifthey hold premium money for any length oftime before giving it to the insurer. ThePFTA must be separate from personal orother business accounts.

Captive Insurance Companies A captive insurer is a company whose business isprimarily supplied and controlled by the one interestor group of related interests that set the company upto insure their assets and operations. In this type ofsituation, coverage can usually be provided at alower cost than that which is available in the generalinsurance market.

A captive insurance company may be a non-admitted, non-resident, or foreign insurer, and thereare mainly two (2) types:

1. Pure captive companies, which are whollycontrolled by one parent

2. Group captive companies, which areinsurers owned by a number of otherwiseunaffiliated firms that are in the same typeof business.

Authority and Powers ofProducers

Law of AgencyAccording to the Law of Agency, an agent's actionsare regarded the same as if the company itselfperformed the action. The agent is a representativeof the insurer and acts for the insurer. As such, theinsurer becomes partially liable for the actions ofthe agent. It is the insurer's responsibility to monitorthe compliance of its agents in order to verify thatthey follow all required laws. An agent representsthe company through several directives.

Express DirectiveExpress directive is when authority is expresslygiven to the producer, either orally or in writing inhis/her contract. Examples of this include: thecountersigning and delivering of policies. Expressdirective clauses are such things as scale ofcommissions, ownership of contracts sold, andcontract cancellation procedures.

Implied Directive The doctrine of “ostensible authority,” or implieddirective, gives agents unwritten authority toperform incidental acts that the public assumes theagent to have. Example: Exclusive Property andCasualty agents can bind insurance coverage. If theagent binds a particular risk, the company is boundto that risk and must pay for any losses until itcancels the contract.

Apparent DirectiveApparent directive is neither expressly given norimplied, but exists because the agent has used it inthe past without the insurer stopping him or herfrom doing so, or it is authority that a reasonableperson would assume an agent to have. If the agenthas paid minor claims in the past and beenreimbursed by the insurer, it is apparent he or shehas the authority to do so.

Responsibilities to the Applicantand Insured

For risks covered by the policy, the insurer mustpay all sums up to the policy limits that the insuredbecomes legally liable to pay; in other words, theinsurer pays the lower of the claim (loss) or thepolicy limits. Deductibles will be applied to anyproperty claims, but there is no deductible formedical or liability claims. The producer hasresponsibilities that are owed to applicants and/orinsureds. He or she will:

1. Act only in the best interests of his or herclients.

2. Only provide accurate and up-to-dateinformation and advice to customers aboutpolicies and coverages.

3. Aid with the accurate completion ofapplications and any other accompanyingdocumentation.

4. Service policies as necessary and accordingto the desires of the insured.

5. Process any coverage changes orcancellations.

6. Act only within the scope of authority thathas been given them by the insurer.

Common Situations for Errors and Omissions

1. Failure to adequately explain policycoverages or claim procedures


2. Unfairly/inadequately comparing policycoverages when replacing an existing policy

3. Failure to get the policyholder's signatureupon delivery

4. Failure to explain changes made to thepolicy during underwriting

Note: Obtain all necessary signatures and copies ofdocumentation, summaries, and examples. Allconversations should be documented.

CONTRACTS

Elements of a Legal Contract

Insurance ContractA contract is a binding agreement between two (2)or more parties, legally enforceable to do certainthings. In an insurance contract, the insured agreesto pay a monetary premium and abide by certainagreements in exchange for the insurer agreeing toindemnify the insured in case of loss.

There are four (4) principle elements that must be inevery legal contract.

1. Offer and Acceptance An insurance policy is the written statement of theterms of the contract. There must be both an offerand an acceptance.

During the offer period the applicant submits anapplication along with the correct premium. Duringthe acceptance period the insurer issues the policy.

If the applicant does not submit money with theapplication, it is not an offer, but it is an invitationto the insurer to make an offer, and the agent cannotbind coverage.

2. Consideration The applicant's consideration is the premium, andthe insurer's consideration is the promise toindemnify the insured in the event of a loss.3. Competent Parties A party to a contract is one who holds theobligations and receives the benefits of a legallybinding agreement. When two (2) parties enter intoan agreement, there are two (2) distinct roles eachplay: the promisor and the promisee.

When a contract benefits others who are not party tothe agreement, these third-party beneficiariesreceive benefits of a contract, while not owing anyobligation.

All parties concerned must have legal capacity toenter into a contract. This is best shown by definingthose who do not have legal capacity to enter into acontract. This includes:

1. Minors2. Those legally declared incompetent3. People under the influence of drugs or

alcohol

In the case of minors, the insurer may be required touphold the terms of the contract while minors maynot be.

4. Legal purpose The insurance policy owner must have an insurableinterest in the property or person being insured.Insurable interest is defined as having a financialinterest wherein the insured could lose financialposition if the property were damaged or destroyed,or if the person was injured or died.Mutual AgreementAny changes the insurer makes must be agreed to inwriting by the insured, or the policy will not beissued.

Characteristics of an InsuranceContract

Two Party ContractsInsurance contracts are generally between two (2)parties: (1) The insured, and (2) The insurer. Theinsured suffers a loss of property, health, or life, oris liable for someone else's losses. The insureragrees to indemnify the insured for such financialloss. Insurers may pay money to a third party towhom the insured is liable (the insureds haveliability because they caused financial damage to


another, or owe compensation for services renderedfor repair of property or health).

Third Party ContractsSometimes a third party contract is created toindicate that the performance of the contract willresult in a benefit to a person that did not sign thecontact. Benefits to third parties are usuallyexpected and left out of contracts, unless one of thesigners wants to designate a specific benefit to aspecific third party. To be able to enforce thecontract, a third party must be able to prove that thecontract was drawn for its benefit, otherwise thebenefit is considered incidental and the contract isonly enforceable by the original signers.

Banks and other mortgage companies are commonthird parties because many contracts involvepayment on property for which the mortgagecompany has a financial interest because of a loan.

Contract of AdhesionOnly one (1) party to the contract (the insurer)prepares the contract and submits it to the otherparty (the insured) for acceptance in a contract ofadhesion. The insured cannot make any changes tothe contract.

Aleatory ContractIn an aleatory contract unequal amounts of moneyare exchanged. The premium that the insured paysis less than the potential benefit he or she willreceive in the event of a loss.Personal ContractInsurance policies are personal contracts. Theycover the insurable interest of the individual insuredand cannot be transferred or assigned to anotherindividual. The exception to this is Life insurance.

Unilateral ContractIn a unilateral contract, only one party is legallybound to perform any duties once premium is paid.In an insurance contract, only the insurer makes anylegally enforceable promise. The insured does notmake a promise but pays a premium, whichconstitutes his or her part of the consideration.

Conditional ContractIn a conditional contract, both parties mustperform certain duties to make the agreementenforceable. The insured pays premiums andfollows certain policy conditions. The insurer paysclaims according to policy terms.

Contract of IndemnityThe insurer must restore the insured to the samefinancial position he/she was in before the lossoccurred in a contract of indemnity.

Legal Interpretations AffectingContracts

Ambiguities in a Contract of Adhesion Any doubt or ambiguity found in an insurancepolicy will be found in favor of the party that didnot draw up the contract (the insured).

Reasonable ExpectationsThe reasonable expectations of policy owners orbeneficiaries will be honored even though the strictterms of the policy do not support theseexpectations.

Utmost Good FaithIt is understood that both parties bargain in goodfaith in forming the contract. Applicants andinsureds are expected to make a full, fair, andhonest disclosure of facts. Insurers are expected topromptly indemnify the insured in the event of lossaccording to the contract.

Representations / Misrepresentations Representations are statements made by one partythat are believed to be true. The insured'smisrepresentation will not affect the insurancecontract or policy unless it affects the conditionsunder which the policy would be issued or not.Therefore, it is material to the risk. An agent'smisrepresentation, whether intended or not, is morelikely to void a policy. For example, an agent mayfalsely represent that certain coverage is containedin the policy when, in fact, it is not.

WarrantiesThese are statements made by the applicant that areguaranteed to be true. Warranties become part ofthe contract and, if found to be untrue, can begrounds for revoking the contract. They areconsidered to be material because they affect theinsurer's decision to accept or reject an applicant.


Property Insurance Example: The insured states there is a sprinkler system in thebuilding and that it will be kept in workingcondition.

ConcealmentConcealment is the willful failure to disclose factsthat are material to the risk. An applicant'sconcealment of information from the insurancecompany could affect the insurer's decision whetheror not to insure the property and could void thepolicy.

Casualty Insurance Example: A women says she is divorced or legally separatedfrom her husband in order to get Auto insurance.She actually is fully married and living with him,but he lost his driver's license due to a DUI and isnot insurable.

FraudDeceit, intentional misrepresentation, or theconcealment of material facts with the intention ofcausing injury to another party is known as fraud. Itis a deception deliberately practiced in order tosecure unfair or unlawful gain (e.g., making false ormisleading statements or concealing circumstancesin relation to a claim or on an application).

Unfair Marketing Practices

MisrepresentationInsurers or producers may not misrepresent:

1. A policy’s terms, benefits, or dividends.2. Policy comparisons (e.g., through

incomplete explanations).3. The type of policy being sold.4. The company’s financial status.5. The assets or funds owned or controlled by

an insurance company.6. The company or its funds being guaranteed

by a federal or state governmental agency.

Disparaging remarks about another agent, company,or policy can also be examples of misrepresentationand defamation.

Unfair Policy ReplacementInsurance laws of many states:

1. Regulate the replacement of insurancepolicies.

2. Protect policyholders and prospectivebuyers from unfair or deceptive practices.

3. Require full disclosure to the prospectivebuyer, as well as notice to the existinginsuring company, that a policy is to bereplaced. This gives the existing company achance to contact the insured and make surethey have correct information andunderstand what might be lost by makingthe change.

DiscriminationCharging different rates for the same exposurebased on non-actuarial data, or not founded in actualstatistics is a form of discrimination. It is alsoillegal to discriminate against handicapped ordisabled individuals, or against anyone regardingthe following:

1. Race2. Religion3. National origin4. Marital status5. Sex6. Where he or she lives7. Individuals of the same class and equal

expectation in life8. Individuals of essentially the same hazard

RebatingRebating is:

1. The reduction in premium charged or thereturn of part of the required premium.

2. A form of discrimination. Rebating allowsone individual to purchase insurance at alower cost than another with no actuarialpurpose.

3. Included in the area of paying commissionsto an individual who does not have alicense.

4. A misdemeanor in many states. (If so, boththe agent and the insured may be subject tofines, and the agent’s license could be suspended.)

Examples:1. Reducing premiums2. Accepting something of material value

(barter)3. Offering an incentive if the person buys a

policy


RedliningRedlining is the refusal of an insurer to underwriteinsurance coverage in certain geographic areas,especially inner-city neighborhoods, or theincreasing of premium rates to an unreasonableamount to discourage certain customers in order toavoid perceived risks.

BoycottingTo boycott is to stop buying or using the goods orservices of a certain company or country as aprotest. Boycotting in insurance is to stop buyingfrom a particular business to force them to buyinsurance from a particular source. Insurers may notboycott or deny legitimate claims of insuredsbecause of the provider used for services covered bythe insurer. Neither insurers nor producers may useboycotts to manipulate individuals or companies topurchase insurance coverage from them.

IntimidationTo force into or deter from buying insurance byinducing fear is known as intimidation.

Monopoly in the Insurance Business A monopoly is a situation in which a singlecompany owns all, or nearly all, of the market for a

given product or service. Neither insurers norproducers may set up artificial barriers to entry thatdo not allow competition to enter the marketplace.

Misappropriation of FundsThis is the intentional, illegal use of the property orfunds of another person for one's own use or otherunauthorized purpose, particularly by a publicofficial, a trustee of a trust, an executor,administrator of a deceased person's estate, or byany person with the responsibility to care for andprotect another person's assets (a fiduciary duty,such as an insurance producer). Misappropriationof funds is a felony, a crime punishable by a prisonsentence.

False Financial Statements It is prohibited to knowingly:

1. Make any false material statement of fact asto the financial condition of a person orcompany.

2. Make any false entry of a material fact in abook, report, or statement of a person orcompany.

3. Omit to make a true entry of a material factpertaining to a person's or company'sbusiness in any book, report, or statement.


SECTION I – GENERAL INSURANCE CONCEPTS REVIEW QUESTIONS

1. The concept of restoring individuals to thesame financial position they were in beforea loss occurred is called:a) Insurance.b) Reimbursement.c) Restoration.d) Indemnification.

2. Which of the following is NOT correctabout stock insurance companies?a) They are owned by policyholders.b) They are organized under the laws of

the state where they are sellinginsurance.

c) Officers and directors are elected byshareholders.

d) Shareholders share in profits throughstock growth.

3. Groups that exchange insurance on eachother are called:a) Mutual insurers.b) Reciprocal insurers.c) Syndicate insurers.d) Reinsurers.

4. Insurance companies that insure otherinsurers against catastrophic losses arecalled:a) Mutual insurers.b) Reciprocal insurers.c) Syndicate insurers.d) Reinsurers.

5. The intentional use of funds for a purposeother than that for which they were intendedis:a) Misappropriation of funds.b) Redlining.c) Rebating.d) Concealment.

6. Which of the following is an example of asurplus lines insurer?a) An insurer organized under the laws of

a state other than the one in which it isdoing business

b) A company organized in a differentstate, but which sells a Life insurancepolicy sold by other companies as well

c) A company that offers insurance notoffered by admitted insurers

d) A non-admitted insurer that offersinsurance at half the price that admittedinsurers offer it

7. The tendency of poorer risks to continueand for better risks to drop or seek coverageelsewhere is called:a) Guaranteed Insurability.b) Substandard Rating.c) A Pre-Existing Condition Clause.d) Adverse Selection.

8. Why is it important to have a large group ofindividuals insured?a) The larger the group, the more accurate

statistical assumptions will become.b) The larger the group, the more profit

can be made by the insurer.c) Policies can only be written on large

groups.d) Small groups tend to have more claims.

9. All of the following risks are insurableEXCEPT those that are:a) Measurableb) Predictablec) Speculatived) Selected from a diverse, randomly

selected pool of risks

10. Forcing someone to buy insurance byinducing fear is:a) Intimidation.b) Boycotting.c) Misappropriation.d) Redlining.


11. An insurance company which is owned bypolicyholders is a:a) Stock insurance company.b) Mutual insurance company.c) Syndicate insurer.d) Fraternal Benefit Society.

12. Insurers in which membership is based onreligious, ethnic, or national lines is a:a) Stock insurance company.b) Mutual insurance company.c) Syndicate insurer.d) Fraternal Benefit Society.

13. An insurer chartered under the laws of oneof the states other than the one in which it istransacting business is a(n):a) Domestic insurer.b) Alien insurer.c) Non-resident insurer.d) Foreign insurer.

14. An agent's ability to solicit insuranceapplications and accept premiums is anexample of:a) Express directive.b) Implied directive.c) Apparent directive.d) Sales directive.

15. The role of the state insurancecommissioners consists of all of thefollowing EXCEPT:a) Determining the types of insurance

policies that can be sold in their state.b) Pass legislation regarding insurance

business in their state.c) Determining the amount of surplus that

insurers must maintain.d) Investigating complaints against agents

and insurance companies.

16. A primary purpose of Premium Fund TrustAccounts is to:a) Allow agents to maintain only one

account for both business operationsand premium monies.

b) Allow quicker claim payment byrequiring agents to write claims out oftheir PFTA and then be reimbursed bythe insurer.

c) Require the agent to maintain separateaccounts for business expenses andpremium monies.

d) None of the above

17. Susan is an agent in a rural area whobelieves in doing business with those whodo business with her. She makes a practiceof buying a side of beef from farmers whenthey buy a policy from her. This is anexample of:a) Misrepresentation.b) Rebating.c) Redlining.d) Discrimination.

18. The principal role of the NationalAssociation of Insurance Commissioners isto:a) Encourage the standardization of

insurance laws around the country.b) Regulate insurance commerce between

different states.c) Create generic insurance policy forms.d) Determine the fiduciary capacity of

insurance agents and companies.

19. The refusal of an insurer to insureindividuals in a certain part of town becauseof a non-actuarial belief that that part oftown is a bad insurance risk is:a) Misrepresentation.b) Rebating.c) Redlining.d) Discrimination.

20. Which of the following explains that anyact by an insurance agent is the same as ifthe insurance company did the act?a) Representative insuranceb) Fraternal insurerc) Domestic insurerd) Law of Agency


21. Frank sold his car to Jill but did not cancelhis Auto insurance policy. Jill had anaccident one month later, and Frankreported the accident to his insurancecompany. Frank was not able to collectmoney for damages to the car, even thoughhis policy was still in force because:a) Frank no longer had insurable interest.b) Frank was not the individual who had

the accident.c) Frank misrepresented that he still

owned the vehicle by keeping thepolicy in force.

d) The insurance company did not followproper claims procedures.

22. An insurance company which sharesdividends with policyholders is called a:a) Syndicate insurer.b) Stock insurer.c) Mutual insurer.d) Miracle.

23. An insurer that can only sell insurance toit's members or their families is a:a) Mutual insurer.b) Fraternal Benefit Society.c) Domestic insurer.d) Reinsurer.


Section II – Property Insurance Concepts

PRINCIPLES AND CONCEPTS

Insurable Interest

The insurance applicant must have a potential forfinancial loss if some person or entity suffersdamages as the result of using the insured'sproperty, goods, or services. In Property andCasualty insurance, insurable interest must bepresent at the time of both application and loss. InLife insurance, insurable interest is only required atthe time of application.

Underwriting

FunctionOnce an insurance application is received by theinsurance company, underwriters review theapplication to verify information and to decide ifthis risk is one acceptable by the company.

Sources of Underwriting Information : 1. The application2. The agent report3. Credit reports4. Prior insurance

Rating TypesThere are several categories under which anapplication can fall:

1. Acceptable with Standard Rates: Theinsurance policy will be issued as appliedfor, subject to full premium payments.

2. Acceptable with Substandard Rates orwith Exclusions: The application will beissued, but the insured must sign anendorsement showing that he or she acceptsthe changes and/or increased premium andmust pay the increased premium to keep thepolicy in force.

3. Unacceptable and Denied Coverage: Ifthe insurer denies coverage to an applicant,the insurer must give a detailed, writtenexplanation as to why the coverage wasdenied. Any paid or unearned premium isreturned. The insured must seek insurance

elsewhere, either through a high risk insureror through state FAIR plans (Fair Access toInsurance Regulations).

Loss RatioAn insurer's loss ratio is one way of measuring theinsurer's profitability. It takes claim expenses andcompares them to premiums.

(incurred losses + loss adjustment expenses)

earned premiums

The lower the ratio, the better the claims experienceof the insurer and the more profitable the company.This ratio does not include profits the insurer makesfrom interest on collected premiums.

Premium rates generally need to be submitted to orapproved by state insurance departments beforethey may be used in sales.

Rates

Types of RatesJudgment RatingPremiums are determined without manuals ortables. Instead, the underwriter evaluates theindividual risk to determine the probability of loss,the extent of possible loss, and the premium thatwould need to be charged to cover possible claims,other expenses, and projected profits.

Manual RatingThis method separates risks into category groupingsor classes. The agent or underwriter decides theclass into which the risk would fit and then consultsa rating manual. The printed manual rate is per unitof insurance, such as per $1,000 of coverage. Theunderwriter can then multiply the rate by therequired number of units for the specific risk todetermine the proper premium to charge.

Merit RatingMerit ratings generally modify a manual rating by


Loss Ratio =

taking particular aspects of the individual risk intoaccount. Experience Rating, for instance, takes theparticular risk's past loss history (usually the pastthree (3) years) and compares it to an average claimexperience for similar risks. If the risk has a poorerloss history, then the premium will be adjustedupward. If there is a better-than-average losshistory, then the premium will be adjusteddownward.

Loss CostsLoss costs represent the portions of insurance ratesused to cover claims and the costs of adjustingclaims. Insurers determine rates by estimating theirfuture loss costs and adding a provision forexpenses, profit, and other contingencies.

Components/Premium Determination Factors taken into consideration when determiningpremium rates include claims costs and relatedexpenses, insurer administrative expenses,investment income (from invested premiums andother income), producer commissions, and insurerprofits.

Hazards

The following are types of hazards, or conditionsthat increase risk or the chance of a loss occurring:

PhysicalPhysical hazards are material or structuralproblems such as damaged steps or worn auto tires.

MoralMoral hazards are the insured's habits, such asdishonesty or criminal activity. Moral hazard occurswhen the party with more information about itsactions or intentions has a tendency or incentive tobehave inappropriately from the perspective of theparty with less information.

MoraleMorale hazards are the insured's attitude or lack ofconcern about safety and liability issues because ofthe existence of insurance coverage, such as abusiness not having or following safety policies, orallowing people with bad driving records to drivecompany owned vehicles because they know theirinsurance will cover losses.

LegalHazards arising from changes in law while thepolicy is in force, requiring the insurer to addcoverages that were not included before, are legalhazards.

Causes of Loss (Perils)

The cause of loss is the event insured against.Examples include: fire, lightning, and theft. Perilscan be specifically named in the policy and aretypically included unless they are specificallyexcluded from coverage.

Named Perils vs. Open-Perils

Named Peril Policies These policies protect only against perilsspecifically listed in the policy.

Open-Peril Policies Also called Special Peril Policies (previouslyknown as All-Risk), these policies have muchbroader coverages. They protect against all physicalloss risks, except perils specifically limited orexcluded by the policy.

Direct and Indirect Losses

Direct LossA loss in which the covered peril is the immediateor proximate (dominant or first) cause of damage toproperty, such as hail damage to the roof of a house,is known as a direct loss. Example: After hail hasdamaged the roof, water from the rain was able todamage property inside.

Consequential or Indirect LossesConsequential or indirect losses are losses inwhich the covered peril is not the direct cause ofdamage. If a restaurant suffers a fire, for instance,the fire is the direct cause of the loss. The loss ofincome from the business while the restaurant isclosed for repairs is an indirect loss.


Liability

Absolute/ Strict Liability A legal doctrine that states that an individual can beheld liable even if negligence does not exist orcannot be proven is known as liability. The injuredparty may collect damages even though there isnothing legally wrong with what the other persondid or the manner in which they did it. Examples:

1. Strict Liability: Workers Compensation2. Absolute Liability: Especially dangerous

activities (i.e., using dynamite, or owning apet rattle snake)

Vicarious LiabilityVicarious liability arises out of imputed negligencein which one individual becomes liable for thenegligent behavior of another. Employers aregenerally held liable for the negligent acts ofemployees while those employees are acting withinthe scope of their employment. Insurancecompanies, as principals, are liable for the negligentacts of their agents.

Proximate Cause

An event that, in natural and sequential order, isresponsible for a loss is called proximate cause. Itis an event considered to be a primary cause of thatloss.

In Property insurance, rain coming in an openwindow would not be covered. However, iflightning struck, breaking the window, the lightningwould be the proximate cause for rain coming in thewindow, and the loss would be covered.

In Casualty (Liability) insurance, consider thatsomeone runs their truck into the wall, causing abrick to shake loose and fall, and it knocks apedestrian in the head. The brick is the actual causeof loss, but the driver who lost control of the truckcould be negligent as the proximate cause.

Blanket vs. Specific Insurance

An insurance contract covers a particular type ofrisk, but may be open or closed as to the people orobjects covered. A specific policy would cover onlythose objects or perils named in the policy. A

blanket policy would be one that covers a class ofobjects or perils. A property blanket policy, forinstance, might be one that covers all apartmentbuildings owned by the insured, while a casualtyblanket policy would cover the liability associatedwith those apartments. A blanket health policymight cover all students at a particular school or allmembers of a sports team.

Scheduled personal property protects valuableitems that are out of the ordinary and need to carryseparate coverage to ensure that their full value iscovered in the event of a claim.

Basic Types of Construction

There are two (2) types of property covered byProperty Insurance policies:

1. Real property (land and buildings)2. Personal property (belongings such as

clothes and furniture)

Basic Types of ConstructionProperty insurance agents must know the six (6)basic types of construction when determining thevalue to which the property should be insured. Ingeneral, these methods include:

1. Wood Frame (most common constructionfor residences in the U.S.)

2. Masonry (brick) 3. Reinforced Concrete (multi-family units)4. Structured Steel5. Steel Frame (garages and outbuildings,

especially around farms) 6. Prefabricated Structures (most commonly

used for residences)

Classifications of Construction1. Framed Construction means buildings

with floors, walls, and roofs constructed ofcombustible material(s).

2. Joisted Masonry Construction consists ofbuildings with exterior walls of masonry orfire-resistive construction rated for not lessthan one hour and with combustible floorsand roofs.

3. Non-Combustible Construction is floors,walls, roofs, and building supports must bemade of non-combustible or slow-burningmaterials.

4. Masonry Non-Combustible Construction


means buildings with fire-resistive masonrywalls and non-combustible or slow-burningfloors and roofs.

5. Modified Fire-Resistive Construction isbuildings with exterior bearing walls andload-bearing portions of exterior wallsmade of masonry or non-combustiblematerials (exterior non-bearing walls maybe slow-burning, combustible, or have nofire-resistive rating).

6. Fire-Resistive Construction consists of:a) Solid masonry, including reinforced

concrete not less than four inches thick.b) Hollow masonry not less than 12 inches

thick.c) Hollow masonry less than 12 inches

thick, but not less than eight (8) inchesthick with a listed fire-resistance ratingof not less than two (2) hours.

d) Assemblies with not less than a two-hour fire-resistance rating.

Loss Valuation

Property may be valued differently by differentindividuals.

Sentimental ValueSomeone might have strong emotional ties toproperty, such as an heirloom or an old car. This isknown as sentimental value.

Resale ValueThe price that the individual could get for theproperty if it were sold is the resale value.

Actual Cash Value (ACV) The ACV of property is calculated as theReplacement Cost at the time of loss, minusdepreciation. Replacement CostThe cost to rebuild or replace property withmaterials of like kind and quality, and at the samelocation, is known as the Replacement Cost.

Functional Replacement CostThis is the cost to repair or replace damagedproperty with less expensive but functionallyequivalent materials. An example would be customwoodwork that is replaced with standard woodwork.

Guaranteed Replacement CostThe actual cost to rebuild or replace the propertyafter a loss, even if that cost is more than the statedvalue insurance amount, is the GuaranteedReplacement Cost.

Market ValueMarket value is the price property would likelyfetch if sold on the market. A home in a small,remote town would have a similar price to one in alarger city to rebuild or replace (Replacement Cost).However, if the house were sold (Market Value),the price might be considerably less in the smalltown because of:

1. Lower land and property values.2. Fewer potential buyers for a property in a

small town.

Agreed ValueA provision that specifies a certain value that willsatisfy policy co-insurance requirements is anagreed value. The insured cannot be assessed a co-insurance penalty as long as the policy limit is atleast the agreed value amount.

Stated AmountAn agreed upon policy amount that is paid in theevent of a total loss, regardless of the property'sactual value, is known as the stated amount.

Valued Poli cy With a valued policy, in the event of a total loss,the entire face amount is payable without regard fordepreciation. This is common with Ocean Marinepolicies, and required coverage in many states.

Limit of LiabilityThe limit of liability is the maximum amount aninsurance company will pay to protect the insuredunder a given policy. The insurer will pay theamount of the loss or the limit of coverage under thepolicy, whichever is less. Liability coverage is NOTsubject to deductibles.

Fire Legal Liability A form of liability insurance that covers damage toleased or rented property caused by fire or otherspecified perils is known as fire legal liability. Itmay be used in Personal or Commercial Lines rentalpolicies.


POLICY STRUCTURE

(D-I-C-E)

Declarationsand

Definitions

Who? Identifies both the insured's and the insurer's name and addressWhat? Identifies both the real and the personal property insuredWhere? Identifies the territory covered by the policyWhen? Identifies the policy period (inception and expiration dates and times)How much? The amount of insurance coverage and the premium

InsuringAgreement or

Clause

Summarizes covered risks, additional or supplementary coverages, and theinsurer's responsibility to indemnify against losses suffered as a result of the perils

Conditions

Lists the insured's responsibilities both at the time of application (truthfulrepresentations in the application and payment of premium) as well as at the timeof loss (notice of and proof of loss, which is a sworn statement made by aninsured verifying the amount, date, and cause of a loss)

Exclusions andEndorsements

Lists the property, perils, and other hazards not covered by the policy or whichhave a reduction of coverage in the policy

Additional/SupplementaryCoverage

Supplementary payments that the insurer will payover and beyond the policy's liability limits includethe following:

1. Legal fees for defending the insured if alawsuit goes to trial

2. Claims expenses3. First aid expense for others4. Damage to property, or person, of others'

when not legally liable5. Loss assessment coverage

COMMON POLICY PROVISIONS

Policy Period

Loss must occur between the policy inception andcancellation dates. This is what is called the policyperiod.

Policy Territory

In personal lines, the policy territory is the locationof the insured property and/or the area in which thepolicy will cover liability issues.

In commercial lines, the policy territory is a list ofstates in which the insured does business. Thisincludes a list of other states in which the insured

may potentially do business in the future, except forany of the four monopolistic fund states of (NorthDakota, Ohio, Washington, and Wyoming).

Deductibles

Deductibles are a type of cost containment toolwherein the insured pays for the first portion ofcosts and the insurer pays the balance, up to policylimits. When the insured has to pay somethingupfront, he/she is less likely to submit a claim, orthere will be no claim to submit because thedeductible covers the loss. This way, the insurer isonly paying for bigger claims, which do not happenas often.


Other Insurance

Non-ConcurrencyNon-concurrency happens when two (2) or morepolicies do not cover a risk in the same way at thesame time. This can create coverage gaps for theinsured.

Primary and ExcessPrimary InsurancePrimary insurance is the main, or underlying,coverage on a risk.

Excess InsuranceExcess insurance is coverage that starts when theunderlying policy's coverage ends, also known as anumbrella policy.

Handling of Claims: Pro Rata vs. Contribution by Equal SharesWhen there are two (2) or more liability policies ona given risk, depending on the type of policy, claimsare handled differently than on a property policy.Liability insurance can be primary or excessinsurance.

Pro R ata If a loss occurs that is covered by more than oneinsurance policy that was purchased by the insured,each policy pays a portion of the loss that isproportional to the amount of that policy over thetotal amount of all policies for the loss. Each policypays its pro rata share.

Example: Pro Rata LiabilityThe insured has a building worth $1 million, but,for underwriting reasons, the maximum amount hecan purchase from three (3) insurance companies is$600,000, $300,000, and $100,000. He purchasesthe three (3) policies with the maximum limits. If hesuffers a $200,000 loss, then the first company willpay 60 percent of the loss, the second 30 percent,and the third 10 percent.

Contribution by Equal SharesSome policies handle multiple coverages throughpayments of equal shares rather than pro ratapayments. Each company pays an equal amountuntil the loss is covered, or the policy limit of anypolicy is reached. If one or more of the policy limits

is reached, then the equal share principle applies tothe remaining insurers. As each policy limit isreached, the remaining insurers make equalpayments with the remaining amount of uncoveredloss until the loss is covered or all policies aremaxed out.

Example: Contribution by Equal SharesConsider the same facts as in the pro rata exampleabove.

1. If there is a $150,000 loss, each companypays $50,000 for a total of $150,000.

2. If the loss was $400,000, each companypays $100,000, and the two (2) with highercoverage pay an additional $50,000 for atotal of $400,000.

3. If the loss was $800,000, then the low-limitcompany pays its policy limit of $100,000,the next company pays its policy limit of$300,000, and the remaining insurancecompany pays the remaining $400,000 tocover the loss.

Policy Limits

Policy limits are the maximum lifetime benefit ofan insurance policy.

Restoration/Non-Reduction ofLimits

Limits of liability will return to the insured amountshowing on the Declarations Sheet after a propertyclaim has been settled. There is no reduction invalue because a claim has been paid.

Co-Insurance

A clause which requires the insured to keepinsurance equal to or greater than the stipulatedpercentage of full value, or they will not be able tocollect the partial losses in full is known as co-insurance. This is to encourage insureds to insuretheir property to a proper amount. If the insurance isnot as high as required, the amount payable iscalculated as follows:

(Amount of insurance carried / Amount of insurancerequired) x Amount of loss = Amount Payable.


Examples:1. A $10,000 loss for property valued at

$100,000 with an 80 percent co-insurancerequirement and insured for $80,000:

$80,000/$80,000 x $10,000 = $10,0002. A $10,000 loss for property valued at

$100,000 with an 80 percent co-insurancerequirement and insured for $60,000:

$60,000/$80,000 x $10,000 = $7,500

Vacancy or Unoccupancy

Coverage is canceled if the building is vacant orunoccupied. Such buildings can have a greatlyincreased risk of loss by becoming an “attractivenuisance” in the neighborhood, meaning that itwould “attract” vandals or other groups who mayuse the unwatched or abandoned property for illegalpurposes.

1. Unoccupancy: Buildings which have noresidents or active business for more than60 days are considered unoccupied.

2. Vacancy: Buildings that are bothunoccupied and have no personal/businessproperty in them for more than 60 days areconsidered vacant.

Named Insured Provisions

Only the first named insured is responsible forinteractions with the insurance company, includingthe making of policy changes, receiving returnedpremium, and giving or receiving notice ofcancellation.

Insured's Duties After Loss ( Claims Handli ng ):

1. Fully cooperate with the insurer'sinvestigation, settlement, or defense of aclaim

2. Provide proof of loss and take reasonablesteps to prevent further loss

3. A third party claimant must make a claimagainst the insured. The insured must thensubmit the claim to his insurer. An insureris not liable to a third party claimant andcannot be sued directly by the claimantunless the insurer agrees its insured is liableand refuses to pay, or if the insurer is notmaking payments when ordered to do so bya court of law.

Appraisal and ArbitrationIn the event of a disagreement over the insurer'shandling of a claim, the insured and the insurer mayeach select an appraiser, and if there is stilldisagreement, the two appraisers select an umpireappraiser.

AssignmentAn assignment is the transfer of a policy, or someof the policy's, rights from the insured to anotherentity.

The Assignment Clause states that the policy cannotbe assigned or transferred to another without writtenauthorization, signed by an officer (not the agent) ofthe insurance company.

AbandonmentProperty cannot be abandoned to the insurer. Theinsured cannot declare something a total loss andturn it over to the insurer and demand paymentwithout the insurer's consent.

Insurer Provisions

Duty to DefendThe insurer has the responsibility to defend theinsured against lawsuits or liability claims.

1. The insured will only be defended up to thelimits of the policy.

2. The only time the insurer cannot settle alawsuit without the permission of theinsured is when the insured is coveredunder an Errors and Omissions policy.

Liberalization Clause If the insurer changes the same type of policy theinsured owns in any way, providing for morecoverage without additional premium, the insured'soriginal policy will be extended for those coverageswithout need for additional forms or premium.

SubrogationThe insurer has the right to pursue legal action in itsown name, or the name of a policy owner, against athird party who is liable for a loss that has been paidby the insurer. The insured must assign rights tomake a claim against the other party to the insurerupon the insurer's handling of the claim settlement.


This prevents the insured from collecting from bothhis/her insurer and a third party, so he/she does notprofit from his insurance.

SalvageThe insurer may pay either the cost to repair orreplace the damaged vehicle or property, or theActual Cash Value. Any replaced personal propertythen belongs to the insurer.

An example of this would be if a valuable vase isdeclared a loss as the result of a fire, the insurer hasthe right to take possession of the vase after payingits full value, minus any deductible, to the insured.The insurer then has the right to sell the vase forwhatever they can and keep the proceeds of suchsale.

Claim Settlement OptionsThe insurer may pay either:

1. The cost to repair the damaged property2. The cost to replace the damaged property 3. The Actual Cash Value

Third Party Provisions

Standard Mortgagee ClauseA provision in a Property insurance policy thatgives a mortgage holder (such as a bank) three (3)rights:

1. The right to be given 10 days notice ifeither the insured or the insurer cancels thepolicy

2. Claims settlement will be made directly tothe mortgagee in the event of a loss

3. The right to provide proof of loss so themortgagee can be compensated for damagesif the insured does not provide such proof inthe event of a loss

Loss Payable ClauseA loss payee listed in the Declarations page isconsidered an insured with respect to the propertyhe/she is linked to. The Loss Payee will be notifiedin writing if the insured cancels or does not renewthe policy.

No Benefit to the BaileeThis provision does not allow the bailee to receivepayment for coverage to insured property while it isbeing held, stored, repaired or moved for a fee bythe bailee. This prevents the bailee from benefitingfrom the insured's coverage on the property.

PERSONAL PROPERTY LINES

There are two (2) major types of personal propertypolicy forms (also called Cause of Loss forms):

1. Dwelling Forms2. Homeowners’ Forms

Each of these is further broken down into Basic,Broad, and Special (Special Peril) policies. Thesedivisions each include a set of coverages andexclusions that are intrinsic to that type, whether thepolicy is a Dwelling or Homeowners’ Policy.

STATE AND FEDERAL LAWS, REGULATIONS AND REQUIRED PROVISIONS

State Property and CasualtyInsurance Guaranty Association

InsolvencyInsolvency refers to being unable to pay debts asthey arise or a company in bankruptcy.

After an insurer becomes insolvent, the state findsfunds to guarantee that the insureds' claims will becovered. All of the insurance companies in the statewill provide their share of the money to cover theclaims of the insolvent insurer. All states, except forNew York, collect the funds on a post-insolvencybasis.


Standard Fire Policy

The Standard Fire Policy is the most basic of allproperty insurance policies. Initially drafted in NewYork in 1918, it was amended in 1943 and has only165 lines describing the coverage. It was generallyreplaced by simplified language policies in the1980s. When still used, other forms mustaccompany it in order to make it a complete modernpolicy. Covered perils include:

1. Fire2. Lightning3. Removal of property after a fire to protect it

from further damage

Cancellation and Non-Renewal

The insured may cancel the policy by:1. Returning the policy to the insurer or to the

insurer's representative.2. Notifying the insurer in writing as to when

the cancellation is to take effect.

The insurance company may cancel the policy bywritten notice delivered to the insured or to theinsured's representative for the following reasons:

1. Non-payment of premium (notificationmust be at least 10 days before cancellation)

2. Any reason, within 60 days of application;if in effect for more than 30 days, the policymay be canceled on its anniversary date,with 31 days written notice

Or at any time with 31 days written notice for:1. Discovery of grossly negligent acts or

omissions by the insured that increase therisk of the hazard insured against

2. Operational changes in the insured'sbusiness or the covered risk

3. Physical changes in the insured's propertywhich result in its becoming uninsurable

4. The insured being convicted of a crime thatincreases the hazard insured against

5. Discovery of fraud in obtaining the policyor pursuing a claim

Non-Renewal or Conditional RenewalThe insurer may non-renew or conditionally renewwith a reduction of limits or with elimination of

some coverages by giving a 30-day written notice.Example: An insurer decides it will no longer offersewer or sump pump back-up coverage, or that itwill change the way it will cover damage caused byan earthquake.

Private ResidenceThe notification for canceling Homeowners’policies requires more advance notice because it is aprivate residence, and the insured's belongingsneed to be covered. Depending on the state, thenotice must be sent 45 days before the effective dateof cancellation or nonrenewal.

CommercialBecause the notification is being sent to acorporation instead of an individual, notice on acommercial policy must be sent 60 days before theeffective date of the cancellation or nonrenewal.The number of days varies by state.

Basic Property Insurance-Death of Named InsuredIn the event of the death of the named insured,coverage still exists for:

1. The legal representative of the deceased.2. The spouse.3. Relatives residing in the property.4. Any person having custody of the property

until a legal representative is appointed.

Negligence

Elements of a Negligent ActNegligence is a concept that has been developedthrough common law. The basic premise ofcommon law is that people have an obligation orlegal duty to behave in a reasonable and prudentfashion. This is called the Reasonable Person Rule.

Failure to act in this manner constitutes negligence.If this negligence leads to the injury of another or tothe damage of another's property, the negligentparty may be held liable for the damage. In order forlegal liability to exist, it must be established that:

1. Negligence occurred.2. That there was actual damage or loss.3. That the negligence was the proximate

cause of the loss.


A person cannot be held legally liable unless he orshe had a duty to act and failed to do so, or failed toact correctly. Negligence is the failure to takereasonable care, precaution, or action to lessen riskexposure. Negligence may be the result of eitheromitted acts (such as failure to shut a windowbefore leaving the house) or committed acts(playing catch with your child in front of a slidingglass door).

Four (4) Basic Categories of Individuals that Cannot Be Held Negligent

1. Infants2. The mentally ill3. Governmental bodies4. Charitable institutions

However, recent legislation and court decisionshave held that the government can be liable to thesame extent as private individuals, and charitableinstitutions are to be treated in the same manner asfor-profit businesses.

Defenses Against NegligenceNegligent behavior doesn't necessarily mean legalliability. Certain defenses can free the person fromlegal liability in spite of negligent behavior, orprevents recovery for possible injuries caused bynegligence:

1. Assumption of Risk: A person whounderstands the danger involved in aparticular activity and voluntarily choosesto do the activity anyway can beacknowledged to have assumed the riskhim/herself. For an example, an individualwho goes to a hockey game assumes therisk of getting hit by a flying puck.

2. Contributory Negligence: Any negligenceon the part of an injured party will normallydefeat a claim. A few states use the doctrineof contributory negligence.

3. Comparative Negligence is more lenientand used by more states than contributorynegligence. Contributory negligence on thepart of the injured party will not necessarilydefeat the claim, but will be used in someway to lessen the damages payable by theother party.

4. There are two (2) separate schools ofthought:a) The Mississippi Rule states that any

defendant who is partly at fault must

pay in proportion to their share of thefault.

b) The Wisconsin Rule is used by moststates, and states that the defendant whois least at fault is not required to pay forany of the damages.

5. Intervening Cause/Last Clear Chance:The injured party would be able to collectdamages even if he/she had contributorynegligence if the other party had anopportunity (last clear chance) to avert theaccident but did not do so.

6. Statutes of Limitations are the time limitson how long an injured person can sue fordamages. The injured party must act tocollect for damages during the given timeperiod or forfeits the right to do so.

7. Common Law Fellow Servant Rule: Anemployer cannot be held liable for theactions of a co-worker if an employee isinjured due to the negligence of that co-worker.

Common Law DefensesSome of the more common Common LawDefenses include:

1. Automatism2. Duress3. Insufficient mental capacity4. SODDI – Some Other Dude Did It

Binders

The binding of coverage is the giving of an oral orwritten statement that provides immediate insuranceprotection for a specified time period, usually fromthe time an application for coverage and premiumpayment is accepted by the agent, until a policy isissued or denied by the insurance company.

1. Exclusive agents have authority to bindcoverage when they write an application.

2. Independent agents/brokers often do nothave authority to bind coverage, but ratherthey submit the application to one of thecompanies they represent and the insurermay or may not bind the coverage.

All policy terms and conditions are in force until apolicy is issued or coverage is declined by theinsurer on whom the binder was written.


Insurance Consultation ServicesExemption

Insurance Consultation Service is any of thefollowing:

1. Survey2. Consultation3. Inspection

performed by an insurer to reduce the likelihood ofinjury, death, or loss.

Whether or not a consultation is made does notsubject the insurer to liability for damages occurringas a result of omission during insuranceconsultation services unless the damages (injury,death or loss):

1. Occurred during the performance of theconsultation and was caused by negligence.

2. Are the result of any consultation servicerequired by a service contract.

3. Are the result of actions by the insurerwhich are determined by a judge to becriminal, malicious, or because of grossnegligence.

FAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act is a federal lawthat regulates the collection, dissemination, and useof consumer information, including consumer creditinformation.

A growing number of personal auto andHomeowners’ insurance companies have begunlooking at consumer credit information to decidewhether to issue or renew policies, or to decidewhat premiums to charge for those policies.Insurers must obtained a signed disclosurestatement from an insurance applicant informing theapplicant that a credit report may be obtained whileunderwriting the policy.

Insurance companies may not use credit informationto discriminate against people with low incomes,particular genders, or races. They also may notgather information to track medical information anduse that in figuring credit worthiness and premiumrates.

Use of Credit InformationUnderwriting departments use this information indeciding whether to issue a new policy or to renewexisting policies. Some state laws prohibit insurancecompanies from refusing to issue a new policy orfrom not renewing an existing policy based solelyon information obtained from a credit report.

Rating: Deciding what premium to charge, eitherby placing the insured into a specific rating tier, orlevel, or by placing them into a specific companywithin their group of companies is known as a

rating. Some insurance companies use creditinformation along with other more traditional ratingfactors, such as motor vehicle records and claimshistory. Some states allow insurance companies touse credit alone to determine the rate, and otherswill not.

A consumer must be told if their premium has beenadversely affected by a credit score. They may get afree report from the reporting agency, and challengeany adverse information. While they can't justchange the information, they can:

1. Discover what creditors issued offendinginformation and write them asking tocorrect misinformation.

2. Write the credit company with their side ofa credit dispute.

How Long C an Negative Information Stay on a Credit Report?A credit reporting company generally can reportmost negative information for seven (7) years.Information about a lawsuit or a judgment againstyou can be reported for seven (7) years, or until thestatute of limitations runs out, whichever is longer.Bankruptcies can stay on a report for up to 10 years.The credit company won't generally report thisinformation after these time limits, but these timelimits on reporting negative information do notapply if the credit report will be used in connectionwith:

1. Your application for a job that pays morethan $75,000 a year.

2. Your application for more than $150,000worth of credit or Life insurance.


FRAUD AND FALSE STATEMENTS18 USC 1033 and 1034

The section involves those who are engaged ininsurance whose activities affect interstatecommerce.

1. Anyone so engaged who overvalues anyland or property in connection with anyfinancial reports or documents presented toany insurance regulatory official or agencyor an agent or examiner appointed by thatofficial or agency to examine the affairs ofsuch person, and who tries to influence theactions of the official, agency, or appointedagent or examiner, shall be punished.

2. If such a person knowingly makes any falseentry of a material fact in any book, report,or statement with the intent to deceiveanother, including an officer, employee, oragent of the person making the false entry,an insurance regulatory official or agency,or any agent or examiner appointed toexamine the affairs of such person, aboutthe financial condition or solvency of suchbusiness shall also be punished.

3. If such person uses threats of force orthreatening communication to try toimpede, obstruct, or influence legalproceedings relating to insurance affairs

they may be fined and imprisoned for up to10 years.

Those w ith Felony Records Any individual who has been convicted of acriminal felony involving dishonesty or a breach oftrust, or who has been convicted of an offense underthis section, and who willfully engages in thebusiness of insurance whose activities affectinterstate commerce or participates in such business,shall be fined or imprisoned not more than five (5)years, or both.

Those Permitting/Complicit in These ActionsAny such person who willfully permits theparticipation described shall be fined, or imprisonednot more than five (5) years, or both.

PenaltiesPersons found guilty of fraud under these sectionsmay be punished by fines of up to $50,000 and jailtime of up to 10 years. If the action endangers aninsurer's stability, the maximum jail time is 15years. If the amount or value so embezzled,abstracted, purloined, or misappropriated does notexceed $5,000, jail time will not exceed one (1)year, and there may also be a fine.

PRIVACY PROTECTION

The Gramm Leach Bliley Act regulates thedisclosure of non-public information to non-affiliated third parties. When insurers gatherinformation from prospects and insureds, they must

be informed that information will not be so shared,and the insured must sign forms showing they havehad this information disclosed to them.

TERRORISM RISK INSURANCE ACT (TRIA) PurposeAlso known as TRIA, this federal law provides afederal backstop for defined acts of terrorism andimposes certain obligations on insurers. As a resultof this act property and casualty insurers mustparticipate in the Terrorism Insurance Program (theProgram) and must make coverage available for all

insured losses in all of their covered commerciallines policies.

DefinitionsAct of TerrorismAn act of terrorism is any act that is certified bythe Secretary of the Treasury, in concurrence with


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the Secretary of State and the Attorney General ofthe United States to be an act of terrorism and:

1. To be a violent act or an act that isdangerous to human life, property,infrastructure.

2. To have resulted in damage within the U.S.,or outside the U.S. in the case of an aircarrier or vessel or on the premises of aU.S. mission.

3. To have been committed by an individual(s)on behalf of a foreign person or foreigninterest as part of an effort to coerce thecivilian population of the U.S. or toinfluence the policy or affect the conduct ofthe U.S. Government by coercion.

No act that is committed in the course of a declaredwar is considered an act of terrorism. Exceptions:

1. For purposes of Workers Compensation2. For the case of property and casualty

policies where the losses resulting from theact exceed $5 million in total losses

Insured LossAny loss resulting from an act of terrorism(including an act of war, in the case of WorkersCompensation) that is covered by primary or excessProperty and Casualty insurance issued by aninsurer if such a loss occurs:

1. Within the United States2. In an air carrier (as described in section

40102 of title 49, United States Code) to aUnited States flag vessel (or a vessel basedprincipally in the United States, on whichU.S income tax is paid and whose insurancecoverage is subject to regulation in theU.S.), regardless of where the loss occurs

3. At the premises of a U.S. mission

is considered an insured loss.

Insured loss excludes amounts awarded in a civilaction that are attributable to punitive damages.Insurers must make property and casualty insurancecoverage available for these insured losses that donot differ materially from the terms, amounts, andother coverage limitations applicable to lossesarising from events other than acts of terrorism.

Certified LossA certified loss is a loss that fits the definition of aninsured loss as described in the Act.

Non-Certified LossA non-certified loss is a loss that is not covered asdescribed in the Act.

Certified vs. Non-Certified LossesThe main difference between a certified and a non-certified act of terrorism is that a certified actalways involves a foreign person or interest, while anon-certified act may not.

Requirement for Terrorism Risk Coverage to be OfferedInsurers are allowed to charge extra premium forTerrorism Coverage, but must give the option to allcommercial Property and Casualty insureds.

To speed availability of terrorism risk insurance ascalled for in the Act, rates and forms for thecoverage covered by the Act do not need to be pre-filed with any state or be subject to prior approvalor a waiting period under any state's law throughDecember 31, 2003, but may be subject toregulatory review for excessive charges orcompliance with state laws once the rates and formsare in use.

Effect on Workers CompensationThe federal program shares the risk of loss withWorkers Compensation for acts of war as well asfor acts of terrorism.

Extension Act of 2005

The Extension Act of 2005 extended the programthrough 2007. It updates Section 102(B) so that theterm “Property and Casualty insurance” does notinclude the following types of insurance:

1. Commercial automobile 2. Burglary and theft 3. Surety 4. Professional liability 5. Farm owners multiple peril

The insurer deductible for 2006 was the value of aninsurer's direct earned premiums for 2005multiplied by 17.5 percent. The insurer deductiblefor 2007 was the value of an insurer's direct earnedpremiums for 2006 multiplied by 20 percent.


The insurance marketplace aggregate retentionamount will now be the lesser of the aggregateamount for all insurers and $27,500,000,000 for2007–2014.

Re-Authorization Act of 2007

In December 2007, the Terrorism Risk InsuranceAct was extended for seven (7) years until 2014.(Note: The current test outline only covers theExtension Act of 2005, but the information isincluded here for your convenience.)

An “act of terrorism” can be done by anyindividual(s) as part of an effort to coerce thecivilian population, no longer only in the interest ofa foreign person or interest.

The insurer deductible for 2008–2014 is the valueof an insurer's direct earned premiums for theprevious year multiplied by 20 percent.

The U.S. Secretary will notify Congress within 15days after an act of terrorism whether the aggregateinsured losses will exceed $100,000,000,000.

Any policy that is issued or renewed after 2008must clearly provide disclosure to the policy ownerthe existence of the $100,000,000,000 cap.

The secretary is required to collect terrorismpremiums within two (2) years or by 2017.

The Terrorism Risk InsuranceProgram Re-Authorization Act

(TRIPRA) of 2015

This act extends the federal backstop program foran additional six (6) years through December 31,2020.

Minimum Threshold and CertificationTRIPRA 2015 requires certain criteria to have beenmet before federal coverage under the programbegins.

1. Property and Casualty insurance lossesresulting from a terrorism-linked attackmust meet the minimum damagecertification level of $5 million.

2. If losses are expected to meet this minimumthreshold, then the event must also beofficially certified as an "act of terrorism."This certification is determined by the U.S.Secretary of the Treasury in concurrencewith the Attorney General of the UnitedStates and – new under TRIPRA 2015 – theU.S. Secretary of Homeland Security.

Program TriggerIf an act of terrorism has been officially certified,then compensation under the program will still notbegin until aggregate insured losses in a calendaryear reach the "program trigger." Under TRIPRA2015, the program trigger will gradually be raisedeach year from USD $100 million in 2015 to USD$200 million by 2020. The increase to the programtrigger is considered to be one of the mostsubstantial changes to the program and aims totransfer more of the risk to the private insurancemarket.


SECTION II – PROPERTY INSURANCE CONCEPTS REVIEW QUESTIONS

1. Chris moves to another city before sellinghis house in the first city, leaving some ofhis property in the house to aid in its sale.He leaves the insurance policy in force toprotect the house and personal property.Three (3) months later the insurer finds outthat Chris is no longer living in the houseand decides to cancel the policy. Whichdefinition explains this situation and whythe insurer can cancel the policy?a) Unoccupancyb) Vacancyc) Abandonmentd) Loss assessment

2. Which section of the insurance policyidentifies areas where there are reductionsin coverage?a) Declarationsb) Insuring Agreementc) Conditionsd) Exclusions and Endorsements

3. Which section of the insurance policyidentifies the insured?a) Declarationsb) Insuring Agreementc) Conditionsd) Exclusions and Endorsements

4. Which section of the insurance policyidentifies the insurance company'sresponsibilities?a) Declarationsb) Insuring Agreementc) Conditionsd) Exclusions and Endorsements

5. Calvin sells his home to Don and Peg. Inorder to make the sale easier, he wants totransfer his Homeowners’ insurance policyto them at the time of the closing. Whichpart of the policy explains this type ofsituation?a) Arbitration clauseb) Subrogation clause c) Assignment claused) Other insurance provision

6. Which section of the insurance policyidentifies the insured's responsibilities?a) Declarationsb) Insuring Agreementc) Conditionsd) Exclusions and Endorsements

7. Where does a policy mention that once theinsurer has paid a claim, the insurer has theright to pursue action against a liable thirdparty to recoup the loss?a) Arbitration clauseb) Subrogation clausec) Assignment claused) Other insurance provision

8. The Standard Fire Policy insures against allof the following perils except:a) Fire.b) Lightning.c) Hail.d) Removal of property to protect from

further damage.

9. An act of terrorism must be certified assuch by:a) The U.S. Secretary of the Treasury, the

Secretary of State and the U.S. AttorneyGeneral.

b) The President of the United States.c) The Secretary of State and the U.S.

Attorney General.d) The U.S. Secretary of the Treasury, as

approved by the U.S. Congress.

10. For a loss due to terrorism to be consideredan insured loss, the loss must occur in anyof the following locations except:a) Within the United States.b) On a U.S. flag vessel in foreign waters.c) On the premises of a U.S. embassy.d) On a vessel on which U.S. income tax

is paid, regardless of where thevehicle's insurance coverage isregulated.


Section III – Dwelling Policy (DP)

CHARACTERISTICS AND PURPOSE

Dwelling Policy (DP) forms are mono-line policies.Mono-line policies only cover one (1) type ofinsurance. The DP covers the dwelling/buildingonly, not liability or theft. Contents Coverage isincluded only by endorsement.

EligibilityCertain criteria must be met to be eligible for aDwelling Policy:

1. Maximum of four (4) families and five (5)boarders in the building

2. Owner occupancy not required3. Mobile homes can be included on a

Dwelling Policy Form policy, but only ifthey are permanently located

4. Incidental service business occupancy only,such as beauty shops, music lessons, orprofessional offices, with a maximum oftwo (2) workers

COVERAGE FORMS: PERILS INSURED AGAINST AND PROPERTY COVERED

DefinitionsAppurtenant StructuresOther buildings or structures on the premises whichare of lesser value than the main building beinginsured are appurtenant structures. This includesbuildings such as storage sheds or guest houses(also known as separate structures).

Fair Rental ValueSimilar to additional living expense, fair rentalvalue can cover the loss of rents due to damage tothe rented property if the damage is due to acovered peril. It applies only for the period requiredto repair or replace the damage.

Homes that are under construction are often coveredunder a dwelling policy with the Building/Dwelling Under Construction endorsement.

Standard Fire Policy Perils

Standard Fire Policy perils include:1. Fire2. Lightning3. Removal of property to prevent further

damage

Extended Coverage Perils

1. Riot or civil commotion2. Above ground damage from volcanic

eruption3. Vehicle damage4. Windstorm5. Smoke6. Hail7. Aircraft damage8. Explosion

General Policy ExclusionsIn a named peril policy, any peril that is notspecifically mentioned is automatically excluded.

There are eight (8) perils that are explicitlyexcluded from all property policies:

1. Earth movement2. Ordinance or law changes3. Water damage by flood4. Sewer back-up5. Overflow from a sump pump6. Power interruption/failure7. Neglect8. War or nuclear risk

Other Generally Excluded Perils Include:1. Artificially generated electrical current2. Explosion of steam boilers3. Predictable losses


Basic Form (DP-1)

Covered Perils1. The three (3) standard fire perils2. The eight (8) extended coverage perils3. Vandalism and malicious mischief

(V&MM), until the building is vacant for30 consecutive days

4. Theft coverage is optional – Broad FormCoverage if owner-occupied, limited iftenant-occupied

Coverage A-BuildingCovered for Actual Cash Value (ACV)

Coverage B-Structures (Other Than the Building/Separate Structures/Appurtenant Structures)Insured for 10% of the Coverage A amount, but canbe increased for additional premium

Coverage C-Personal Property (Optional)If covered, covered on an ACV basis for additionalpremium

Coverage D-Fair Rental Value10% of the Coverage A amount if the rentedbuilding is damaged by a covered peril

Broad Form (DP-2)

Covered Perils1. The Basic Form perils (riot or civil

commotion, above ground damage fromvolcanic eruption, vehicle damage,windstorm, smoke, hail, aircraft damage,explosion)

2. Broader explosion coverage3. Glass breakage4. Damage caused by burglars5. Falling objects6. Weight of ice, snow, and sleet7. Collapse8. Artificially generated electric currents9. Freezing of or discharge from a plumbing,

heating, or cooling system10. Theft coverage is optional – it is Broad

Form if owner-occupied, limited if tenantoccupied

Coverage A-BuildingBuilding is insured for Replacement Value, asopposed to the Basic Form's ACV coverage

Coverage B-Other StructuresIncluded

Coverage C-Personal Property (Optional)If covered, it is settled on an ACV basis

Coverage D-Fair Rental Value (Optional)10% of the Coverage A amount if the rentedbuilding is damaged by a covered peril

Coverage E-Additional Living ExpenseThe insurer covers living expenses so the householdmay maintain its normal standard of living; also, payment will be for the shortest time to repair or replace the dwelling, or the shortest time to settle elsewhere.

Special Form (DP-3)

Special Form policies usually have moreunderwriting requirements, such as greater squarefootage or the building being less than a certain age.The buildings are more likely to be owner-occupied,so greater coverage is available.

Special Form Covered PerilsSpecial Peril (Previously All-Risk)The Special Form policy is the first policy writtenon a “Special Peril” basis. As previously described,these policies cover all risks unless explicitlyexcluded from coverage. While the Basic and BroadForm policies only cover the perils listed in thepolicy, and some exclusions are listed for the sakeof clarification and to be more explicit. Exclusionsare more important to the “Special Peril” Policy,because if a peril is not listed as excluded, it iscovered.

Coverages A, B, and D are each covered on an all-risk basis (unless specifically excluded). Theftcoverage is optional.

Coverage A-BuildingCovered for replacement value

Coverage B-Other Structures (Optional) Insured for 10% of the Coverage A amount and canbe increased for additional premium


Coverage C-Personal Property (Optional)If included, covered against Broad Form perils only

Coverage D-Fair Rental Value (Optional)10% of the Coverage A amount if the rentedbuilding is damaged by a covered peril

Coverage E-Additional Living ExpensesThe insurer covers living expenses so the householdmay maintain its normal standard of living; also, payment will be for the shortest time to repair or replace the dwelling, or the shortest time to settle elsewhere.

GENERAL EXCLUSIONS

Excluded Perils for Basic Form:1. The eight (8) general policy exclusions

(earth movement, ordinance or law changes,water damage by flood, sewer back-up,overflow from a sump pump, powerinterruption/failure, neglect, war or nuclearrisk)

2. Vandalism and Malicious Mischief(V&MM) if the premises have been vacant30 consecutive days

3. Artificially generated electrical current4. Explosion of steam boilers5. Predictable losses (assumed)6. Damages from a vehicle owned or operated

by an insured or a tenant

Excluded Perils for Broad Form:1. The Basic Form policy exclusions (earth

movement, ordinance or law changes, waterdamage by flood, sewer back-up, overflowfrom a sump pump, power

interruption/failure, neglect, war or nuclearrisk, V&MM if the premises have beenvacant 30 consecutive days, explosion ofsteam boilers, damages from a vehicleowned or operated by an insured or atenant)

2. Damage caused by agricultural or industrialsmudging (pollution)

Excluded Perils for Special FormIf a particular peril is not specifically excluded, it iscovered. The Special Form Exclusions include:

1. The Basic Form policy exclusions2. Agricultural or industrial smudging

(pollution)3. Damage by wear and tear, rot and

deterioration4. Settling and cracking, or mechanical

breakdown5. Damage caused by birds, vermin, and

insects

CONDITIONS

Duties After a LossThe insured must cooperate with the insurer in theevent of a claim investigation.

Legal ActionThe time allowed to bring action against the insureris two (2) years.

Other InsuranceLosses covered by a home warranty or service planare covered first by the warranty or service plan.

The Homeowners Policy becomes secondarycoverage, paying after the other plan's coverageends.

Loss Payable ClauseA loss payee listed in the Declarations page isconsidered an insured with respect to the propertythey are linked to. The Loss Payee will be notifiedin writing if the insured cancels or does not renewsthe policy.


SELECTED ENDORSEMENTS

Special Provisions for States

If a state's requirements differ from the policywording or change during the policy period, thestate regulations take precedence. The policychanges to meet the state regulation, whether thewritten policy is changed or not.

Automatic Increase in Insurance

This adjusts the amount of property coverage (thepolicy's face amount) according to a stipulatedannual percentage based on an index of costs torebuild or replace the property. Premiums willincrease along with the coverage.

Broad Theft Coverage

Coverage is on a Special Peril basis for loss due totheft or mysterious disappearance of personalproperty, damage to premises and property resultingfrom theft, with sub-limits on property particularlysusceptible to theft (e.g., money, securities,paintings, and jewelry). This also covers vandalismand malicious mischief to the premises interior andto other property of the insured away from theinsured premises.

Dwelling Under Construction

Also known as the Builder's Risk Form, thiscovers buildings that are under construction for lossdue to liability or theft/destruction of materials oralready finished construction.

Builder's Risk policies have been further brokendown to two (2) methods of determining premiums:

1. Completed Value FormPerhaps the most common method, theCompleted Value Form determines theamount of coverage based on the projectedvalue of the building when it is completed.The insurer will pay the Actual Cash Valueof a loss, up to the proportion of thecoverage as compared to the actual value ofthe property after construction is finished. If, for instance, the insured valued the finalconstruction at half-price when taking outthe insurance, the insurer will pay only halfof the ACV of the actual loss.

2. Reporting FormThe insured is required to file a monthlyreport with the insurer that shows theconstruction's current completion value.Along with this, the insured pays premiumonly on the amount completed, and theinsurer is only responsible for a claim up tothe percentage of the final completed valuethat is shown as the amount on the currentmonthly report.

PERSONAL LIABILITY SUPPLEMENT

This provides personal liability coverage as aseparate policy (i.e., someone who owns neitherpersonal property nor an auto and, hence, has no

insurance for either) or on a supplemental basis tothe mono-line dwelling policies.

ORDINANCE OR LAW

Coverage for loss caused by enforcement ofordinances or laws regulating construction andrepair of damaged buildings. Older structures thatare damaged may need upgraded electrical, heating,ventilating, air-conditioning, or plumbing based on

city codes. Many communities have an ordinance(s)requiring that a building that has been damaged to aspecified extent (typically 50%) must bedemolished and rebuilt in accordance with currentbuilding codes rather than simply being repaired.


SECTION III – DWELLING POLICY (DP) REVIEW QUESTIONS

1. In which of the following situations could aDwelling Policy Form not be used?a) The owner does not live in the building.b) There are three (3) families, but two (2)

of them have a non-family memberliving with them

c) There is only one (1) family living inthe building, but the wife does hairstyling in the basement.

d) Five (5) families live in the building,but there are no boarders.

2. Jim and Barb buy a rental unit and insure itunder a DP-2 policy. Which of thefollowing situations would NOT becovered?a) The kitchen ceiling caves in under the

pressure of snow after a severesnowstorm.

b) Children playing baseball in the lot nextdoor hit a ball through the front windowof the house.

c) A hailstorm damages the roof of thebuilding.

d) A factory next door to the buildingspills chemicals that get into thedrinking water of the insured building.

3. Which of the following situations wouldNOT be excluded from coverage in a DP-1Form Policy?a) The building has been vacant for 40

days.b) The building falls into a sinkhole that

was located under it.c) A flood causes damage to the building's

basement.d) The home next door to the insured

building catches fire and the resultingsmoke causes damage to the insuredbuilding.

4. Which of the following is NOT one of the12 Basic Form exclusions for the Dwellingpolicy?a) Industrial smudgingb) Explosion of steam boilersc) Predictable lossesd) Artificially generated electrical current

5. How will the loss payee be notified if theinsured cancels or does not renews theDwelling Policy?a) Face-to-faceb) In writingc) By phoned) Vocally

6. Adam lives in Delaware. His state'srequirements have changed since hisDwelling policy started. What will takeprecedence?a) The municipality's regulationsb) Adam's Dwelling policyc) Delaware's regulationsd) A new policy will be immediately sent

to Adam

7. The Dwelling Under Construction Form isalso known as:a) Builder's Risk Form.b) Broad Theft.c) Automatic Increase.d) Major Coverages.

8. Broad Theft does not cover which of thefollowing?a) Vandalism to the premises interiorb) Malicious mischiefc) 15 foot Sailboatsd) Paintings


Section IV – Homeowners’ Policy

PURPOSE

Homeowners’ insurance is designed to offer thehomeowner protection in case of loss or damage totheir home and property. A typical Homeowners’insurance policy includes protection for both thehouse and the property that it sits on, as well asother buildings or structures on that property. MostHomeowners’ insurance policies also provideprotection for any items within the house or otherstructures. In the event of damage or theft, theinsured is reimbursed for the cost of repairs orreplacement as well as the time spent away from

home while repairs are being done.

Homeowners’ insurance typically provides liabilitycoverage for your property as well. Your policy willlikely cover the costs associated with accidents onyour property, including medical treatment if avisitor falls on your steps or is bitten by your dog.

To be eligible for a Homeowners’ policy, theproperty owner must live on the property.

COVERAGE FORMS

Note: The HO-1 is rarely used anymore, and thereis no HO-7 policy.

HO-1

The HO-1 Home Insurance Policy is the most basic,named perils insurance policy available tohomeowners. Most homeowners that purchase HO-1 insurance are insuring for catastrophic losses only.The HO-1 home insurance policy only protects thehome and contents for the most common perils thatoccur. It is a very uncommon form today.

Perils Insured Against with the HO-1 Home Insurance PolicyThe 10 perils the HO-1 Home Insurance Policy willprotect your home and belongings from are:

1. Fire or lightning 2. Windstorm or hail 3. Explosion 4. Riot or civil commotion 5. Aircraft 6. Vehicles (unless caused by the insured) 7. Smoke 8. Vandalism or malicious mischief 9. Theft (limit of liability on HO-1 is usually

$1,000) 10. Volcanic eruption

The HO-1 policy can be Replacement Cost orActual Cash Value.

HO-2 – HO-8

The definition of Insured has been expanded underthe Homeowners’ policies to include “other personsunder the age of 21 and in your care or the care of aresident of your household who is your relative.”

Broad Form / HO-2 ( Named Peril ) The Broad Form policy does not cover losses doneby a vehicle owned or operated by the insured to afence, driveway, or walkway.

Special Form / HO-3 ( Special Peril )/ Open- Peril )

1. Buildings on an HO-3 policy are protectedagainst all risks except those specificallyexcluded.

2. Concurrent Causation principles, however,say that if two (2) causes combine toproduce loss or damage, and one of the two(2) causes is excluded (e.g., flood) and theother cause is covered (e.g., windstorm), theloss will be covered.

3. Coverages A-Building and B-SeparateStructures are covered on a ReplacementCost basis. Coverage C-Personal Property iscovered on an ACV basis, but may beendorsed to a Replacement Cost basis.

4. This does not cover losses done by a


vehicle owned or operated by the insured toa fence, driveway, or walkway.

5. Personal Property of the insured, which isin a storage facility or even at a secondhome, is covered for up to 10 percent of theinsured's Personal Property coverage limit.This would also include property that achild might have with them at an apartmentor dorm while at college.

Homeowners Contents/ Tenant / Renter’s Coverage/ HO-4 There is no building coverage in a Renters’ Policy.

1. In the Renters’ Policy, Coverage C-Personal Property is the stated, basicinsured amount.

2. Renters’ Coverage D-Additional LivingExpense is for 20 percent of the Coverage Camount. It is used by the insured for a motelor other living accommodations whilewaiting for their rental unit to be repaired.

Comprehensive Form / HO-5 ( Special Peril/Open-Peril)As with the HO-3, the HO-5 policy protects boththe building and outbuildings on a Special Perilbasis, except for those specifically excluded.

1. Coverage C-Personal Property is alsocovered on a Special Peril basis and on aReplacement Cost basis, as opposed to theHO-3's ACV basis coverage.

2. While claim settlements are usually ACV,market value, or stated value basis, on theHO-1, 2, and 3, the HO-5 settlements areusually based on a Replacement Cost basis.

Guaranteed Replacement Cost A modification of Replacement Cost, buildings arereplaced at the actual cost to replace, even if it ismore than the stated insurance amount, withGuaranteed Replacement Cost.

Extended Replacement CostA cap, such as 25 percent, that is placed on theamount over the actual stated insurance amount thatthe insurer will pay to replace property is known asthe Extended Replacement Cost.

Condominium Unit Owner Form / HO-6 Special Form Coverage can be purchased foradditional premium.

Condo Unit Coverages:Coverage A-BuildingThe HO-6 policy protects interior walls andstructures the unit owner owns individually, such ascabinets, plumbing, electrical fixtures, and wall-to-wall carpet.

Coverage B-OutbuildingsOptional in case the insured is responsible forprotecting such

Coverage C-Personal PropertyCovers a stated amount as in a Renters’ Package

Coverage D-Additional Living Expense20% of Coverage C (Personal Property) amount

Loss Assessment CoverageLoss Assessment is coverage that protects theindividual condominium owner from their share of apro rata loss assessed by the association for lossesover the amount of the association's policy, usually$1,000, though optional increased amounts can beas high as $25,000 or even $50,000. This couldhappen from a loss sustained in a common area usedby all the condo owners, such as a pool, orextending beyond the bounds of the association'spolicy over the entire complex.

Condo Coverage can be tricky. The condoassociation must purchase an association policy tocover building exteriors, outbuildings, and commonproperties and liabilities owned collectively by allthe condominium owners. Different condoassociations include different parts of the structureas association-owned. Some include the basiccabinets, plumbing, and wall-to-wall carpets, butnot any upgrades. Others include only to the drywalland floor surrounding the unit. Still others includeall parts of or attachments to the building, needingonly a renters’ policy to cover the insured's personalproperty and liability. Care must be given to ensurethe correct coverage is extended in each case.

Market Value/ ModifiedCoverage Form HO-8

This is used primarily for homes and structures thatmight have a Replacement Cost greater than the


market value. For example, older homes, usuallybuilt before 1950, often have ornate details or mayinvolve reproducing obsolete techniques at highlabor costs.

1. Building coverage is Actual Cash Value orrepair cost using functionally equivalent

materials and methods rather than aReplacement Cost basis.

2. HO-8 personal property is covered on anACV basis, unless endorsed to aReplacement Cost basis.

PROPERTY AND LIABILITY COVERAGES

While Coverages A-D cover the physical propertyitself, Coverages E and F are for liability, includingpersonal liability and medical payments to others.

Coverage A-Dwelling

Buildings' coverage includes only the dwellingitself.

Coverage B-Other Structures

Also called Appurtenant Structure or SeparateStructure Coverage, this coverage includes suchthings as a separate garage, a shed, fencing, or anin-ground swimming pool. An above-groundremovable pool would be considered personalproperty.

Coverage C-Personal Property

Covers furniture, clothing, appliances, etc. Personalproperty which is usually located at the insured'sresidence, but is temporarily away from thosepremises or is stored at a self-storage facility, islimited to 10 percent of the Coverage C amount or$1,000, whichever is greater. This 10 percent limitdoes not apply to personal property moved from theprimary residence while the residence is beingrepaired, or while in a newly acquired principalresidence for up to 30 days. Personal PropertyCoverage is usually on an ACV basis except for theHO-5, but Replacement Cost coverage may beendorsed with extra premium.

Coverage D-Loss of Use

This includes temporary rental or motel expenses,meals out, and other costs over and above normal

living expenses while an insured home is beingrepaired due to loss suffered by an insured peril, butnot normal expenses, such as a mortgage.

Coverage E-Personal Liability

Covers amounts for which an insured is legallyliable because of bodily injuries or property damagecaused to third parties, whether on or away from theinsured premises. This includes $100,000 liabilitycoverage.

1. On-Site Liability Example: A visitor fallsdown the stairs of the insured home

2. Off-Site Liability Example: The insuredbreaks someone's leg while playingbasketball at a local gym

Coverage F-Medical Payments toOthers

Medical payments cover emergency medicaltreatment to those other than the insured for injuriessuffered on the insured premises or caused by aninsured. Medical payments coverage is consideredgoodwill coverage and is included in addition toliability coverage. It is often viewed and used as amethod to avoid the need for entering the liabilitycoverage area by taking care of minor injuries.

Additional CoveragesDebris RemovalFallen tree removal is $1,000, with a $500 limit forany one tree. Coverage is available if the fallen tree:

1. Damages a covered structure.2. Blocks a driveway, preventing a motor

vehicle from entering or leaving theresidence premises.


3. Blocks a ramp or other fixture designed tohelp a handicapped person to enter or leavethe dwelling.

Ordinance or LawCoverage of up to 10 percent of the Coverage-Alimit for the increased cost to repair or rebuild adwelling or other structure to conform to applicablebuilding and land use codes is included as part ofthe homeowners policies without endorsement.Additional amounts of coverage may be purchasedfor additional premium. This is not covered underthe HO-8 policy.

Credit Card, Fund Transfer Card, Forgery and Counterfeit MoneyThis includes coverage for electronic fund transfercards and devices used to deposit, withdraw, ortransfer funds.

CollapseBuilding collapse, or the abrupt falling down orcaving in of all or part of a building, or the risk ofloss involving a collapse making the collapsedportion so that it cannot be occupied, is covered.Collapse resulting from hidden decay or hiddeninsect or vermin damage is excluded if the insuredknew about the damage before the buildingcollapsed. Collapse is not covered under the HO-8policy.

Breakage of Glass or Safety Glazing Material by Earth MovementThe HO forms allow for coverage of glass that ispart of a covered building, storm door, or stormwindow when caused directly by earth movement.Direct physical loss to covered property causedsolely by the pieces, fragments, or splinters of suchbroken glass is also covered.

Grave MarkersUp to $5,000 for grave markers, includingmausoleums, on or away from the insured premises,is covered for loss caused by a peril insured against.

Smoke CoverageIn the Homeowners’ policy, Smoke Coverageincludes the release of soot, vapor, and fumes froma boiler, furnace, or similar equipment.

Policy coverage limit percentages are differentdepending on the type of policy and the number offamilies in the dwelling.

Other Additions:1. Legal fees for defending the insured if a

lawsuit goes to trial2. Claims expense3. First aid expense for others4. Damage to property of others when not

legally liable5. Loss assessment coverage

PERILS INSURED AGAINST

Broad Form / HO-2 , Named Perils 1. The three (3) standard fire perils (fire,

lightning, and removal of property toprevent further damage)

2. The eight extended (8) coverage perils(Riotor civil commotion, above ground damagefrom volcanic eruption, vehicle damage,windstorm, smoke, hail, aircraft damage,explosion)

3. Vandalism and malicious mischief(V&MM), until the building is vacant for30 consecutive days

4. Broad Form theft is included in owner-occupied homes.

Special Form / HO-3 , Special Peril s/ Open- PerilBuildings on an HO-3 policy are protected againstall risks except those specifically excluded. Personalproperty is insured against the Broad Form namedperils, which include:

1. The Basic Form perils (fire, lightning, andremoval of property to prevent furtherdamage) and the eight (8) extendedcoverage perils (riot or civil commotion,above ground damage from volcaniceruption, vehicle damage, windstorm,smoke, hail, aircraft damage, explosion)

2. Broader explosion coverage3. Glass breakage4. Falling objects


5. Weight of ice, snow, and sleet6. Collapse7. Artificially generated currents8. Freezing of or discharge from a plumbing,

heating, or cooling system9. Theft coverage is optional – Broad Form if

owner-occupied, limited if tenant-occupiedHomeowners Contents/Tenant/Renter's Coverage/HO-4

1. Coverage is against the Broad Form namedperils listed previously.

Comprehensive Form / HO-5 (Special Peril /Open-Peril)

1. These policies cover all risks, unlessexplicitly excluded from coverage for bothbuilding and personal property.

Condominium Unit Owner Form/HO-61. Includes the Broad Form named perils

listed above

ADDITIONAL HOMEOWNERS’ NOTES

Pair and Sets ClauseIf a single item in a pair or set is lost or destroyed,the insurer will repair, replace, or pay the value ofthe lost part, or will pay the difference between theActual Cash Value of the property before and afterthe loss. This provision prevents the insured fromcollecting for a total loss when only a part of a pairor set is lost. Example: (Note that the numbersused here are strictly arbitrary. There is no formulato determine the value of a set vs. individualpieces.) A set of 12 silver spoons may be worth$1,800 as a set, but each individual spoon is worthonly $100. If one (1) spoon is lost or destroyed, theremaining spoons are worth only $1,100. The lossof one (1) spoon, therefore, is not $100, but the loss

to the set as a whole, for a total loss of $700.

Additional/Supplemental Coverages Payments over the stated insured amount include:

1. Debris removal and cost of reasonablerepair to prevent additional loss.

2. Loss of trees, shrubs, and plants, but forlimited perils only, and coverage is limitedto only five (5) percent of the Coverage Aamount with a $500 limit/plant.

3. Fire department charges are covered up to$500.

4. Credit card, check forgery, or counterfeitmoney with a $500 limit.

EXCLUSIONS

Hovercraft and PartsSelf-propelled motorized ground effect vehicles,such as flarecraft and air cushion vehicles, arecovered.

Water or SteamWater is not considered personal property of theinsured, even after it has passed through theinsured's water meter.

Excluded PerilsThe general fire policy exclusions:

1. Homeowners’ policies do include theft andwill cover vehicular damage to the building,even if done by the owner or tenant.

2. Vandalism and Malicious Mischief(V&MM) if vacant for 60 days

3. Agricultural and industrial smudging(pollution)

4. Damage by wear and tear, rot anddeterioration, settling and cracking, ormechanical breakdown (i.e., a furnace)

5. Damage caused by birds and insects6. Damage to animals (such as pets) of the

insured or caused by animals of the insured

As previously mentioned, the following perils aregenerally excluded under property insurancepolicies, but may be added for additional premium:

1. Ordinance or law2. Earth movements – mine subsidence and

earthquake3. Flood (covered by the National Flood

Insurance Program – NFIP)


4. Sewer back-up and sump pumps5. Off premises power failure – loss caused by

power company outages 6. War7. Nuclear8. Theft in or to a dwelling under construction9. Vandalism10. Hidden mold or wet rot11. Wear and tear12. Pollution13. Concurrent Causation14. The insured's animals and/or pets

Additional Liability ExclusionsThe following types of liability were added asspecific exclusions under the HO policies:

1. Communicable disease (bodily injury orproperty damage arising out of thetransmission of a communicable disease byan insured)

2. Sexual molestation, corporal punishment, orphysical or mental abuse

3. Controlled substance (bodily injury orproperty damage arising out of the sale,manufacture, delivery, transfer orpossession by any person of a controlledsubstance, including cocaine, LSD,marijuana, and all narcotic drugs, except bythe legitimate use of prescription drugsunder the care of a licensed physician)

4. Liability caused by intentional acts by or atthe direction of the insured, or failure toprevent another person's intentional act

5. Liability to an insured's employee (whichshould be covered by WorkersCompensation policies)

6. Professional liability7. Business pursuits8. Vehicle, watercraft, or aircraft

CONDITIONS

The Conditions section of the Homeowners’ Policyis the same as in the Dwelling policy and includesthe following:

1. Duties after a loss2. Legal action3. Other insurance4. Loss payable clause

Personal Property ReplacementCost

Homeowners’ -2, -3, -5, and -8 PoliciesReplacement Cost on contents protects possessionslike televisions, furniture, and more. It covers thecost to fully replace personal property if it isdamaged or destroyed by a covered loss. If personalproperty Replacement Cost coverage is not includedin a Homeowners’ policy, the property would becovered on an Actual Cash Value basis.Replacement Cost can often be added byendorsement for additional premium.


Coverage Limit of Liability

ADwelling

ACV, Market Replacement Cost Price, or Replacement Cost

BOther Structures

One (1) and Two (2) Family Dwellings: 10% of Coverage AThree (3) and Four (4) Family Dwellings: 5% of Coverage A

CPersonal Property

One (1) and Two (2) Family Dwellings: 50% of Coverage AThree (3) Family Dwellings: 30% of Coverage AFour (4) Family Dwellings: 25% of Coverage A

DLoss of Use

Any necessary increase in living expenses so the household can maintain itsnormal standard of living – payment will be for the shortest time required torepair or replace the damage or, if the insured permanently relocates, the shortesttime required for the household to settle elsewhere

Homeowners’ -4 and -6Coverage Limit of Liability

ADwelling

Homeowners’ -4: Not applicableHomeowners’ -6: $1,000

BOther Structures

Not applicable

CPersonal Property

Personal Property is the policy's primary limit – the coverage amount dependson the amount of the insured's personal property

DLoss of Use

Any necessary increase in living expenses so the household can maintain itsnormal standard of living – payment will be for the shortest time required torepair or replace the damage or, if the insured permanently relocates, theshortest time required for the household to settle elsewhere

Special Limits of LiabilityMoney, bank notes, bullion, gold, or silver, other than goldware or silverware $200Securities, manuscripts, passports, tickets and stamps $1,500

Watercraft, including trailers and equipment $1,500Trailers and semi-trailers not used with watercraft $1,500Theft of jewelry, watches, furs, and precious/semi-precious stones $1,500Theft of silverware, goldware, pewterware, platinumware, or things plated with thesemetals

$2,500

Grave markers and mausoleums (not covered under HO-8) $5,000Personal property used for business purposes $2,500Property away from residence used for business purposes $1,500Electronic devices and accessories used primarily for business while away fromresidence premises

$1,500

Electronic devices while in, upon, or away from a motorized vehicle $1,500Theft/loss of firearms and related equipment $2,500


SELECTED ENDORSEMENTS

Special Provisions for StatesIf a state's requirements differ from the policywording or change during the policy period, thestate regulations take precedence. The policychanges to meet the state regulation, whether thewritten policy is changed or not.

Limited Fungi, Wet or Dry Rot,or Bacteria Coverage

Coverage is included on the HO-3 and HO-5 andendorsable on the other forms.

Loss is covered when such damage is caused by theaccidental discharge or overflow of water or steam,or by constant seepage or leakage of water or thepresence of condensation or humidity, moisture orvapor. The resulting damage must be unknown toall insureds and be hidden in the walls, ceilings orbeneath the floors or above the ceilings of a coveredstructure. This endorsement covers the cost ofdamages caused by this peril in the building if theloss is caused by a peril insured against during thepolicy period. Subject to the limits the insuredchooses and for additional premium, thisendorsement covers the cost to:

a) Remove the fungi.b) Tear out and replace any part of the

building as needed to gain access to thefungi.

c) Test air or property to confirm theabsence, presence, or level of fungi, butonly if there is a reason to believe thereis the presence of fungi, wet or dry rot,or bacteria.

Permitted IncidentalOccupancies/Business Pursuits

Homeowners’ policies cover personal property andliability and extend coverage on a limited basis toproperty that is used in a business. The PermittedIncidental Occupancies endorsement extendscoverage to premises' business property andpremises' liable for a named particular businesses.Off-premises coverage is not included.

Earthquake

This covers loss caused by earthquake or volcaniceruption. Earthquake Coverage can be for thebuildings only, or for both the buildings andpersonal property of the insured. When added to theproperty policy, Earthquake Coverage may have thesame deductible as the rest of the policy but usuallyhas a separate deductible that is often expressed as apercentage of the total loss rather than a set amount.

Note that if there is an earthquake, it is often followed by aftershocks. As long as the aftershocks are within 168 hours of the initial earthquake, they are considered a single occurrence. If 168 hours have passed before another shock occurs, insurers consider them separate occurrences.

Scheduled PersonalProperty/Personal Article Floater

This is an endorsement which provides Open-Perilcoverage on specific property. The insuredschedules both the coverage and the value. Often, acurrent appraisal of the object's value is needed.

There are nine (9) different types of property thatcan be endorsed:

1. Personal furs2. Personal jewelry3. Silverware4. Golfer's equipment5. Cameras6. Guns7. Fine arts and antiques8. Stamp and coin collections9. Musical instruments

While this is a floater that is usually attached tohomeowners policies, it is considered a commercialpolicy form.

Home Day Care

Property and liability coverage for a home day carebusiness may both be endorsed or added to the


policy. The typical endorsement is for insuredscaring for up to three (3) children, in addition to theinsured's own children. Special permission from theinsurer's underwriting department is required formore children.

Windstorm or Hail(All Forms Except HO-4 and HO-6)A percentage deductible is applied to the total losscaused by windstorm or hail, separate from thepolicy deductible. Windstorm or hail damage maybe totally excluded from coverage for a premiumcredit, or may be endorsed to be covered by ActualCash Value for such losses.

Special Additional Amount of Insurance for Coverage ADwelling (Forms HO-2, HO-3 and HO-5)Coverage is extended to cover an additionalpercentage over the coverage amount of thedwelling in Coverage A if the insured has allowedthe insurer to increase the coverage on the home,along with inflation and additional premium.

Identity Fraud Expense Coverage This covers expenses up to $15,000 incurred by theinsured if a “means of identification” of the insured(such as a driver's license or passport) is unlawfullytaken with the intent to commit any unlawfulactivity. Expenses include notarized affidavits,certified mail to law enforcement officials, lost

income up to $200 per day, loan application fees forreapplication for loans rejected as the result ofincorrect information, and reasonable attorney feesto defend lawsuits brought against the insuredbecause of the identity theft. This endorsement has aspecial $250 deductible.

Functional Replacement Cost(Forms HO-2, HO-3 and HO-5)The amount to repair or replace a damaged coveredbuilding with less costly common constructionmaterials and methods that are the equivalent toobsolete, antique, or custom materials and methodsused in the building's original construction is knownas Functional Replacement Cost. (Note: receives apremium discount)

Property Remediation for Escaped Fuel and Limited Lead and Escaped Liquid Fuel LiabilityThis covers real property (land and buildings) andpersonal property from damage caused by escape ofliquid fuel from a fuel system, boiler, heater orpumping apparatus located on an insured location. Italso covers the cost to temporarily stop suchleakage and clean up or remove the damage asrequired by law or in response to a governmentalauthority request. The endorsement does not pay forany reduction in market value, fuel replacement, orrepair or restoration of the fuel system.

MOBILE HOME POLICIES

Mobile homes are legally classified as personalproperty and are not covered by homeownerspolicies. Mobile homes have their own policies thathave been developed for them. Mobile homecoverage includes:

a) The structure itself.b) Original equipment as well as additions.c) Appurtenant (added) structures.d) Personal property.e) Liability coverage.f) Medical payments to others.

Restrictions on Mobile Home Policy Coverage

a) Actual Cash Value coverage on boththe structure and personal property isstandard.

b) Replacement Cost can be endorsed onthe structure, but not usually oncontents.

c) Age and value requirements arecommon, where the insurer will onlyinsure mobile homes less than a certainage and greater than a certain monetaryvalue.


SECTION IV – HOMEOWNERS’ POLICY REVIEW QUESTIONS

1. Debra's Victorian home has ornate woodbanisters along a winding staircase, as wellas intricate moldings around the windows.If a fire destroys the house and theinsurance company replaces the woodworkwith standard material and work, which ofthe following types of coverage does Debrahave?a) Replacement Costb) Guaranteed Replacement Costc) Functional Replacement Costd) Stated value

2. Ted just bought a home in a small town for$60,000. He knows the home would cost$150,000 if he were to build it today, butwants to insure the home for the actual costhe paid for it. Which of the followingcoverages types will he insure the home?a) Actual Cash Valueb) Replacement Costc) Market valued) Stated value

3. The amount of personal property coveragein an HO-6 Policy Form is:a) A stated amount.b) 10% of the Coverage A amount.c) 50% of the Coverage A amount.d) Personal Property is not covered on an

HO-6 policy.

4. Which of the Homeowners Forms wouldoffer the least coverage, but still coverdamage caused by a deer breaking the frontwindow of the insured building?a) HO-1b) HO-2c) HO-3d) HO-5

5. What is the standard amount of coveragefor Separate Structures on a Homeowners’Policy?a) 10% of Coverage Ab) 10% of Coverage Bc) 20% of Coverage Ad) 20% of Coverage B

6. Which statement is true regarding MobileHome policies?a) Mobile homes are covered as dwellings.b) Medical Coverage is not included.c) Personal property is covered with

Replacement Cost.d) A mobile home is personal property.

7. The RWE Safe Condominium Associationis sued for liability damages when a visitordrowns in the association's pool. Theamount of damages awarded is above theliability limits of the association's policy.Which of the following would give theindividual association owners coverage fortheir share of the amount in excess of theassociation's policy?a) Replacement Costb) Loss assessmentc) Liability coveraged) Additional living expense

8. Ray has an HO-5 Special Peril Policy. Hecame home one day to find his houseburglarized with $800 stolen. If Ray had a$200 deductible, how much would theinsurer pay to indemnify him?a) $0b) $250c) $300d) $550

9. Gene and Dee have an HO-3 policy withthe building insured for $100,000. Howmuch coverage of personal property do Deeand Gene have for property they keepstored at a second residence they own?a) $0b) $1,000c) $5,000d) $10,000


10. Which of the following would not beallowed a Homeowners’ policy under theHO eligibility rules?a) A building with four (4) families living

in itb) A home with one (1) family that has

two (2) boardersc) A building with three (3) families living

in itd) A one (1) family home with an

incidental bakery business

11. What is the special limit of liability for theftof jewelry on the HO policies?a) $500b) $1,000c) $1,500d) $2,500

12. Pritika and Allan bought a home built in the1880s in a small town for $85,000 thatwould cost $235,000 to rebuild if destroyedbecause of the ornate molding andwindows. What type of Homeowners’policy would BEST cover their needs ifPritika and Allan would be willing torebuild the home with functionallyequivalent materials and moderntechniques?a) HO-2b) HO-3c) HO-5d) HO-8

13. Which of the following is NOT covered bythe Limited Fungi, Wet or Dry Rot, orBacteria Coverage endorsement in the HOpolicies?a) Periodic testing of the building to test

for the possible existence of fungib) Removal of the fungic) The cost to tear out and replace any part

of the building as needed to gain accessto the fungi

d) The cost of a house guest's medical billsafter he or she becomes ill because ofthe presence of mold

14. The amount to repair or replace a damagedcovered building with less costly commonconstruction materials and methods whichare the equivalent to obsolete, antique orcustom materials and methods used in thebuilding's original construction is called:a) Functional Replacement Cost.b) Replacement Cost.c) Modified Replacement Cost.d) ACV.


Section V – Commercial Package Policy

INTRODUCTION

Our thriving economy does so well because of themany different types of businesses that have sprungup to meet the needs of people. The fact that thesebusinesses are so different means that they havequite different needs in terms of insuranceprotection. A restaurant, for instance, has differentneeds than a bookstore, a trucking company, or amanufacturing plant.

For this reason, the first commercial policies werecustomized to the needs of the particular business.Fire insurers wrote commercial fire policies thatcovered losses from fire and extended coverageendorsement perils, but did not cover property awayfrom the insured premises, theft, or crime. Casualtyinsurers developed commercial auto policies andboiler and machinery policies to cover the particularnuances of that market. There were no generalguidelines for policies, and coverages could differgreatly from one company to another. There may begaps in coverage developed between different

companies, policies, and policy types.

Insurance Services Office (ISO) The ISO is an independent organization thatservices the insurance industry. The ISO developedstandardized forms to offer a spread of coverages tolarger segments of the business marketplace in1986. Coverage modules allow for policyflexibility, because some coverages might beneeded by one type of business but not by another.Two (2) broad categories are:

1. Commercial Package Policy (CPP) • (For large businesses): Allows insured

to pick and choose coverages on amono-line policy basis, grouping themono-line policies together into oneplace for the insured's convenience

2. Business Owners Package Policy (BOP)• (For smaller businesses): A package of

coverages that will serve the needs ofmost small businesses

COMPONENTS OF A COMMERCIAL POLICY

The Insuring Agreement is the portion of theinsurance policy in which the insurer promises tomake payment to or on behalf of the insured. TheInsuring Agreement is usually contained in acoverage form from which a policy is constructed.

As stated above, the Commercial Package Policyallows the insured to pick and choose coverages ona mono-line policy basis, grouping the mono-linepolicies together into one place for the insured'sconvenience.

There are two (2) required sections:1. Common Policy Declarations2. Common Policy Conditions contains the

agreed upon legal obligations and duties ofthe insurer and the insured.

This will include:a) Policy Period (loss must occur between

policy inception and cancellation dates)b) Policy Territory (coverage only in the U.S.,

its territories, Puerto Rico, or Canada)c) Policy cancellation or changesd) Concealmente) Misrepresentation or fraudf) Insurer's right to examine company records

and to hold inspections and surveysg) Other insurance provisionsh) Policy liberalization proceduresi) Premium amountsj) Subrogation

The Commercial Policy must also contain at leasttwo (2) of the following commercial coverages:

1. Commercial Property2. Commercial General Liability3. Commercial Crime4. Commercial Auto5. Commercial Inland Marine6. Equipment Breakdown (formerly Boiler

and Machinery)7. Farm Property and Liability


Common Policy DeclarationsContains information about the insured, theinception and ending dates, and premium charges.Each coverage part in the policy has its owndeclarations page, because each is a mono-linepolicy in and of itself.

Interline EndorsementsEndorsements can modify one (1) or more of theCommercial Package Policy Coverages. AnInterline Endorsement modifies two (2) or morecoverages.

One or More Coverage Parts

Coverage on Commercial Building and Propertyforms or parts is on a mono-line basis for thebuildings only.

• Coverage is on an ACV basis, butReplacement Cost settlement can be added asan endorsement.

• Covered Peril Forms include thosediscussed earlier in the Dwelling andHomeowners’ Policies (Basic, Broad, SpecialCauses of Loss Forms, and the EarthquakeForm).

• Sinkhole and sprinkler leakage damage is anadded peril.

• V&MM is also a Commercial peril, but is notcovered if the property has been vacant for 60days or more.

The most common Commercial Property Coveragesinclude:

• Building and Personal Property• Coverage Extensions• Commercial Property Form Endorsements• Glass• Condominium Association• Builders Risk Form• Legal Liability Form• Leasehold Interest Form• Mortgage Holders Error and Omissions

Form• Tobacco Sales and Warehouse Form

COMMERCIAL PROPERTY

Commercial Property ConditionsForm

A Commercial Property Policy (CPP) consists ofthe basic parts of a policy:

• Declarations• Insuring Agreement• Conditions• Exclusions and Endorsements

Commercial Coverage Forms

Building and Personal PropertyThe structure of the Building and Personal PropertyCoverage Form includes:

• Covered Property• Buildings are listed and described

in the Declarations section;anything that is or has become apermanent part of the buildings(additions, fixtures, extensions,machinery, and equipment) iscovered as well.

• Business Personal Property isproperty that is owned by theinsured and used in the course ofthe insured's business.

• Personal Property of Othersinclude improvements andalterations made by the insured to abuilding that is leased and thatcannot be removed upon thetermination of the lease, as well aspersonal property of someone otherthan the insured that is under thecare, custody, or control of theinsured.

• Other Provisions include:• Additional Coverages (extra perils

covered) • Extensions of Coverage (additional

amounts)

Newly Acquired Buildings/Personal PropertyAny newly acquired/constructed building coverageis temporary as it exists for a finite period no greater


than policy expiration or 30 days. Coverage duringthis temporary period is limited to $250,000 pernewly acquired or constructed building and$100,000 for personal property at each of thesesame covered buildings.

Business Personal Property ExclusionsCovered property does not include:

• Accounts, bills, and currency• Animals, unless held for sale or boarded by

the insured, or owned and held as stockinside of buildings

• Automobiles held for sale• Aircraft and watercraft, unless held for sale• Crops outside of buildings• Signs not attached to the insured building• Contraband or property from illegal trade• Bridges, roadways, walks, patios, or other

paved surfaces• The cost of excavations, grading, filling, or

backfilling• Foundations of buildings, structures,

machinery, or boilers if their foundationsare below the lowest basement floor or thesurface of the ground, if there is nobasement

• Land (including land on which the propertyis located), water, growing crops, or lawns

• Personal property while airborne orwaterborne

• Bulkheads, pilings, piers, wharves, or docks• Property that is covered under another

coverage form of any other policy in whichit is more specifically described, except forthe excess of the amount due (whether theinsured can collect on it or not) from thatother insurance

• Retaining walls that are not part of abuilding

• Underground pipes, flues, or drains• Electronic data, except as provided under

Additional Coverages• The cost to replace or restore information

on valuable papers and records, includingthose which exist as electronic data

Condominium AssociationThis covers buildings and fixtures and is primary toindividual unit owner policies.

• Some association policies cover the entirebuilding.

• Some policies cover only up to the drywall,

making the individual condo ownersresponsible for covering from the paint in,such as cabinets and built-in bookshelves.

Condominium Commercial Unit-OwnersThis protects the owner of a business or commercialcondominium unit against loss or damage offurniture, fixtures, stock, and improvements oralterations owned by the insured.

Builders RiskThis covers commercial, residential, or farmbuildings that are under construction.

Business IncomeThis covers earnings losses while the business isshut down to remodel and restock after a loss due toa covered peril. Incomes included in this coverageare:

1. Net income before taxes2. Earnings necessary for continued operating

expenses3. Extra expense coverage

Operating expenses are those like utilities,advertising, rent or mortgage payments, and payroll.Payroll is automatically included unless excludedby endorsement. This coverage allows a business tomaintain employees who might otherwise be lost ifthey had to look for a different job. Coverage is on aco-insured basis, with the insured choosing the levelof coverage: 50 percent, 75 percent, 80 percent, or100 percent. The insured chooses the percentage oflost income coverage he/she wants. The insurerpays only that percentage and not the full amount oflost income.

Leg al Liability This covers damage to property of others in theinsured's care, custody, and control.

Extra ExpenseThis covers business continuation at anotherlocation while repairs from a covered loss areoccurring at the insured premises (rent, phoneinstallation, mailings to customers about temporaryrelocation, etc.).

There are two (2) basic ways that Extra ExpenseInsurance can be provided. Extra Expense can bewritten as a separate coverage form, or it can be


provided in combination with Business IncomeInsurance. The most common way to provide ExtraExpense is in combination. One of the advantagesof the combination form is that it does not have“Limits on Loss Payment,” which has often beenreferred to as the 40/80/100 clause.

Percentage availability (40/80/100)The ISO Form states: “We will not pay more forExtra Expense than the percentages shown in theDeclarations times the Limit of Insurance.”

When the “period of restoration” is:• 30 days or less, the first percentage applies.• 60 days or less, but more than 30 days, the

second percentage applies.• More than 60 days, the third percentage

applies.

Using the 40/80/100 as applicable percentages, onfirst read the policy appears to be saying that themost an insured can collect the first month of theirloss is 40 percent of the limit. Reading moreclosely, that is not what the form says at all. It sayswhen the period of restoration is less than 30, daysthen the insured can only collect 40 percent of theloss. In other words, if the insured's loss lasts morethan 60 days to repair or replace so that the insuredis operational, then the insured is entitled to 100percent of the amount of Extra Expense loss thatthey are able to prove. The intent of the limits ofloss payment is to limit the amount of ExtraExpense if the loss is minor in nature.

Causes of Loss Forms: Basic,Broad, and Special

For a loss to be covered, it must exceed thedeductible stated in the Declarations section, but beless than the Limit of Insurance – the amountbetween the two is the covered amount. There mayalso be deductions for any co-insurance or AgreedValue Coverage provision.When the loss or damage from any one (1)occurrence involves two (2) or more items ofcovered property and more than one Limit ofInsurance, the deductible is applied to the totalamount of loss, as long as loss to at least one (1)item is less than the total or sum of the Limit ofInsurance on that item plus the Deductible.

The CPP uses the same three (3) covered perilforms as the HO and Dwelling policies: The BasicForm, the Broad Form, and the Special Form.

1. The Basic Form includes fire, lightning,windstorm, hail, explosion, vandalism,smoke, sprinkler leakage, riot or civilcommotion, sinkhole collapse, and volcano.

2. The Broad Form includes perils foundunder the Basic Form, plus falling objectscausing exterior damage that results ininterior damage (weight of ice, sleet, andsnow); accidental discharge of water orsteam from a system or appliancecontaining steam or water, not including anautomatic sprinkler system; and breakage ofglass; subject to a $500 maximum limit.

3. The Special Cause-of-Loss Form includesall direct accidental losses except thosespecifically excluded in the policy (such asflood, war, wear and tear, and earthmovement).

Selected Commercial PropertyEndorsements

Ordinance or LawThis endorsement covers loss of value or damage toan undamaged portion of a building, demolition andremoval of undamaged parts of the building, andany increased costs of repairs due to civil building,zoning, or land use law changes.

SpoilageIf endorsed to the policy, the SpoilageEndorsement covers perishable stock for damageresulting from a mechanical breakdown, a poweroutage, or a refrigerant contamination.

Peak Season Limit of Insurance This seasonal endorsement allows additionalamounts of Personal Property Coverage duringdesignated periods, such as Christmas or otherholidays, when inventory levels are increased.

Value Reporting FormThe Value Reporting Form allows an insured thathas property that fluctuates in value to pay premiumon an average value for the entire policy year.Periodic updated value reports are filed with theinsurer to keep the property completely insured withno penalties in the event of a loss.


EarthquakeAs with Homeowners’ and dwelling policies,

Earthquake Coverage is excluded from coverageunless specifically endorsed to the CommercialProperty Policy.

COMMERCIAL INLAND MARINE

Historically, Inland Marine Coverage started afterthe development of the railroad, trucks, andairplanes in order to cover inland transportation, asopposed to Ocean Marine Coverage for ocean-bound ships. It covers property on land that ismobile and away from the owner's premises. Majorforms include:

• Common Carrier• Trucker's• Shipper's• Owner's• Transit Forms

Nationwide Marine Definition

The standard for Inland Marine Coverages, theNationwide Marine Definition, includes six (6)coverage types:

1. Personal property floaters and pleasure craft2. Commercial property Coverages, including

the contractor's equipment floater3. Domestic shipments (trucking)4. Instrumentalities of transportation or

communication5. Imports6. Exports

Commercial Inland MarineConditions Form

This contains the agreed upon legal obligations andduties of the insurer and the insured. It is the sameas the CPP Conditions Form.

Inland Marine Coverage Forms

Accounts ReceivableAccounts Receivable covers amounts due to theinsured that are not collectible from customersbecause of direct physical loss to accounts

receivable records because of fire or other insuredperils.

Bailee's CustomerThis covers damage to or loss of a customer's goodsregardless of the Bailee's (insured's) liability.Businesses such as laundries or dry cleaners wouldhave need of Bailee's Customer Coverage.

Commercial ArticlesCommercial Articles covers cameras, musicalinstruments, projection machines, film and relatedequipment and accessories of others while in theinsured's care, custody and control being used for acommercial or professional purpose.

Commercial Contractor's Equipment FloaterInsurance that covers contractor's equipment, eitheron or off premises is known as CommercialContractor's Equipment insurance.

Electronic Data Processing (EDP) This provides Special Peril coverage for loss ofcomputer programs, data or media. “Special Peril”refers to all risks except those expressly excluded.

EDP policies provide “special” peril coveragesimilar to that provided by “special” property forms,PLUS coverage for all electrical and magneticdamage, mechanical breakdown, and oftentemperature and humidity changes as well. Someinsurers include the perils of electrical and magneticdamage, mechanical breakdown, and temperatureand humidity changes in the Basic Form, whileothers make them available by endorsement for anadditional premium.

Equipment DealersThis insures the stock in trade of the insured thatconsists mainly of mobile agriculture andconstruction equipment, as well as similar propertyof others in the insured's care, custody, and control(not including autos, trucks, motorcycles, aircraft,or watercraft).


Exclusions Include:• Mysterious disappearance• Shortages found at inventory• Water damage • Loss caused by artificially generated current

Installation FloaterThis covers machinery and equipment that are to beinstalled in a building while in-transit and whilebeing installed. Further coverage on this floater mayvary with individual companies.

Some floaters, for example, include coverage forcollapse of a building or structure, which is adefinite plus, particularly for contractors involved inthe repair or refurbishing of television orcommunication towers. Some floaters also providecoverage for testing, debris removal, pollutioncleanup, and soft costs, such as:

• Delay in completion of work• Loss of use• Extra expenses

At what point coverage ends under an installationfloater is also an important consideration. It is notunusual for coverage to end when construction byothers continues for long periods.

Jeweler's BlockJeweler's Block covers a jeweler's stock consistingmainly of jewelry, precious and semi-preciousstones, precious metals and alloys, and similarproperty of others in the insured's care, custody, andcontrol. This includes that which is held for sale, onexhibit, in transit by common carrier, or that whichis in the custody of an outside salesperson.Claims are settled for the lesser of:

• Actual Cash Value.• The cost to restore to prior condition

immediately before the loss.• The cost to replace the property.• The lowest figure in the insured's books and

records showing the property's value.

Sentimental, antique, or historic value is notconsidered in claim payment.

• Coverage is suspended if protectivesafeguards, such as security alarms that arerequired in the policy, are not in activeworking order. Coverage resumes when thedevices are working again.

• The insured must take inventory every 12months, detailing purchases and salesrecords, and keep the records for 36 monthsafter the policy ends.

SignsThis covers the insured's signs and similar propertyof others in the insured's care, custody, and control.

Camera and Musical Instrument Dealers FormThis covers the insured's merchandise of camerasand musical instruments and related or similarequipment of others in the insured's care, custody,and control.

Valuable Papers and RecordsValuable Papers and Records covers such itemsas deeds, abstracts, mortgages, books, manuscripts,files, maps, drawings, and other records that areimportant to the continuation of the insured'sbusiness, whether owned by the business or theproperty of others in the insured's care, custody, andcontrol.

Transportation Coverages

Inland marine policies also contain TransportationCoverages for those firms that carry cargo ormerchandise from one location to another.

Common Carrier Cargo LiabilityAlso known as Transit Coverage policies,Common Carrier Cargo Liability policies coverlegal liability for damage to goods the carrier carrieswith only a few exceptions, those being acts of Godand acts of a public enemy (war). Order of publicauthority could also exclude liability if the authoritywere to cause problems with roads or dams thatcause damage to the cargo.

Neglect of the ShipperThis excludes the carrier from liability in the eventthe shipper did not pack the cargo well.

Inherent ViceA characteristic of the merchandise to destroy itself,such as the spoilage of fresh fruits and vegetables isknown as inherent vice.


Motor Truck Cargo FormsForms exist for truckers, shippers, and owners. TheStandard Form to insure a carrier's liability is theMotor Truck Cargo Policy-Trucker's Form, andit is usually written on a named-peril basis. It paysdamages only when the trucker is legally obligatedto pay.Transit Coverage FormsInland Marine Coverage on the insured's propertywhile in transit over land from one location toanother is covered under the Transit CoverageForm. These forms can cover property on either anAnnual or a Specific Trip Transit policy.

Released Bills of LadingA means by which carriers attempt to limit theirliability by specifying a maximum amount forwhich the carrier will be held liable is known asReleased Bills of Lading. The carrier often chargesa lower rate to those shippers who accept thelimitation and a higher rate to those who do notaccept it. Coverage for the owner of goods beingshipped by common carrier is provided under aMotor Truck Cargo Policy Shipper's Form or undera Transit Coverage Form. The Shipper's version ofthe form is a property coverage policy.

EQUIPMENT BREAKDOWN COVERAGE(Formerly known as Boiler and Machinery)

Historically, Boiler and Machinery (B&M)coverage began with the inspection and insuring ofsteam boilers and eventually expanded to includeother pressure machinery. This form of insuranceprovides important mechanical breakdown coveragegenerally not available under any other insurancepolicy. An Equipment Breakdown Coveragepolicy can protect an insured against the effects ofcatastrophic property loss, such as steam boilerexplosion or an expensive breakdown of machineryand equipment. It can also protect against the loss ofearnings or income while machinery is beingrepaired. Today, Equipment Breakdown Coverageincludes machines as diverse as refrigeration and airconditioning units, deep well pumps, transformers,and turbines.

Equipment Breakdown Coverage policies covermost machines and equipment used to containpressure or generate/transmit power and which aresubject to accidental breakdown that could destroyor damage a large part of the machine.

Parts of an Equipment Breakdown PolicyThe Equipment Breakdown policy consists of four(4) parts:

1. Declarations Page2. Coverage Form3. Object Definition Form(s)4. Any applicable endorsements

CoveragesThere are (3) three types of Equipment Breakdownpolicies:

1. Standard Equipment Breakdown Policy2. Small Business Coverage Form3. Small Business Broad Coverage Form

Equipment Breakdown policies cover losses causedby sudden and accidental breakdown or explosionon a Replacement Cost basis.

Covered Property

Covered property includes:1. Any building or business personal property

the insured owns2. Any property of others in the insured's care,

custody, or control or for which the insuredis legally liable

Coverage does NOT include the following:1. Valve leakage2. Breakdown of structures that support the

equipment3. Something outside the boiler exploding and

causing damage4. Losses caused while the equipment is being

tested5. Loss to adjoining property


Conditions

Periodic Inspection and the Suspension ProvisionA major part of the Equipment Breakdown policystill includes the insurer's periodic inspection ofthe insured devices. The purpose of this inspectionis to discover dangerous conditions before theycause an accident; the inspection does not create awarranty for the equipment. The insurer maysuspend coverage or cancel the policy at any time ifthe equipment is found to be in bad or dangerouscondition. This is known as the SuspensionProvision.

Equipment BreakdownProtection Coverage Form

One or more of the Object Definition Forms mustbe included with the policy.

Pressure and Refrigeration Objects FormThis covers boilers, refrigeration units, piping, andair conditioning units.

Mechanical Objects FormThe Mechanical Objects Form covers engines,compressors, fans and blowers, wheels and shafting,and deep-well pumps.

Turbine Objects FormThis form includes both steam and water turbines.

Electrical Objects FormThe Electrical Objects Form covers such things astransformers and rotating electrical machines.

Comprehensive Coverage Form (Excluding Production Machinery)This defines all Equipment Breakdown objects thatcan be covered, except for production machinery.

Comprehensive Coverage Form (Including Production Machinery)This form defines all Equipment Breakdown objectsthat can be covered, including productionmachinery.

Object definition forms are endorsed onto thestandard Equipment Breakdown (Boiler andMachinery) form, but are included in both SmallBusiness Equipment Breakdown Coverage Forms.

Selected Endorsements

Business Income – Report of ValuesBusiness income is income received for productssold or for services rendered.

Business Interruption – Insureds must report netannual sales and other earnings, and profits eachyear in order to qualify for this coverage. Form BM15 31 Business Income-Report of Values may beprovided to the insured as a means of reporting thisinformation.

• The Business Interruption, Actual LossSustained Endorsement covers the actualloss of business income as the result of anaccident to a covered object, including extraexpense to reduce or prevent theinterruption.

• The Business Interruption, ValuedCoverage Endorsement pays a specifiedamount for each day the businessinterruption continues.

Actual Cash ValueFor damaged property not repaired within 18months of the accident (unless previously agreed toin writing by the insurer) claim payment will be forthe lesser of the:

1. Cost it would have taken to repair OR2. The property's Actual Cash Value at the

time of the accident.


FARM COVERAGE

Farmers usually need coverage for their home andpersonal property, as well as for their farm businessoperations. Aside from a farm dwelling, most farmsalso have a large investment in land, otherbuildings, and farm equipment that need insuranceprotection.

Farm Property Coverage Forms

The Farm Property Coverage Form is similar tothat of a Homeowners’ Policy and covers buildingsand personal property. The difference between thetwo policy types is that business coverage isgenerally excluded from a Homeowners’ Policy butis included in the Commercial Farm Property Policyas Coverages E, F, and G. Each coverage isavailable only if there is a limit shown for it in theDeclarations Page of the policy.

Farm Policy Coverages

Coverage A Dwellings

Coverage B Other Private Structures

Coverage C Household Personal Property

Coverage DLoss of Use (additional living expenses or fair rentalvalue)

Coverage E Scheduled Farm Personal Property*

Coverage F Unscheduled Farm Personal Property*

Coverage G Other Farm Structures

Coverage H Bodily Injury and Property Damage

Coverage I Personal and Advertising Injury

Coverage J Medical Payments

*Coverages E and F cover farm machinery,

whether on or away from the describedpremises. They also include coverage formules, swine, and sheep, but not poultry.

Mobile Agricultural Machineryand Equipment Coverage Form

This is used when machinery and equipment is theonly exposure, provides Special Peril coverage formobile equipment.

• There is an 80 percent co-insurance clause.• Coverage is written on either a blanket or

scheduled form.• Coverage is excluded for irrigation

equipment and for dishonesty of the insuredor the insured's employees or agents.

Livestock Coverage Form

This form mainly used when livestock is the onlyfarm exposure, but is also used if it is desirable towrite Livestock Coverage separately.

Written on a named-peril basis, this covers death ordestruction from 11 perils:

1. Fire2. Lightning3. Windstorm4. Hail5. Explosions6. Riot7. Collision with vehicles on public roads

except for vehicles owned or operated bythe insured

8. Sinkhole collapse9. Volcanic action10. Vandalism11. Theft

Livestock excluded from coverage under this forminclude race or show animals, livestock on ranges,and livestock being transported to, from, or while atstockyards or commercial feedlots.


Definitions

Custom FarmingCustom Farming is the performance of specificplanting, cultivating, harvesting, or similar specificfarming operations by an insured, at a farm that isnot an insured location when the performance is for,and under the direction or supervision of, the owneror operator of the farm or the authorizedrepresentative of the owner or operator. However,custom farming does NOT mean:

• Operations conducted at a premises rentedto, leased to, or controlled by an insured.

• Operations for which no compensation inmoney or goods is received.

• A neighborly exchange of services.

Farm EmployeeThis means any insured's employee whose dutiesare principally in connection with the maintenanceor use of the insured location as a farm. Theseduties include the maintenance or use of theinsured's farm equipment. “Farm employee” doesnot mean any employee while engaged in aninsured's business.

FarmingThis means the operation of an agricultural oraquacultural enterprise and includes the operation ofroadside stands on farm premises maintained solelyfor the sale of products produced principally onthose premises. Unless specifically indicated in theDeclarations, farming does not include:

• Retail activity other than that describedabove.

• Mechanized processing operations.

Causes of Loss (Basic, Broad andSpecial)

The Farm policy uses the same three (3) coveredperil forms as other policies (Basic Form, BroadForm, and Special Form) with their specific coveredperils.

Conditions

The following conditions apply in addition toCommon Policy conditions:Loss ConditionsBankruptcyThe bankruptcy, or insolvency, of the insured or ofthe insured's estate will not relieve the insurer of itsobligations.

Insured Duties in the Event of Occurrence, Offense, Claim, or Suit Notice of a claim must be provided to the insurer assoon as is possible and must include:

• How, when, and where the occurrence tookplace.

• The names and addresses of any injuredpersons and witnesses.

• The nature and location of any injury ordamage arising out of the occurrence oroffense.

If a claim is made or suit is brought against anyinsured, he or she must:

• Immediately record the specifics of theclaim or suit and the date received

• Notify the insurer in writing as soon aspossible.

The insured must give the insurer written notice ofthe claim or suit as soon as practicable.

In addition, the insured must: 1. Notify the police if a law may have been

broken. 2. Immediately send the insurer copies of any

demands, notices, summonses, or legalpapers received in connection with theclaim or suit.

3. Authorize the insurer to obtain records andother information.

4. Cooperate with the insurer in theinvestigation or settlement of the claim ordefense against the suit.

5. At the insurer's request, assist in theenforcement of any right against any personor organization that may be liable to theinsured because of injury or damage towhich this insurance may also apply.


No insured will, except at that insured's own cost,voluntarily make any payment, assume anyobligation, or incur any expense, other than for firstaid, without the insurer's consent.

Any injured person who makes a claim for paymentof medical expenses under the provisions ofCoverage J must:

• Give the insured written proof of claim,under oath if required, as soon aspracticable.

• Execute authorization to allow the insuredto obtain copies of medical reports andrecords.

• Submit to physical examination by aphysician selected by the insurer when andas often as reasonably required.

Insurance Under Two (2) Or More Coverages If two (2) or more of a policy's coverages apply tothe same loss or damage, the insurer will not paymore than the actual amount of the loss or damage.

Legal Action Against the Insurer A person or organization may sue the insurer torecover on an agreed settlement or on a finaljudgment against an insured, but the insurer will notbe liable for damages that are not payable under theterms of this coverage form or that are in excess ofthe applicable Limit of Insurance. An agreedsettlement means a settlement and release ofliability signed by the insurer, the insured, and theclaimant or the claimant's legal representative.

No Admission of Liability with Medical Payments No payment made under the Medical Paymentsprovisions of Coverage J constitutes an admissionof liability by any insured or the insurer.

Other Insurance This condition applies only if, in addition to theinsurance provided under a coverage form, theinsured has other insurance under any other policycovering the same obligations to pay damages andprovide defense against suits for damages.

The insurer will pay only the proportion of covereddamages and related defense costs that theapplicable Limit of Insurance under this coverageform bears to the total amount of all your insuranceproviding the same coverage, in covered

occurrences arising from any cause except theownership, maintenance, use, operation or loadingor unloading of a:

• Motor vehicle.• Vehicle which qualifies as mobile

equipment only while used on premises theinsured owns or rents.

• Watercraft.

Transfer of Rights of Recovery Against Othersto the Insurer (Subrogation)If the insured has rights to recover all or part of anypayment the insurer has made under this coverageform, those rights are transferred to the insurer. Theinsured must do nothing after loss to impair them.At the insurer's request, the insured will bring suitor transfer those rights to the insurer and helpenforce them.

Liberalization If the insurer adopts any revision that wouldbroaden the coverage under a coverage formwithout additional premium within 45 days prior toor during the policy period, the broadened coveragewill immediately apply to the coverage form.

Representations By accepting a policy, the insured agrees:

1. The statements in the Declarations areaccurate and complete.

2. The statements are based uponrepresentations made to the insurer.

3. The insurer has issued the policy in relianceupon the insured's representations.

Separation of Insureds Except with respect to the limits of insurance, andany rights or duties specifically assigned in acoverage form to the first named insured, thisinsurance applies:

1. As if each named insured were the onlynamed insured.

2. Separately to each insured against whomclaim is made or suit is brought.

Exclusions

This insurance does not apply to: 1. Expected or Intended Injury2. Contractual Liability 3. Pollution


4. Release or Discharge From Aircraft 5. Aircraft, Motor Vehicle, Motorized

Bicycle, or Tricycle 6. Bodily injury or property damage:

a) Arising out of ownership, maintenance,use, or entrusting to others of anyaircraft, motor vehicle, motorizedbicycle or tricycle owned or operatedby or rented or loaned to any insured(use includes operation and loading orunloading).

b) Giving rise to vicarious liability,whether or not imposed by law, for theactions of a child or minor involvingany aircraft, motor vehicle, motorizedbicycle or tricycle.

7. Watercraft Bodily injury or property damage: a) Arising out of ownership, maintenance,

use, or entrusting to others of anexcluded watercraft (use includesoperation and loading or unloading).

b) Giving rise to vicarious liability,whether or not imposed by law, for theactions of a child or minor involving anexcluded watercraft. (Excludedwatercraft are those that are principallydesigned to be propelled by enginepower or electric motor or are sailingvessels, whether owned by or rented toan insured.)

8. Mobile Equipment Bodily injury or property damage arisingout of: a) The transportation of mobile equipment

by a motor vehicle owned or operatedby, or rented or loaned to, any insured.

b) The use of any self-propelled landvehicle or mobile equipment in, orwhile in practice or preparation for, aprearranged racing, speed, strength, ordemolition contest or any stuntingactivity.

9. Use of Livestock or Other AnimalsBodily injury or property damage arisingout of the use of any livestock or otheranimal:a) In, or while in practice or preparation

for, a prearranged racing, speed, orstrength contest or prearranged stuntingactivity.

b) With or without an accessory vehicle,

for providing rides to any person for afee or for providing rides in connectionwith or during a fair, charitablefunction, or similar type of event.

10. Business Pursuits Bodily injury or property damage arisingout of or in connection with a businessengaged in by an insured. This exclusionapplies but is not limited to an act oromission, regardless of its nature orcircumstance, involving a service or dutyrendered, promised, owed, or implied to beprovided because of the nature of thebusiness.

11. Custom Farming Bodily injury or property damage arisingout of the insured's performance of, orfailure to perform, custom farmingoperations. (This exclusion applies onlywhen receipts from “custom farming”operations exceed $5,000 for the 12 monthsimmediately preceding the date of theoccurrence.)

12. Professional Services Bodily injury or property damage arisingout of the rendering of, or failure to render,professional services.

13. Rental of Premises and Ownership orControl of PremisesBodily injury or property damage arisingout of: a) An act or omission in connection with

any location (other than an insuredlocation) that is rented to, or owned orcontrolled by, the insured.

b) The rental or holding for rental of aninsured location.

14. Communicable Disease 15. Workers Compensation or Similar Law16. Employers Liability

Bodily injury sustained by: a) Any employee (other than a residence

employee) as a result of his or heremployment by the insured.

b) Any residence employee, unless theemployee makes a written claim orbrings suit no later than 36 months afterthe end of the policy period.

c) The spouse, child, parent, brother orsister of any employee as aconsequence of bodily injury to thatemployee. (This exclusion applies


whether the insured may be held liableas an employer or in any other capacityand to any obligation to share damageswith or repay someone else who mustpay damages because of the injury.)

17. Building/Structure Under ConstructionBodily injury arising out of any premises onwhich a building or structure is being constructed. The only exception to this exclusion is in an occurrence of bodily injury sustained by: a) Persons who are not insureds.b) Residence employees of an insured

arising out of or in the course of theiremployment.

18. Bodily Injury to An Insured19. Damage to Property20. Damage to Your Product21. Damage to Your Work 22. Damage to Impaired Property or

Property not Physically Injured Property damage to impaired property or property that has not been physically injured, arising out of: a) A defect, deficiency, inadequacy or

dangerous condition in your product orthe insured's work.

b) A delay or failure by the insured oranyone acting on his or her behalf toperform a contract or agreement inaccordance with its terms.

23. Recall of Products, Work, or ImpairedPropertyDamages claimed for any loss, cost orexpense incurred by you or others for theloss of use, withdrawal, recall, inspection,repair, replacement, adjustment, removal ordisposal of the insured's: a) Productb) Workc) Impaired property

I. If such product, work, or propertyis withdrawn or recalled from themarket or from use by anyperson or organization because ofa known or suspected defect,

deficiency, inadequacy ordangerous condition in it.

24. Sexual Molestation, Corporal Punishment or Physical or Mental Abuse

25. Controlled Substances 26. Personal Injury

Limits1. The Limits of Insurance shown in the

Declarations and the provisions below fixthe most the insurer will pay regardless ofthe number of: a) Insureds.b) Claims made or suits brought.c) Persons or organizations making claims

or bringing suits.2. The General Aggregate Limit is the most

the insurer will pay for the sum of: a) Damages under Coverage H and

Coverage I.b) Medical expenses under Coverage J.

3. The Each Occurrence Limit is the most theinsurer will pay for the sum of: a) Damages under Coverage Hb) Medical expenses under Coverage J

because of all bodily injury andproperty damage arising out of anyone occurrence.

All bodily injury and property damage resultingfrom any one accident or from continuous orrepeated exposure to substantially the same generalharmful conditions will be considered to be theresult of one occurrence.

Included within the Occurrence Limit is a specialLimit of Insurance of $10,000, which is the mostthe insured will pay for all covered damages that theinsured becomes legally obligated to pay because ofstatutorily imposed vicarious liability for the actionsof a child or minor.

Additional CoveragesAs with other real property policies, farm policiesalso include coverages for such things as:

• Debris removal.• Fire department charges.• Cost to restore farm records.• Limited coverage for Fungi and Bacteria for

Property, Farm, Dwellings, AppurtenantStructures and Household PersonalProperty.

• Liability coverage.

Farm Umbrella CoverageAn umbrella policy adds additional liability orexcess coverage for $1 million or more over andabove the basic liability limits of an underlyingpolicy.


SECTION V – COMMERCIAL PACKAGE POLICY REVIEW QUESTIONS

1. If the insured desires coverage for businesscontinuation at another location whilerepairs from a covered loss are beingcompleted, they should purchase which ofthe following coverages?a) Business Incomeb) Commercial Propertyc) Extra Expensed) No coverage is offered for indirect

losses.

2. Which of the following is NOT an optionalpart of a Commercial Insurance Policy?a) Commercial Policy Conditionsb) Commercial Propertyc) Commercial General Liabilityd) Equipment Breakdown (Boiler and

Machinery)

3. Equipment Breakdown coverage covers allof the following except:a) Deep well pumps.b) Periodic inspections of the insured

devices.c) Transformers.d) Loss caused while the unit is being

tested.

4. Showplace Windows has large plate glasswindows to show off its merchandise andhas only the Commercial PropertyCoverage Form. How much will the insurerpay if the glass is damaged by fire?a) $100/pane with a maximum of $500b) $100/pane with no limit to the

aggregate amountc) The full amount of the lossd) $0 (no glass coverage unless the insured

purchased a Glass Coverage FormPolicy)

5. If the insured works on the property ofcustomers that it holds in its premises,which of the following would BEST protectthe insured against damage to thecustomer's property?a) Personal Article Floaterb) Bailee's Customerc) Commercial Articlesd) Contractor's Equipment

6. Which of the following would exclude acarrier from liability in the event theShipper did not pack the cargo well?a) Motor Truck Cargo-Shipper's Formb) Neglect of the Shipperc) Inherent viced) Released Bills of Lading

7. An insured's air conditioning unit would becovered under which of the followingObject Definition Forms?a) Mechanical Objectsb) Turbine Objectsc) Pressure and Refrigeration Objectsd) Electrical Objects

8. WE R Growing, Inc. recently bought anadditional building. How much coverage isautomatically extended to the new buildingon their Commercial Property CoverageForm?a) Up to 10 percent of the Commercial

Buildings amountb) Up to 50 percent of the Commercial

Buildings amountc) Up to $100,000d) Up to $250,000

9. Farmers can insure their crops through allof the following EXCEPT:a) Crop hail insurance.b) Unscheduled farm property insurance.c) The FCIC.d) Multi-peril crop insurance.

10. Krismis Goodies has increased theirmerchandise in stock in November andDecember of each year. What coveragewould give them the BEST coverage fortheir stock during this period of time?a) Commercial Propertyb) Peak Seasonc) Value Reportingd) Personal Effects


11. Which coverage covers earnings losseswhile the business is shut down to remodeland restock after a loss due to a coveredperil?a) Business Incomeb) Builders Riskc) Emergency shutdownd) Remodeling coverage


Section VI – Business Owners Policy (BOP)

CHARACTERISTICS AND PURPOSE

Why Needed?Commercial package policies are designed for largebusinesses. They cover a wide variety of risks andoptions that may occur with business changes andgrowth. Smaller businesses do not meet theeligibility requirements of the Commercial PackagePolicy, nor do they have a need for many of thecoverages, yet these small businesses have specialneeds that must be met.

What is a BOP?The Business Owners Package Policy, or BOP, isfor smaller businesses and is primarily designed forsmall, one-location risks. They are commercialpackage policies that provide both property andliability coverage to certain types of smallbusinesses. It is a package of coverages that willserve the needs of most small businesses.Employing the Homeowners approach, the BOPprovides extensive building and business personalproperty coverages and broad liability insurance. Itis unique in that it basically includes coverage forloss of earnings, due to insured hazard, on an“actual loss sustained” basis.

Eligible BusinessesInsurers consider a number of factors when decidingto write BOPs, including:

1. The type of business2. The size of the premises3. The required limits of liability4. The extent of offsite activity

Premiums for BOP policies are based on businesslocation, financial stability, building construction,security features, and fire hazards in addition to theabove factors.

Risks covered by the BOP include the following:• Businesses with fewer than 100 employees

and less than $1 million in revenue• Apartment buildings that may also contain

offices and certain service and mercantileoccupancies

• Eligible office buildings for the BOP 2002are those that:

• Are principally for office purposes.• Are no more than six stories and have

less than 100,000 square feet of floorspace.

• May contain apartments and certainwholesale, service, or processingincidental occupancies that do notexceed 25,000 square feet.

• Restaurants (such as delis, cafes, pizzaparlors, etc.) limited to fast food types up to7,500 square feet – beer and wine sales(only) are permitted, but are limited to 25percent of gross sales.

• Convenience stores with gasoline pumps.• Gas sales are limited to 75 percent of

gross sales.• No auto services, restaurant, or propane

or kerosene dispensing is permitted.• Laundries and dry cleaners.• Motels not exceeding three (3) stories and

not including a bar or a lounge.• Contractors (carpenters, electricians,

painters, plumbers, etc.).• Self-storage facilities (excluding industrial

storage) not exceeding two (2) stories.

Ineligible BusinessesCertain categories of risks are ineligible forBusiness Owners policies. They include thefollowing:

• Large premises operations• Businesses whose majority of operations

are conducted off-premise• Automobile-type businesses-dealers,

Garages, repair shops, parking lots, etc. • Places of amusement• Bars, grills, and restaurants (unless within

eligibility guidelines)• Financial institutions• Manufacturing or processing risks (unless

within eligibility guidelines)• One (1) or two (2) family dwellings• Household personal property• High risk or highly specialized operations • Businesses that require higher liability

limits than those offered in a BOP


BUSINESS OWNERS POLICY (SECTION I) – PROPERTY

Coverages

BOP Policy/Cause of Loss Forms and Coverages

1. Standard Form (named peril)Covered losses include:• Fire• Lightning• Explosion• Windstorm or hail• Aircraft and vehicles• Riot or civil commotion• Vandalism and malicious mischief• Sprinkler leakage• Sinkhole collapse• Volcanic action• Transportation damage to property in

transit2. Special Form (Open-Peril/Special Peril)

Exclusions

BOP Standard Form Exclusions1. Ordinance or law2. Earth movement3. Government action4. Nuclear hazard5. Utility failure occurring away from the

insured's premises6. War7. Water, such as flood and sewer backup8. Artificially generated electrical current9. Water pipe rupture or bursting10. Leakage or discharge of water or steam

caused by breakdown of water or steamsystem or appliance or mechanicalbreakdown

11. Consequential loss that causes extraexpenses or increases in loss of income

12. Failure of computers to recognize aparticular date or time (i.e., the year 2000)

13. Loss to valuable papers, records andaccounts receivables due to the insured'sdishonest or criminal acts

BOP Special Form ExclusionsThe BOP Special Form is a Special Peril policy andcovers any risks that are not listed as exclusions.Exclusions include the standard form exclusionsand 15 others:

1. Wear and tear2. Rust, corrosion, fungus, decay,

deterioration, and hidden or latent defects3. Smog and other pollution4. Settling, cracking, or expansion5. Damage from birds, insects, rodents or

animals6. Dishonest or criminal acts of the insured or

his employees7. Voluntary parting with property through

fraud8. Rain, snow, sleet, or ice damage to personal

property that is not in a building9. Collapse10. Faulty planning, workmanship, or repair11. Smoke, vapor, or gas12. Frozen plumbing13. Weather conditions that contribute to

causing a loss14. Loss resulting from acts or decisions or the

failure to act or decide15. Consequential losses caused by delay, loss

of use, or loss of market

Deductibles

The standard deductible on the BOP is $500, butother deductibles may be chosen.

Loss Conditions

Unless a dollar limit has been specified in thedeclarations, business income or loss of incomecoverage provided by a business owners policytypically covers the actual loss sustained byinterruption of operations during the period ofrestoration that occurs within 12 consecutivemonths following the date of direct physical loss ordamage. Co-insurance does not apply.


BOP policies cover extra expenses the insuredincurs following a loss, and this helps the businessresume normal business activities. It also means thatless pure income is needed for the use ofemployees.

Major insurers use “all-purpose” time elementforms (a product that addresses businessinterruption underwriting problems and lossexperience) to provide the earnings protectionneeded by most businesses, eliminating a number offorms previously used for the purpose. As anautomatic feature, this business income insuranceincludes rental value coverage by virtue ofgeneralization of terms and extra expense coverage,without monthly limits. These forms are designedfor the vast majority of businesses for whichearnings loss is the primary time element risk.

General Conditions

BOP conditions consist of:• Policy cancellation or changes• Concealment• Misrepresentation or fraud• Insurer's right to examine company records

and to hold inspections and surveys• Policy liberalization procedures• Premium amounts• Subrogation• Other insurance provisions

Inflation Guard ProvisionThis increases building coverage by eight (8)percent each year.

Peak Season ProvisionBusiness Personal Property can be increased by upto 25 percent to provide for seasonal stockvariations.

The Control of Property ConditionThis states that a negligent act of someone beyondthe insured's direction or control will not affectcoverage. If the insured violates contract conditionsat one location, coverage to other locations will notbe affected.

Legal Action Against the Insurer ProvisionThis limits the insured's right to bring action againstthe insurer for damages to two (2) years if theinsured has complied with policy conditions and theinsurer has not indemnified the insured for directphysical loss.

Policy Period/Coverage Territory ConditionA loss must occur during the policy period and inthe policy's coverage territory of the U.S., itsterritories, Puerto Rico, or Canada in order to becovered.

Optional Coverages

The following are included in the BOP, but onlyapply if particulars are noted in the Declarationspage and extra premium is paid:

• Outdoor signs• Exterior glass• Interior glass• Employee dishonesty• Mechanical breakdown• Burglary and robbery• Money and securities

BOP Additional Coverages (Subject to policy limits)

• Debris removal, including property ofothers: $25,000 limit

• Property preservation• Fire department service charge• Loss of business income and extra expense• Pollutant cleanup and removal• Order of civil authority• Money order and counterfeit currency• Forgery and alteration

BOP Extended Coverages• Personal property at a newly acquired

premises: up to $10,000 coverage• Personal property off-premises (i.e., at a

storage facility): up to $5,000 coverage• Outdoor property: up to $1,000 coverage

with a $250 limit for any one (1) tree,shrub, or plant

• Valuable papers and records: up to $1,000coverage


BUSINESS OWNERS POLICY (SECTION II) - LIABILITY

Business Liability

• Business Liability: $300,000 limit• Medical Expense: $5,000 limit (per

person) • Fire Legal Liability: $50,000 limit• Policy Aggregate Limit: Two (2) times the

business liability and medical expenseliability limit for all damages or injuries thathappen during the policy period.

Products and Completed Operations liability isseparate from other liability limits.

Medical Expenses

Medical Expenses have a $5,000 limit per person.

Conditions

Like those of the CPP, BOP conditions consist of:• Policy cancellation or changes• Concealment• Misrepresentation or fraud• Insurer's right to examine company records


Exclusions

BOP Standard Form Exclusions• Ordinance or law• Earth movement• Government action• Nuclear hazard• Utility failure occurring away from the

insured's premises• War• Water, such as flood and sewer backup• Artificially generated electrical current• Water pipe rupture or bursting• Leakage or discharge of water or steam

caused by breakdown of water or steamsystem or appliance, or mechanicalbreakdown

• Consequential loss that causes extraexpenses or increases in loss of income

• Failure of computers to recognize aparticular date or time (i.e., the year 2000)

• Loss to valuable papers, records andaccounts receivables due to the insured'sdishonest or criminal acts

BOP Special Form ExclusionsThe BOP Special Form is a Special Peril policy andcovers any risks that are not listed as exclusions.Exclusions include the standard form exclusionsand 15 others:

1. Wear and tear2. Rust, corrosion, fungus, decay,

deterioration, and hidden or latent defects3. Smog and other pollution4. Settling, cracking, or expansion5. Damage from birds, insects, rodents or

animals6. Dishonest or criminal acts of the insured or

his employees7. Voluntary parting with property through

fraud8. Rain, snow, sleet, or ice damage to personal

property that is not in a building9. Collapse10. Faulty planning, workmanship, or repair11. Smoke, vapor, or gas12. Frozen plumbing13. Weather conditions that contribute to

causing a loss14. Loss resulting from acts or decisions or the

failure to act or decide15. Consequential losses caused by delay, loss

of use, or loss of market

Definitions

InsuredThe business, its owner(s) and employees acting inthe course of employment and under the direction ofthe company are considered insureds under a BOP.


BUSINESS OWNERS POLICY (SECTION III) – COMMON POLICY CONDITIONS

BOP Cause of Loss Form and Coverages1. Standard Form (Named Peril)

Covered losses include:• Fire• Lightning• Explosion• Windstorm or hail• Aircraft and vehicles• Riot or civil commotion• V&MM• Sprinkler leakage• Sinkhole collapse• Volcanic action• Transportation damage to property in

transit2. Special Form (Open-Peril/Special Perils)

BOP Additional Coverages Subject to policy limits, but includes:

• Debris removal• Property preservation• Fire department service charge• Loss of business income and extra expense• Pollutant cleanup and removal• Order of civil authority• Money order and counterfeit currency• Forgery and alteration

BOP Extended Coverages• Personal property at a newly acquired

premises: up to $10,000 coverage• Personal property off-premises (i.e., at a

storage facility): up to $10,000 coverage• Outdoor property: up to $1,000 coverage

with a $250 limit for any one (1) tree, shrub,or plant

• Valuable papers and records: up to $1,000coverage

Selected Endorsements

The following endorsements are optional coveragesan insured may purchase for additional premium.

State ChangesIf a state's requirements differ from the policywording or change during the policy period, the stateregulations take precedence. The policy changes to

meet the state regulation, whether the written policyis changed or not. This is automatically included onpolicies.

Protective SafeguardsRather than a coverage in itself, the ProtectiveSafeguards Endorsement lists the protective devicesor services the insured must maintain as a conditionfor coverage. The insurer will not pay for loss if theinsured failed to keep the protective safeguard inworking order or if he/she didn't notify the insurerthe device was not working properly.

The following device classifications apply:1. P-1 Automatic Sprinkler System2. P-2 Automatic Fire Alarm System3. P-3 Security Service4. P-4 Service Contract (for a privately owned

fire department)

Utility Services -Direct Damage Replacement Cost CoverageThis covers loss or damage to scheduled propertycaused by an interruption in water, communicationor power service. The cause of the loss must be oneof the policy's covered perils.

Utility Services-Time Element CoverageThis covers loss of business income and extraexpenses that occurs as a result of utility serviceinterruption. Again, the cause of loss must be one ofthe covered perils.

BOP EligibleWholesale/Distributor Risks

The following are eligible wholesale and distributorrisks:

• Auto parts and supplies• Baked goods (no baking on premises)• Barber and beauty shop supplies• Bookbinding and printers' supplies• Clothing/wearing apparel• Coins, stamps, and rare books• Drugs• Fabrics• Floor coverings


• Fruits and vegetables• Gardening and light farming supplies• Groceries• Hardware and tools• Hearing aids• Heating and air conditioning equipment• Hobby, model maker, and artist supplies• Household appliances• Janitorial supplies• Wholesale florists• Jewelry• Meat, fish, poultry, and seafood• Office machines and appliances• Optical goods• Plumbing supplies and fixtures• Refrigeration equipment• Stationery and paper products• Tobacco• Toys

BOP Eligible Processing orService Businesses

The following are eligible processing or servicebusinesses:

• Commercial or household appliances andaccessories installation, service, or repair

• Bakeries with baking on premises• Barber shops• Beauty shops and hairstyling• Dental labs• Engraving• Laundries and dry cleaning stores using

petroleum or synthetic solvents (three (3) orfewer receiving stations)

• Laundries and dry cleaning or dyeingreceiving stations

• Funeral homes and chapels• Lithographing• Mailing or addressing companies• Photocopy services• Printing• Tailoring/dressmaking establishments• Shoe repair• Taxidermists• TV or radio receiving set installation or

repair

Restaurants

Certain fast food and limited-cooking restaurants(with no appliances that emit smoke or grease-ladenvapors) are also eligible. The eligible restaurant risksare as follows:

• Cafes• Cafe-style buffets• Coffee shops• Concession stands• Delis/sandwich shops• Donut shops• Drive-ins• Drugstores• Hot dog and hamburger stands• Ice cream and yogurt shops• Oriental and ethnic restaurants• Pizza shops• Salad bars• Take-out-only restaurants

Small Contractors

Small contractors with annual sales less than $3million and annual payroll under $300,000 do notmeet the eligibility requirements. Only the followingtypes of small contractors who have annual sales ofless than $3 million and an annual payroll under$300,000 are eligible for a BOP:

• Appliances and accessories• Carpentry• Carpet and furniture cleaning• Concrete construction• Decorative or artistic metal erection• Driveway, parking area, or sidewalk paving• Electrical work (inside)• Fencing• Floor covering installation• Furniture or fixture installation• Glass and glazing• Heating and/or air conditioning• Interior decorating• Landscape gardening• Lawn sprinkler installation• Masonry• Metal ceiling/wall installation• Metal door, window, or assembled millwork

installation• Painting• Paper hanging


• Plastering or stucco work• Plumbing (non-industrial)• Refrigeration systems• Roofing• Septic tank cleaning• Siding installation• Sign painting• Tile or stone work (interior)• Window cleaning (up to three (3) stories

high)


SECTION VI – BUSINESS OWNERS POLICY (BOP) REVIEW QUESTIONS

1. A Standard Form Coverage offered on aBOP policy that is not covered on an HO-2policy is:a) Lightning.b) Fire.c) Sprinkler leakage.d) Riot or civil commotion.

2. The Common Policy Conditions of the BOPcontains all of the following EXCEPT:a) Co-insurance.b) concealment.c) Fraud.d) Subrogation.

3. All of the following are covered under theBOP's extended coverages area EXCEPT:a) $9,000 of personal property at a newly

acquired location.b) $3,000 of personal property being

stored at an off-location unit.c) $750 for the replacement of a Maple

tree.d) $1,000 for the replacement of valuable

papers destroyed by a covered peril.

4. Which of the following is NOT covered bya BOP Form?a) Apartment buildingsb) A nine-story office buildingc) A 90,000 square foot office buildingd) Apartment buildings with a few small

retail stores located therein

5. How long of a period does an insured haveto bring a lawsuit against an insurer forfailure to provide payment for a coveredloss?a) One (1) yearb) Two (2) yearsc) Three (3) yearsd) There is no time limit.

6. The Protective Safeguard does NOT requirethat the insured keep which of the followingin working order?a) Automatic sprinkler systemb) Security systemc) Automatic Fire Alarm systemd) Security Cameras at all entrances

7. Chloe's Rent-A-Storage-Unit facility wasbroken into and had some furniture stolenfrom their office valued at $3,900. If theyhave the BOP standard deductible, howmuch will the insurer cover?a) $250b) $3,590c) $3,400d) $3,900

8. Gas sales are limited to what percent ofgross sales at a convenience store?a) 75%b) 100 percent in New Jerseyc) 33%d) 80 percent in Alaska

9. Which of the following is protected underthe Inflation Guard provision of theCommercial policy?a) Seasonal stock variations of up to 25

percent b) Increases in building valuation of up to

10 percent per yearc) Increases in the insured's stock value

due to the purchase of an additionalfacility

d) Guaranteed Replacement Cost of theinsured merchandise.


Section VII – Other Coverages and Options

AVIATION INSURANCE

Aircraft liability coverage is essentially the same asthe coverages in an Auto Policy. The two (2) mainaviation coverages are the Aircraft Hull and AircraftLiability policy forms.

Aircraft Hull

Hull Insurance can be either Special Peril for bothon the ground and in-flight, or it can be written asSpecial Peril on the ground and limited to only the

perils of fire, lightning, and explosion in flight, andexclude crash or collision.

Aircraft Liability

Coverage for the insured in the event of theinsured's negligent acts and/or omissions result inlosses in connection with the use, ownership, ormaintenance of aircraft.

OCEAN MARINE INSURANCE

Ocean Marine policies are valued policies. In theevent of a total loss, the entire face amount ispayable without regard for depreciation.

This provides property and liability coverage for alltypes of vessels and their cargoes.

Major Coverages

Hull InsuranceThis protects the ship owner against damage to theship itself and is written on a modified Special Peril

basis. It includes a running-down clause that alsoprotects against liability caused by damage to otherships.

Cargo InsuranceThis protects the owner of the cargo from loss dueto destruction.

Freight InsuranceThis indemnifies the ship owner from loss ofincome that would have been earned had the shipcompleted its voyage.

NATIONAL FLOOD INSURANCE PROGRAM(NFIP)

Losses caused by storms, earthquakes, and othernatural disasters can cover large areas and impactlarge portions of the population. Aside from thedevastation to the population, insurance companyresources and capabilities can be stretched too thinto handle the claims resulting from such losses. Insuch cases, the government may step in to helpmitigate damages. Flooding is one such loss that theFederal Government has deemed too large forprivate insurance companies to handle.

Loss caused by flooding is excluded from coverage

in all fire and property policies.

“Write Your Own” vs.Government Flood Insurance

Policies

Flood insurance protection is offered exclusively bythe National Flood Insurance Program and is bothadministered and underwritten by the FederalGovernment (FEMA – the Federal Emergency


Management Association). Some insurers sell thepolicy on their own paper or letterhead as they doany of their other policies. This is called "WriteYour Own" flood insurance, but it is actuallycovered through the Federal Government's program.Flood insurance can be purchased directly from theNFIP or from any licensed broker.

Eligibility

Flood Plain Determination and NFIP QualificationLocal municipal or county governments must applyto the Federal Government for inclusion in theNational Flood Insurance Program (NFIP), andthere must be proper zoning, land use laws, andbuilding use laws in place. A FIRM (FloodInsurance Rate Map) will be designed to showeligible property zoning.

Once an area is determined to be part of a floodplain, lenders must require flood insurance on anyloan they process for buildings located in that area.This provision helps the government to maximizethe amount of premiums received to help fund theplan. Property owners who do not buy floodinsurance are not eligible for full disaster relieffunding in the event of a loss.

Eligible PropertiesMost walled and roofed buildings that are fixed to apermanent site and are mainly above ground areeligible properties.

Non-Eligible Properties1. Underground structures and equipment, such

as wells and septic tanks

2. Newly constructed buildings that are in, on,or above the water

3. Structures that are mainly containers orstorage units, such as gas or liquid storagetanks (silos, grain storage buildings, and theircontents can be covered)

Coverages

• Damage from high waters• Damage caused by subsidence or erosion

from high waters• Damage from unusual accumulations and

surface runoff

Only one (1) building can be insured per policy.Multiple buildings require multiple policies.

Limits

When a community first applies for NFIP coverage,a basic coverage maximum limit is set under theEmergency Program. The Flood Insurance Agency,or FIA, then conducts a detailed study of the areaand the plans set forth by the community. The FIAissues a detailed Flood Insurance Rate Map (FIRM)that establishes flood zones and rates for the area.Only after this process does the community enterthe NFIP's regular program with increasedcoverages.

Note: There is a standard deductible of $1,000 forproperty insured under the NFIP, post-FIRM, orafter the rating map is developed. It is $2,000 pre-FIRM.

Flood CoveragesBuildings Emergency Program Regular Program

Single Family $35,000 $250,000

2-4 Family Dwelling $35,000 $250,000

Other Residential $100,000 $250,000

Non-residential $100,000 $500,000

Contents

Residential $10,000 $100,000

Non-residential $100,000 $500,000


OTHER POLICIES

Boatowners

Boats and yachts can be insured either as anextension on a homeowners policy or on a separatepolicy. Coverage included is for:

• Damage to the boat, including hull andpropeller damage caused by collision eitherwhile in the water or while the boat is beingtransported.

• Theft.

• Liability arising from use of the boat.These policies are covered in more depth in theCasualty section.

Difference in Conditions

Difference in Conditions covers, to a specifiedlimit, any cause of loss that leaves the property in adifferent condition than it was before, excluding fireand extended coverage perils.

RESIDUAL MARKETS (INCLUDING FAIR PLANS)

Some areas, usually urban, are at high risk forinsurance claims due to increased probability of riotor other criminal activity, so many insurers reduceor stop writing insurance in these areas. To makeinsurance available to these areas, the FederalGovernment made riot reinsurance availablethrough the National Insurance Development Fundin the Urban Property Protection and ReinsuranceAct of 1968. This is operated through the FederalGovernment's Department of Housing and UrbanDevelopment, but is administered by the states.These plans are called Fair Access to InsuranceRequirements, or FAIR plans.

Also called joint underwriting pools, jointreinsurance pools, the assigned risk pool or theinsurance pool, most states administer the programin a similar manner and require that all insurerswhich offer property insurance in their state berequired to participate in the pool, to the proportionof their market share of gross premiums written inthe state. Check specifics in your state-specificbooks.

Joint Underwriting/JointReinsurance Pool

Insurers in these pools cooperate with each other inthe making of:

• Rates• Rating systems• Policy forms

• Underwriting rules• Surveys• Inspections and investigations• The furnishing of loss and expense statistics

or other information• Conducting research

Eligibility• Properties must be located in specific areas.• They must be an insurable risk (i.e., they

need to be structurally sound).• The owner must have made an attempt to

obtain insurance through normal markets andbeen refused coverage.

How it Works1. First, a proposed insured applies for coverage

through standard carriers and is turned down.2. Next, the applicant applies for insurance

through the pool by applying to any propertyinsurance agent or broker.

3. Then, the agent submits the application to thestate program and representatives of the stateprogram inspect the property and determine thestructural soundness and occupancy of thebuilding.

4. If the risk meets certain state determinedstandards, the policy will be assigned to one ofthe standard insurers who must accept the riskas a condition to continue to do business in thestate. The state also determines the rules underwhich a company may refuse a risk assignedunder the plan.


MINE SUBSIDENCE INSURANCE

Mine Subsidence Insurance is coverage for losscaused by the movement of land underneath aproperty. Mine Subsidence is particularly commonin areas where mining is active, or once was activeand has subsequently closed operations. Mine

Subsidence may be added by endorsement. Incertain areas where mines have been prevalent,Mine Subsidence is automatically added to thepolicy unless specifically rejected by the policyowner.

FEDERAL CROP INSURANCE AND THE RISK MANAGEMENT AGENCY (RMA)

Crop Insurance is coverage for crops in the case ofloss or insured perils, including hail, lighting,freezing, fire, and wind.

There are three (3) main types of Crop Coverages:1. Crop Hail Insurance is issued for only one

season at a time and covers the marketableportion of the crop against damage fromhail, fire, lightening, and wind. Some statesrequire that the perils of freezing and frostbe covered as well.

2. The Federal Crop Insurance Corporation(FCIC) has existed in many forms since1938. The Federal Crop Insurance Act of1980 established a federal Special Perilprogram. It is an agency of the U.S.Department of Agriculture and providescoverage against natural disasters. Farmerscan apply for coverage directly through theFCIC or purchase multi-peril cropinsurance.

3. Multi-Peril Crop Insurance (MPCI) issimilar to FCIC insurance, but it is writtenand serviced by private insurers andreinsured by those companies through theFCIC.

Risk Management Agency(RMA)

A program under the USDA, the RMA providesinsurance for over 100 types of crops.

Federal crop insurance policies usually consist ofthe following:

• The Common Crop Insurance Policy• Specific crop provisions• Policy endorsements • Special provisions


SECTION VII – OTHER COVERAGES AND OPTIONS REVIEW QUESTIONS

1. The captain of a ship directed his crew tothrow stowed merchandise overboard in badseas to save the ship. Which Ocean Marinepolicy would indemnify the merchandiseowner for his loss?a) Hull insuranceb) Freight insurancec) Cargo insuranced) Protection and Indemnity

2. Which of the following is NOT excludedfrom coverage by flood insurance?a) Septic tanksb) Corn silosc) A new rental unit built on top of a damd) A gasoline storage tank on a farmer's

field

3. FAIR plans are:a) Mandated and administered by the

Federal Government.b) Mandated and administered by

individual state governments.c) Mandated by the NAIC and

administered by the state governments.d) Mandated by the Federal Government

and administered by the stategovernments.

4. Juan and Katy's home is built in an areawhere mines were dug years ago. Themines have long since been closed, butthere is the possibility that homes built inthe area may be built over one of theseabandoned mines. What coverage shouldJuan and Katy purchase to protect theirhome from the risk of sinking into one ofthese abandoned mines?a) Mine Subsidence Coverageb) HO-5 Comprehensive Coveragec) Earthquake Coveraged) Sinkhole Coverage

5. The maximum amount a single-familyresidence can be assured under the NFIP is:a) $ 35,000.b) $100,000.c) $185,000.d) $250,000.

6. Hull Insurance can be:a) Special Peril on the ground.b) Special Peril in-flight.c) Both A and Bd) 50 percent coverage

7. Freight Insurance indemnifies the shipowner from loss of income that would havebeen earned:a) If the ship owner could have made a 15

percent profit.b) If the ship had completed its voyage.c) If the ship only sails in the Pacific.d) If the ship owner only owns the one

ship.

8. Multi-Peril Crop Insurance is similar towhat other type of insurance?a) Crop Hail Insuranceb) FAIR Planc) Federal Crop Insurance Corporationd) Homeowners’ Insurance

9. Which is not covered in a definition offlood?a) River overflowb) Shoreline erosionc) Wind blown raind) Mudslide


PRACTICE EXAM

1. The uncertainty of future outcome defineswhich of the following?a) Hazardb) Accidentc) Occurrenced) Risk

2. Craig had to move his staff to a temporaryoffice while his regular office is beingrepaired due to fire damage. Which of thefollowing would give Craig the BEST claimcoverage to pay for the temporary move andoffice site?a) Extra Expense b) Business Incomec) Umbrella policyd) Commercial Inland Marine

3. Which of the following best describes ahazard?a) A condition that increases the chance of

lossb) The cause of a lossc) The uncertainty of a future outcomed) An unexpected loss

4. Frank's Computer Repair Shop is insuredunder a Building and Personal PropertyCoverage form with limits of $100,000 onthe building and $50,000 for personalproperty. In a fire there is $15,000 inbuilding damages, $25,000 in personalproperty losses and Frank has to pay $1,000for debris removal. What is the maximumamount Frank's insurance company will payif Frank has a deductible of $500?a) $150,000 b) $41,000 c) $40,500 d) $39,500

5. A mortgagee has all of the following rightsunder a DP-1 Dwelling Basic Form except:a) Their rights will not be jeopardized by

any acts of the insured. b) The mortgagee may abandon the

insured property to the insurancecompany.

c) The mortgagee may file a proof of lossif the insured fails to do so.

d) The mortgagee is entitled to receiveprior notice of a policy's cancellation.

6. Which section of a Commercial PropertyPolicy shows the insurer's promise to payfor damage resulting from any coveredperil?a) Declarations b) Insuring Agreement c) Conditions d) Exclusions

7. Information regarding the insurability of aninsurance applicant can be obtained fromwhich of the following sources?a) Physical inspections of the property b) Police records c) Checking account audits d) Lie detector tests

8. Continuous and repeated exposure toconditions neither intended nor expected byan insured is best described by which of thefollowing terms?a) Liability b) Accident c) Occurrence d) Risk


9. What is the minimum that an agent mustobtain from an insurance policy applicantbefore issuing a written binder of coveragefor a commercial property?a) The insured's signature on a premium

finance agreementb) The insured's promise to pay the

premiumc) Payment of the first premium

installmentd) An inventory of property to be covered

on the policy

10. Which of the following businesses wouldbe eligible for a Business Owners' policy?a) An auto body shopb) A theaterc) A tanning salond) A two story storage facility

11. What is the maximum amount an insurerwill pay for $3,000 in flood damage to ahome insured for $80,000 under aHomeowners’ Special Form (HO-3) with a$250 deductible?a) $0b) $2,750 c) $3,000d) $79,750

12. All of the following occurrences arecovered through the National FloodInsurance Program except:a) Runoff from heavy rain.b) Mud slides.c) Water damage to a home built below

the ground.d) Water damage due to the rising waters

of a river.

13. Which of the following statementsregarding the Fair Credit Reporting Act iscorrect?a) The applicant is entitled to receive a

copy of the report from the insurer.b) The applicant's permission is not

required before an insurer obtains acredit report.

c) The applicant has the opportunity toseek to correct information on a creditreport.

d) The insurance company must obtain acredit report on any insurance applicant.

14. A fire in an insured's business burns thewalls and causes smoke damage to the restof the building and business personalproperty. Water used to put out the firedamages several computers and thecarpeting. The water damage is bestdescribed as:a) A direct loss.b) An indirect loss.c) An accidental loss.d) A wet loss.

15. Which of the following policy forms wouldBEST protect a business that must keepoperating after a loss?a) Business Continuationb) Extra Expensec) Business Overhead Expensed) Business Interruption

16. The Personal Liability section of ahomeowners policy covers which of thefollowing?a) Bodily injury to another caused by the

insured's personal activitiesb) Bodily injury to the insured's resident

child caused by a neighbor's dogc) Property damage caused by riotd) Property damage caused by a visitor to

the insured's residence

17. A sudden, unexpected event that isidentifiable as to time and place is bestdescribed as a(n):a) Hazard.b) Accident.c) Occurrence.d) Risk.


18. Information that an insured provides in aproof of loss is called a:a) Warranty.b) Collateral assignment.c) Representation.d) Definitive proof.

19. Which of the following HomeownersForms is the least comprehensive inproviding coverage for loss caused by adeer jumping through the window of aninsured home?a) HO-2b) HO-3c) HO-6d) HO-8

20. Property protected by a Personal ArticleFloater is covered by a loss that occurs:a) Anywhere in the world.b) Only in the U.S., Canada, or Mexico.c) Only in the U.S.d) Only on the insured premises.

21. A proof of loss:a) Is a sworn statement by the insured.b) Must be prepared by an attorney.c) Is only necessary in cases thought to

involve fraud.d) Must be signed by the agent, the

adjustor and also by the insured.

22. An Equipment Breakdown Coverage policycan contain which of the followingcoverages by way of an endorsement?a) Property Damage Liabilityb) Extra Expensec) Business Incomed) Business Overhead Expense

23. An insured has a detached garage destroyedby fire. Her homeowners policy is writtenfor $100,000. How much will the policypay?a) $1,000b) $10,000c) $50,000d) $100,000

24. If an insured suffers a loss under hisHomeowners’ Policy, which of thefollowing is NOT one of the actions, whichwould be required of them?a) Protect the property from further lossb) Notify the police if the loss is the result

of theftc) Give proof of loss to the insurer or its

agent within 60 days of the date of lossd) Hire an appraiser to determine the

amount of the loss

25. Under which of the followingcircumstances would pro rata cancellationtake place?a) An insured cancels a policy in the

middle of the contractb) A policy is not renewed upon expirationc) At any time an insurance company

cancels the policyd) Any time professional underwriters

must look at a policy

26. The primary responsibility of an insurancecompany is to:a) Inspect the insured property on a

regular basis.b) Provide inventory sheets to the insured

along with the policy.c) Provide the insured with a safety

program to help modify losses.d) Pay the claims covered under the

policy.

27. Which of the following is NOT an exampleof insurable interest?a) A tenant's interest in improvements

they have made to a rented buildingb) An individual's interest in property

being bought through a loanc) A cleaner's interest in a customer's

clothing that is still at the cleaner'sfacility

d) An individual's interest in property theirparents told him they have left to him ina will


28. An applicant's statement that the insuredproperty has an operating sprinkler systemand burglar alarm is considered:a) A warranty.b) A representation.c) An affidavit.d) A policy stipulation.

29. “Abandonment,” as used in a propertyinsurance policy, is best described as:a) The insured's decision to leave his or

her property because of the inability tosell it.

b) A policyholder's demand for fullpayment from an insurer in exchangefor a partially damaged item.

c) An insurance company's refusal to paya claim.

d) The insured's declaration of a property'stotal loss and his or her demanding ofpayment from the insurer.

30. Which of the parts to an insurance policystates the procedure for resolving disputesabout a loss settlement between an insurerand an insured?a) Declarationsb) Insuring Agreementc) Appraisal Claused) Exclusions

31. An insured owns a set of six (6) pensdesigned and used by Benjamin Franklin.Each pen is worth $1,000 alone, but the setis worth $12,000. If one of the pens isdestroyed by a covered peril, what is themaximum amount the insurer will payunder the Pairs and Sets Clause?a) $ 1,000b) $ 2,000c) $ 7,000d) $12,000

32. The Commercial Property Basic Formcovers all of the following perils except:a) Artificially generated current.b) Glass breakage.c) Falling objects.d) Loss caused by acts of war.

33. A Commercial Basic Form Building andPersonal Property Coverage policy willNOT protect against which of the followingperils:a) Smoke.b) Sinkhole collapse.c) Earth movement.d) Sprinkler leakage.

34. Which section of a Property Insurancepolicy defines items that are omitted fromcoverage?a) Declarationsb) Insuring Agreementc) Conditionsd) Exclusions

35. Farmer John's barn was destroyed when atornado blew down one of its walls; thewall knocked over a lantern, causing a firethat burned down the entire barn. Theproximate cause of the loss was the:a) Fire.b) Tornado.c) Collapse of the wall.d) Water damage from the storm.

36. After a late night party, Frank dumped hotcoals from a grill into his neighbor, Barb's,garbage can. Overnight the coals started afire that burned down Barb's home. Barb'sinsurer paid for the loss to Barb's home andthen sued Frank to recover damages. This isan example of:a) Assignment.b) Co-insurance.c) Pro rata share.d) Subrogation.

37. The Homeowners Coverage that does notgenerally include a deductible is:a) Coverage A-Dwelling.b) Coverage B-Separate structures.c) Coverage C-Personal property.d) Coverage E-Liability.


38. Coverage for Vandalism and MaliciousMischief under a Commercial PropertyForm expires after the property is leftvacant for how long?a) 30 daysb) 60 daysc) 90 daysd) None of the above

39. Which of the following is the definition ofActual Cash Value (ACV)?a) Replacement Cost minus depreciationb) The amount actually paid for the

propertyc) Appraised valued) Replacement Cost plus appreciation

40. The purpose of indemnity is designed toavoid: a) Pro rata liability payments.b) The return of earned premiums.c) Overpayment on a claim.d) The non-payment of a claim by an

insurer.

41. If the insured and insurer do not agree onthe amount of a loss under an HO-3 Form,which of the following actions can thepolicyholder take?a) Demand an appraisal of the lossb) Sue the insurer in small claims courtc) Demand an inquiry by the state

Department of Insuranced) Refer the claim to an independent

public adjuster to determine the claimvalue

42. An insured has an HO-3 Special FormSpecial Peril policy with Personal PropertyCoverage of $60,000, a deductible of $250,and $100,000 personal liability coverage. Ifthe insured borrows his neighbor's ridingmower and causes $1,000 damages when heruns over a rock, what is the maximum theinsurer will pay on the insured's behalfunder the additional coverages/personalliability section of the policy?a) $0b) $500c) $750d) $1,000

43. All of the following are commonly coveredunder an Inland Marine policy EXCEPT:a) Stamps.b) Boats.c) Automobiles.d) Camera equipment.

44. Which of the following is a responsibility ofthe insured in a Commercial PropertyPolicy?a) To insure the building for 100 percent

of Replacement Costb) To pay premiums within 30 days of the

invoice mailing datec) To provide a notarized proof of loss

statement if requested to do so by thecompany

d) To give the insurer 30 days writtennotice of intent to cancel the policy

45. The maximum amount an insurer will payin the event of a loss is called the:a) Full loss amount.b) Policy liability limits.c) Co-Insurance amount.d) Subrogation amount.

46. An insured's Broad Form HO-2 policy has adwelling coverage limit of $100,000, aPersonal Property Coverage limit of$50,000, and includes a deductible of $250.What is the maximum amount the insurerwill pay if a sailboat valued at $1,500 isstolen from the insured's premises?a) $0b) $1,000c) $1,250d) $1,500

47. At least how many coverage parts must beincluded in a Commercial Package Policy?a) One (1)b) Two (2)c) Three (3)d) Five (5)


48. The owner of a computer store takes nocare in the placement of expensivecomputers on shelves, often leaving themdangerously balanced near the edge,believing that if there is any damage to thecomputers the insurer will pay the damages.This is an example of a:a) Moral hazard.b) Morale hazard.c) Legal hazard.d) Psychological hazard.

49. Under which of the following types ofpolicies would a pleasure boat with a 50horsepower engine be BEST covered forphysical damage while being towed behinda family's personal auto?a) Auto owner's policyb) Boatowner's policyc) Homeowners policyd) Yacht owner's policy

50. Which of the following perils is covered bythe Broad Form policy but NOT by theBasic Form?a) Riotb) Vandalismc) Weight of ice and snowd) Sinkhole collapse


ANSWERS TO REVIEW QUESTIONS

Section I – General Insurance Concepts

1) D. Indemnification is the concept of restoringindividuals to the same financial position they wereat before a loss occurred. 2) A. Stock Insurers are organized under the laws ofthe state in which they are incorporated. Thecompany is owned by the shareholders who electthe officers and directors and share in profitsthrough stock growth and dividends. 3) B. Groups that exchange insurance on each otherare called reciprocal companies. 4) D. Reinsurers insure other insurance companiesagainst catastrophic losses. 5) A. Misappropriation of funds is the improperapplication or use of them. 6) C. Surplus/Excess Lines Insurers offer insurancenot offered through admitted insurers. 7) D. Adverse selection is defined as the tendencyof poorer risks to seek or continue insurance to agreater extent than normal risks. 8) A. Under the Law of Large Numbers, the biggerthe observed sample, the more accurate thepredicted results. 9) C. A speculative risk (such as gambling) does notoffer any certainty as to whether the final outcomewill be a gain or a loss. Speculative risks aregenerally not insurable. 10) A. Intimidation is causing someone to buy outof fear.

11) B. Mutual insurance companies have no capitalstock and are owned by policyholders who shareprofits through dividends and can attend and vote atcompany meetings.

12) D. Membership in Fraternal Benefit Societies isbased on religious, ethnic, or national lines, and thesocieties are noted primarily for social andcharitable functions.

13) D. A foreign insurer is an insurer transactingbusiness in a state but chartered under the laws of adifferent state or one of the U.S. territories. 14) A. The express directive given to an agent bythe insurer is authority expressly given the agent inhis or her contract. 15) B. State commissioners can enforce legislationand enact procedures that allow the administrationof insurance business, but only the legislative bodyof a state may pass laws to regulate the insuranceindustry. 16) C. Many states require a producer to maintain aPremium Fund Trust Account (PFTA) if they holdpremium money for any length of time beforegiving it to the insurer, and the PFTA must beseparate from personal or other business accounts. 17) B. Rebating is the reduction in premiumcharged, or the return of part of the requiredpremium. In Susan's case, she is essentiallyreturning part of the premium when she pays herclient for the side of beef.

18) A. The NAIC’s principal role is to encouragestandardization of insurance laws around thecountry.

19) C. Redlining is the refusal of an insurer tounderwrite in certain geographic areas, or increasingrates to an unreasonable amount to discouragecustomers, in order to avoid perceived risks. 20) D. Because of the Law of Agency, the acts ofthe agent are legally considered to be the acts of theinsurance company.

21) A. Frank no longer owned the car, so he did nothave a financial interest in the car.

22) C. Mutual insurers are owned by policyholderswho share profits through dividends.

23) B. Membership in Fraternal Benefit Societies isbased on religious, ethnic, or national lines, andinsurance is only sold to members or their families.


Section II – Property Insurance Concepts

1) A. Buildings which have no residents or activebusiness for more than 60 days are consideredunoccupied. Because Chris left property at thehouse, it is not considered vacant.

2) D. Exclusions list the property, perils, and otherhazards not covered by the policy or which have areduction of coverage in the policy.

3) A. The Declarations section contains the who(identifies the insureds and the insurer's name andaddress), the what (identifies the real and personalproperty insured), the where (identifies the territorycovered by the policy), the when (identifies thepolicy period – inception/expiration dates andtimes), and the how much (the amount of insurancecoverage and the premium).

4) B. The Insuring Agreement summarizes coveredrisks, additional or supplementary coverages, andthe insurer's responsibility to indemnify againstlosses suffered as a result of the perils.

5) C. The assignment clause states that theinsurance policy cannot be assigned/transferred toanother without the insurance company's writtenauthorization, and an officer of the insurancecompany, not the insurance agent, must sign it.

6) C. The Conditions section lists the insured'sresponsibilities both at the time of application(truthful representations in the application andpayment of premium), as well as at the time of loss(notice of and proof of loss).

7) B. The subrogation clause gives the insurer theright to pursue any course of action in its own nameor the name of a policy owner against a third partywho is liable for a loss that has been paid by theinsurer. This clause prevents the insured fromcollecting from both his insurer and a third party.

8) C. The standard fire policy perils are fire,lightning, and the removal of property to protect itfrom further damage.

9) A. Terrorism is any act that is certified by theSecretary of the Treasury, in concurrence with theSecretary of State and the Attorney General of theUnited States, to be an act of terrorism.

10) D. A vessel based principally in the UnitedStates, on which U.S income tax is paid and whoseinsurance coverage is subject to regulation in theU.S., could be considered the victim of terrorismand would be an insured loss.

Section III – Dwelling Policy (DP)

1) D. To be eligible for a Dwelling Policy, there canbe a maximum of four (4) families and five (5)boarders in the building.

2) D. The factory would bear responsibility for thechemical spill.

3) D. Smoke damage is a covered peril. The othersare specific exclusions.

4). A. Industrial smudging is one of the excludedperils for Broad Form.

5) B. The loss payee will be notified in writingaccording to the loss payable clause.

6) C. The state's regulations always takeprecedence, whether you live in Delaware or anyother state.

7) A. The Dwelling Under Construction Form isalso known as the Builder's Risk Form.

8) C. Sailboats would be covered under aBoatowner's policy.


Section IV – Homeowners’ Policy

1) C. Functional Replacement Cost is the cost torepair or replace damaged property with lessexpensive but functionally equivalent materials. Anexample would be custom woodwork that isreplaced with standard woodwork.

2) C. Market Value is the price property wouldlikely fetch if sold on the market. A home in asmall, remote town would have a similar price toone in a larger city to rebuild or replace(Replacement Cost). However, if the house weresold (Market Value), the price might beconsiderably less in the small town because of:

• Lower land and property values.• Fewer potential buyers for a property in a

small town.

3) A. Personal Property is covered for a statedamount in a Condo Package. 4) C. Animal Coverage is not included in the HO-1or HO-2, and Wild Animal Coverage is notexcluded in the HO-3, which is, therefore, covered.

5) A. Separate Structures (Coverage B) provides anadditional 10 percent of the Coverage A amount.

6) D. Mobile homes are treated as personal propertyand cannot be covered by a Homeowners Policy.

7) B. Loss assessment is an optional coverage thatprotects the individual condominium owner fromtheir share of a pro rata loss assessed by theassociation for losses over the amount of theassociation's policy, usually in amounts between$1,000 and $5,000.

8) A. There is a cap of $200 for cash, so therewould be NO claim payment. The lost cash satisfiesthe deductible.

9) D. There is up to ten percent of personal propertycoverage for personal property that is at a storagefacility or even at a second home the insured owns.

10) D. Incidental service businesses, such as beautyshops, accountants, or music lessons, are allowedunder the HO policies, but bakeries are not.

11) C. The special limit of liability for the theft ofjewelry, watches, furs and precious/semi-preciousstones is $1,500.

12) D. HO-8 is used primarily for homes andstructures that might have a Replacement Costgreater than the market value.

13) D. This endorsement covers the cost to: • Remove the fungi.• Tear out and replace any part of the

building as needed to gain access to thefungi.

• Test air or property to confirm the absence,presence, or level of fungi, but only if thereis a reason to believe there is the presenceof fungi, wet or dry rot or bacteria (but notmedical liability issues).

14) A. Functional Replacement Cost covers theamount to repair or replace a damaged coveredbuilding with less costly, common constructionmaterials and methods that are the equivalent toobsolete, antique, or custom materials and methodsused in the building's original construction.

Section V – Commercial Package Policy

1) C. Extra Expense Coverage covers businesscontinuation at another location while repairs from acovered loss are occurring at the insured premises(rent, phone installation, mailings to customersabout a temporary relocation, etc.).

2) A. “Commercial Policy Conditions” is a requiredsection of a commercial insurance policy.

3) D. Equipment Breakdown (previously Boiler andMachinery) Coverage does not include lossescaused while the equipment is being tested.

4) C. Commercial Property Coverages includeglass.

5) B. The Bailee's Customer Form covers damage toor loss of a customer's goods regardless of the


Bailee's (insured's) liability. Businesses such aslaundries or dry cleaners would need Bailee'sCustomer Coverage.

6) B. The Neglect of the Shipper Form excludes thecarrier from liability in the event the shipper did notpack the cargo well.

7) C. The Pressure and Refrigeration Objects Formcovers boilers, refrigeration units, piping, and airconditioning units.

8) D. Extension of coverage to newly acquiredproperty is limited to $250,000 for 30 days.

9) B. Unscheduled Farm Property Insurance is notan option; the others are legitimate possibilities forCrop Insurance.

10) B. The Peak Season Endorsement allowsadditional amounts of Personal Property Coverageduring designated periods, such as Christmas orother holidays, when inventory levels are increased.

11) A. Business Income Coverage covers earningslosses while the business is shut down to remodeland restock after a loss due to a covered peril.

Section VI – Business Owners Policy (BOP)

1) C. Sprinkler leakage is a Standard FormCoverage under a Business Owner's Policy.

2) A. BOP conditions consist of:• Policy cancellation or changes• Concealment• Misrepresentation or fraud• Insurer's right to examine company records


3) C. There is a $250 limit for any one (1) tree,shrub, or plant.

4) B. Under a BOP, buildings may have no morethan six (6) stories.

5) B. The Legal Action Against the InsurerProvision limits the insured's right to bring actionagainst the insurer for damages (if the insured hascomplied with policy conditions and the insurer hasnot indemnified the insured for direct physical loss)to two (2) years.

6) D. Security cameras are not one of the requiredprotective safeguards that the insurer requires to payfor loss.

7) C. Chloe will receive $3,400. The standarddeductible for the BOP is $500.

8) A. Gas sales are limited to 75 percent atconvenience stores with gasoline pumps.

9) A. With the Inflation Guard Provision, businesspersonal property can be increased by up to 25percent to provide for seasonal stock variations.

Section VII – Other Coverages and Options1) C. Cargo Insurance protects the owner of thecargo from loss due to destruction.

2) B. Septic tanks, storage silos, and gasolinestorage tanks are not eligible properties under floodinsurance.

3) D. FAIR plans are mandated by the FederalGovernment's Department of Housing and UrbanDevelopment, but is administered by the states.4) A. Mine Subsidence is coverage for loss causedby the movement of land underneath a property and,

therefore, is the best choice for Juan and Katy.

5) D. The limit for a single-family residence underNFIP is $250,000.

6) C. Aviation Hull Insurance can be Special Perilfor both on the ground and in-flight.

7) B. This indemnifies the ship owner from loss ofincome that would have been earned had the shipcompleted its voyage.


8) C. Multi-Peril Crop Insurance is basically thesame insurance as Federal Crop InsuranceCorporation (FCIC), but is written and serviced byprivate insurers and reinsured by those companiesthrough the FCIC.

9) C. Flood coverages include: damage from highwaters, damage caused by subsidence or erosionfrom high waters, damage from unusualaccumulations and surface runoff. Windblown raindoes not fall in any of these categories, butmudslide, shoreline erosion, and river overflow do.

ANSWERS TO PRACTICE EXAM

1) D. Risk is the probability or uncertainty that aloss will occur.

2) A. Extra Expense covers business continuation atanother location while repairs from a covered lossare occurring at the insured premises (rent, phoneinstallation, mailings to customers about temporaryrelocation, etc.).

3) A. Hazards are conditions that increase risk orthe chance of a loss occurring.

4) C. $15,000$25,000

+ $ 1,000 $ 41,000 (total losses)

$41,000 - $500 (Frank's deductible) $40,500

5) B. Property cannot be abandoned to the insurer.

6) B. The insuring agreement details the insurer'sresponsibility to indemnify against losses sufferedas a result of the perils.

7) A. Insurability information can come from anumber of sources, including property inspections,the application, consumer reports, etc.

8) C. An occurrence is an event, includingcontinuous and repeated exposure to conditionswhich result in bodily injury or property damage,neither expected nor intended, from the standpointof the insured.

9) B. The minimum that an agent needs in order toput a binder into effect is the insured's promise topay with a time frame within which the premiumwill be paid.

10) D. A storage facility would be eligible for aBOP.

11) A. Flood damage is insured by the NationalFlood Insurance Program and is an exclusion underan HO-3 policy.

12) C. Structures built below ground are excludedunder the National Flood Insurance Program.

13) C. According to the Fair Credit Reporting Act,an applicant has the right to seek to correctmisinformation on the report or register additionalinformation with the investigating company.

14) B. A loss in which the covered peril is not thedirect cause of damage is an indirect loss – the fire,not the water, would be considered the primarycause of damage.

15) B. Extra Expense protection would allow abusiness to continue by paying the expenses foranother location (phones, etc.) above normaloperating costs.

16) A. Personal liability covers activities the insuredengages in outside the home, as well as injury toanother on the property.

17) B. An accident is an undesirable, unforeseen,and unintended event that is identifiable as to timeand place.

18) D. The insured must send the insurer a signed,sworn proof of loss containing the definitiveinformation requested by the insurer to investigatethe claim.

19) D. An HO-8 Form is used primarily for homesand structures that might have a Replacement Costgreater than the market value (uses ACV rather thanReplacement Cost).


20) A. Coverage under a Personal Article Floater isworldwide and Special Peril.

21) A. See #18.

22) C. The Equipment Breakdown (previouslyBoiler and Machinery) endorsement includesbusiness income.

23) B. The Homeowners Policy would pay 10percent for outbuildings and other structures.

24) D. If there is a loss, and insured must do all ofthe choices except hire an appraiser to determine theamount of the loss according to the policyprovisions.

25) C. In this case, if a company cancels a policy,the proportionate amount of premium would be duefor the coverage the company offered beforecancellation.

26) D. In exchange for the premium payments fromthe insured, the insurer agrees to pay thepolicyholder in case of the occurrence of a specificevent.

27) D. A financial interest must exist; in this case,the individual's parents have only told him of aninterest.

28) A. A warranty is the insured's guarantee thatfacts as stated are correct in reference to the risk orthat specified conditions will be fulfilled tomaintain the contract.

29) D. The insured cannot declare something a totalloss and turn it over to the insurer and demandpayment without the insurer's consent.

30) C. The Appraisal Clause describes theprocedure for dispute resolution involving anappraiser.

31) C. If a single item in a pair or set is lost ordestroyed, the insurer will repair, replace, or pay thevalue of the lost part, or will pay the differencebetween the Actual Cash Value of the propertybefore and after the loss. In this case, the value ofthe set is $12,000. Although the worth of one (1)pen is $1,000, the pen's value as part of the set is

greater. Five (5) pens remain (value: $5,000), butthe loss to be paid would be $7,000 – the $5,000remaining value plus $7,000 to indemnify theinsured.

32) D. Loss caused by acts of war is NOT a coveredperil.

33) C. Earth movement is not covered. The otherthree (3) forms are covered under the CommercialBuilding and Personal Property Basic Form.

34) D. The Exclusions section lists the property,perils, and other hazards not covered by the policyor which have a reduction of coverage in the policy.

35) B. The tornado is the proximate cause of loss.

36) D. Subrogation allows an insurer to initially payfor an insured's loss and then sue another party torecoup that payment.

37) D. Liability coverage is NOT subject todeductibles.

38) B. Vandalism and Malicious Mischief(V&MM) is excluded if the property is vacant for60 days.

39) A. The ACV of property is calculated as theReplacement Cost minus depreciation.

40) C. Indemnity is the concept of restoringsomeone to the same financial position they were inbefore a loss occurred, not an improvement.Overpayment of claims is improving their financialsituation.

41) A. Should a disagreement as to the value ofproperty or the amount of a loss result between theinsured and the insurer, either party (insured orinsurer) may make a written demand for anappraisal of the loss.

42) D. Additional coverages pay for damages toothers' property, and the HO Form Limit is $1,000with no deductible because it is a liability to others.

43) C. Autos are not normally included under anInland Marine policy.

44) B. Premium payment within 30 days of notice isa requirement. Proof of loss must be sworn, notnotarized.


45) B. Policy liability limits represent the maximumamount the insurer will pay for damages or lossesunder an insurance policy.

46) C. $1,500 - $250 deductible = $1,250

47) B. The Commercial Policy must also contain atleast two (2) of the following commercialcoverages:

• Commercial Property• Commercial General Liability• Commercial Crime• Commercial Auto

• Commercial Inland Marine• Equipment Breakdown Coverage (Boiler

and Machinery)• Farm Property and Liability

48) B. The store owner's careless attitude is typicalof a morale hazard.

49) B. The Boat Owner's policy would offer the bestcoverage for that particular watercraft.

50) C. Weight of ice and snow is covered by theBroad Form, but not by the Basic Form.


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PROPERTY PUZZLE CLUES

Across3 boats and yachts7 ...and sets clause8 clause that broadens coverage if new policies

include the coverage13 minimum number of commercial policy sections14 once admitted can no longer be denied16 All state commissioners belong18 probability that a loss will occur20 loss where a covered peril is not the immediate

cause of damage22 one party to a contract makes the entire contract25 No benefit to...27 commercial policy coverage28 homeowner policy exclusion29 HO coverage E30 Insurer operated in a different state than where

chartered31 farm property not covered under neither scheduled

nor unscheduled sections33 Replacement Cost minus depreciation35 dwelling policy with least coverage37 unequal amounts of money are exchanged in an

insurance contract42 insurable risks must be...43 endorsement to increase coverage during holidays47 policy part that identifies the insured and what is

insured49 any event or incident50 standard BOP exclusion51 number of days before building considered vacant53 identifies insurer's responsibilities57 insurance applicant does not submit money withthe application58 policy that pays after other policy limits have been

reached59 policy for small business60 plan used to provide property insurance to

properties in high risk areas64 restoring another to the same financial position as

before a loss66 lists property not covered68 commercial inland marine policy69 general policy exclusion70 liability insurance covering damage to rented

property destroyed by fire71 structure covered by mobile home policy72 transfer of a policy to another

Down1 method to reach agreement

2 a type of hazard4 a loss fitting the definition of terrorism described by the federal act5 insurer's promises in an insurance contract6 HO endorsement to cover children of others9 business continuation at another location during

repairs10 paid by insured11 gives insurer right to pursue recovery from paid

claim12 insured's statements in an insurance application13 insurers that operate on a lodge system with

representative government15 fund used to keep premium and agency funds

separate17 covered peril on broad form19 an accident characteristic21 social device used to transfer risk23 insureds are expected to make a full and honest

disclosure of facts24 number of extended coverage perils26 endorsement to protect against fruit damage32 type of valuable paper or record34 flood policy written on a private insurer's forms but insured by NFIP36 taking property by force38 condo owner coverage above the association's

coverage39 type of ship automatically covered as an insured loss if damaged by terrorism40 covers damage to others' property41 main coverage on the HO 04 tenant policy44 another name for premium45 give lower premiums to an insured in exchange for

other services or products46 group members appoint an atty-in-fact to bind

members together48 automatically increases coverage amount52 never covered by a property policy unless endorsed54 objects covered under Equipment Breakdown policies55 only one party must perform after the contract is in

force56 nationwide __________61 policy covering fire, lightning and removal of

property62 written or oral contract63 increasing rates in an area to stop customers from

seeking coverage65 protective safeguard service requirement67 insurance protecting shipowner from damage to the

ship



ALPHABETICAL INDEXAbandonment..........................................................34Absolute liability.....................................................30Acceptance Period...................................................21Accident...................................................................13Accounts Receivable...............................................63Act of Terrorism......................................................39Actual Cash Value.......................................14, 31, 66Additional Coverages........................................50, 72Additional Living Expense......................................44Admitted Insurer......................................................18Adverse Selection....................................................15Agency Agreement..................................................19Agent.......................................................................12Agreed Value...........................................................31Aircraft Hull............................................................83Aircraft Liability......................................................83Aleatory Contract....................................................22Alien Insurer............................................................18Apparent Directive...................................................20Applicant.................................................................12Appraisal and Arbitration........................................34Appurtenant Structures............................................43Assessment Mutual Insurers....................................16Assignment..............................................................34Assumption of Risk.................................................37Attorney-in-Fact......................................................16Authority and Powers of Producers.........................20Automatic Increase in Insurance..............................46Aviation Insurance...................................................83Avoidance................................................................14Bailee's Customer....................................................63Bankruptcy..............................................................69Basic Form...............................................................44Binder......................................................................12Binders.....................................................................37Binding of Coverage................................................37Blanket Policy..........................................................30Boatowners..............................................................85Boiler and Machinery..............................................65BOP.........................................................................75BOP Additional Coverages......................................79BOP Cause of Loss Form and Coverages................79BOP Eligible Wholesale/Distributor Risks..............79BOP Extended Coverages........................................79BOP Special Form Exclusions.................................78Boycotting...............................................................24Broad Form..................................................44, 48, 51Broad Theft Coverage..............................................46Brokers....................................................................18Builders Risk...........................................................61Building and Personal Property...............................60

Burglary...................................................................14Business Income......................................................61Business Income – Report of Values.......................66Business Interruption...............................................66Business Liability....................................................78Business Owners Policy...........................................75Business Personal Property Exclusions....................61Camera and Musical Instrument Dealers Form........64Cancellation.............................................................36Captive Agents........................................................18Captive Insurers.......................................................20Cargo Insurance.......................................................83Causes of Loss...................................................29, 69Causes of Loss Forms..............................................62Ceding Insurer.........................................................15Certificate of Insurance............................................12Certified Loss..........................................................40Characteristics of an Insurance Contract..................21Claim Settlement Options........................................35Claims Handling......................................................34Classifications of Construction................................30Co-Insurance......................................................14, 33Collapse...................................................................51Commercial.............................................................36Commercial Articles................................................63Commercial Building and Property forms...............60Commercial Contractor's Equipment Floater...........63Commercial Coverage Forms..................................60Commercial Inland Marine......................................63Commercial Inland Marine Conditions....................63Commercial Package Policy....................................59Commercial Property...............................................60Commercial Property Conditions.............................60Common Carrier Cargo Liability.............................64Common Law Defenses...........................................37Common Law Fellow Servant Rule.........................37Common Policy Conditions.....................................79Common Policy Declarations..................................60Common Policy Provisions......................................32Comparative Negligence..........................................37Competent Parties....................................................21Completed Value Form............................................46Comprehensive Coverage Form...............................66Comprehensive Form.........................................49, 52Concealment............................................................23Concurrent Causation..............................................48Conditional Contract................................................22Conditional Renewal...............................................36Conditions..............................................32, 45, 53, 69Condominium Association.......................................61Condominium Commercial Unit-Owners................61


Condominium Unit Owner Form.......................49, 52Consequential Loss..................................................11Consideration...........................................................21Contract Legal Interpretations.................................22Contract of Adhesion...............................................22Contracts..................................................................21Contribution by Equal Shares..................................33Contributory Negligence..........................................37Coverage A........................................................50, 67Coverage B........................................................50, 67Coverage C........................................................50, 67Coverage D........................................................50, 67Coverage E........................................................50, 67Coverage F.........................................................50, 67Coverage G..............................................................67Coverage H..............................................................67Coverage I...............................................................67Coverage J...............................................................67Coverages....................................................................

Breakage of Glass by Earth Movement..............51Judgment Rating.................................................28Loss Ratio...........................................................28Manual Rating....................................................28

Covered Perils..........................................................36Credit Card, Fund Transfer Card, Forgery andCounterfeit Money...................................................51Credit Reporting......................................................38Crop Hail Insurance.................................................86Debris Removal.......................................................50Declarations.............................................................32Deductibles..................................................16, 32, 76Defenses Against Negligence..................................37Definitions...............................................................43Deposit Premium.....................................................14Determination..........................................................29Direct Losses...........................................................29Direct Mail...............................................................19Direct Physical Loss................................................11Direct Response.......................................................19Direct Writer............................................................19Discrimination.........................................................23Distribution Systems................................................18Domestic Insurer......................................................18Duties After a Loss..................................................45Duty to Defend........................................................34Dwelling..................................................................50Dwelling Policy.......................................................43Dwelling Under Construction..................................46Earthquake...............................................................55Electrical Objects Form...........................................66Electronic Data Processing......................................63Elements of a Legal Contract...................................21

Elements of a Negligent Act....................................36Elements of Insurable Risks.....................................15Endorsements..............................................................

Functional Replacement Cost.............................56Identity Fraud Expense.......................................56Property Remediation for Escaped Fuel..............56Special Additional Amount of Insurance............56Windstorm or Hail..............................................56

Equipment Breakdown Coverage............................65Equipment Breakdown Protection...........................66Equipment Dealers...................................................63Estoppel...................................................................12Excess Insurance......................................................33Excess Lines Insurer................................................17Excluded Perils........................................................52Exclusions..........................................................43, 53Exclusive agents......................................................18Exposure..................................................................13Express Directive.....................................................20Extended Coverage Perils........................................43Extended Replacement Cost....................................49Extra Expense..........................................................61Fair Credit Reporting Act........................................38FAIR Plans..............................................................85Fair Rental Value...............................................43, 44False Financial Statements.......................................24False Statements......................................................39Farm Coverage........................................................67Farm Coverage Definitions......................................69Farm Employee........................................................69Farm Policy Coverages............................................67Farm Property Coverage Forms...............................67Farm Umbrella Coverage.........................................72Farming...................................................................69FCIC........................................................................86Federal Crop Insurance............................................86Fiduciary..................................................................19Financial Responsibilities........................................19Fire Legal Liability..................................................78Foreign Insurer........................................................18Fraternal Benefit Societies.......................................17Fraud..................................................................23, 39Freight Insurance.....................................................83Functional Replacement Cost..................................31Fungi, Wet or Dry Rot, or Bacteria Coverage..........55General Exclusions..................................................45General Rules of Agency.........................................19Government Insurers...............................................17Gramm Leach Bliley Act.........................................39Grave Markers.........................................................51Guaranteed Replacement Cost...........................31, 49Hazard.....................................................................13


Hazards....................................................................29HO-1........................................................................48HO-2..................................................................48, 51HO-3..................................................................48, 51HO-4..................................................................49, 52HO-5..................................................................49, 52HO-6..................................................................49, 52HO-8........................................................................49Home Day Care.......................................................55Homeowners Contents.......................................49, 52Hovercraft and Parts................................................52Hull Insurance..........................................................83Implied Directive.....................................................20Indemnity.................................................................11Independent Agents.................................................18Independent Rating Services....................................18Indirect Loss............................................................11Indirect Losses.........................................................29Inherent Vice...........................................................64Inland Marine..........................................................63Insolvency................................................................35Installation Floater...................................................64Insurable Interest...............................................11, 28Insurance.................................................................11Insurance Guaranty Association..............................35Insurance Services Office........................................59Insurance Under Two (2) Or More Coverages.........70Insured.....................................................................12Insured Loss.............................................................40Insured's Duties After Loss......................................34Insurer......................................................................12Insurer Provisions....................................................34Insurer Relationship.................................................19Insurers....................................................................16Insuring Agreement.................................................32Interline Endorsements............................................60Intervening Cause..............................................11, 37Intimidation.............................................................24Jeweler's Block........................................................64Joint Underwriting/Joint Reinsurance Pool..............85Larceny....................................................................14Last Clear Chance....................................................37Legal Action............................................................45Legal Action Against the Insurer.............................70Legal Liability.........................................................61Legal Purpose..........................................................21Liability...................................................................14

Fire Legal...........................................................31Liability Coverages..................................................50Liberalization...........................................................70Liberalization Clause...............................................34Limit of Liability.....................................................31

Limits of Liability....................................................16Livestock Coverage.................................................68Lloyd's Associations................................................17Loss.........................................................................11Loss Assessment Coverage......................................49Loss Conditions.................................................69, 76Loss Costs................................................................29Loss of Use..............................................................50Loss Payable Clause..........................................35, 45Loss Valuation.........................................................31Market Value...........................................................31Market Value/ Modified Coverage Form.................49Marketing Systems..................................................18Maslow's Hierarchy of Needs..................................13Mechanical Objects.................................................66Mechanical Objects Form........................................66Med Payments- No Admission Of Liability.............70Medical Expenses....................................................78Medical Payments to Others....................................50Merit Rating.............................................................28Methods of Handling Risk.......................................14Mine Subsidence......................................................86Misappropriation of Funds.......................................24Misrepresentation..............................................22, 23Mobile Home Policies.............................................56Monopoly................................................................24Motor Truck Cargo Forms.......................................65Multi-Line Insurance...............................................16Multi-Peril Crop Insurance......................................86Mutual Companies...................................................16Mysterious Disappearance.......................................14Named Insured...................................................12, 34Named Peril.......................................................29, 48National Association of Insurance Commissioners(NAIC).....................................................................13National Flood Insurance Program (NFIP)..............83Nationwide Marine Definition.................................63Neglect of the Shipper.............................................64Negligence.........................................................12, 36No Benefit to the Bailee...........................................35Non-Admitted Insurer..............................................18Non-Assessable Mutual Insurers.............................16Non-Certified Loss..................................................40Non-Concurrency....................................................33Non-Reduction of Limits.........................................33Nonrenewal..............................................................36Nonresident Agent...................................................18Notice of a Claim.....................................................69Occurrence...............................................................13Ocean Marine Insurance..........................................83Offer and Acceptance..............................................21Offer Period.............................................................21


One or More Coverage Parts....................................60Open-Peril....................................................29, 48, 51Optional Coverages.................................................77Ordinance or Law........................................46, 51, 62Other Farm Structures..............................................67Other Insurance............................................33, 45, 70Other insurance provisions......................................59Other Structures.......................................................50Pair and Sets Clause.................................................52Peak Season.............................................................62Peril.........................................................................13Perils..................................................................29, 51Perils Insured Against..............................................43Periodic Inspection..................................................66Permitted Incidental Occupancies............................55Personal Article Floater...........................................55Personal Contract.....................................................22Personal Liability.....................................................50Personal Liability Supplement.................................46Personal Lines vs. Commercial Lines......................14Personal Property.....................................................50Policy Aggregate Limit............................................78Policy Limits...........................................................33Policy Owner...........................................................12Policy Period...........................................................32Policy Territory........................................................32Policy Types................................................................

Business Owners Package Policy.......................59Commercial Package Policy...............................59

Premium..................................................................11Premium Fund Trust Account..................................20Pressure and Refrigeration Objects..........................66Primary Insurance....................................................33Principal...................................................................19Privacy Protection....................................................39Private Insurers........................................................17Private Residence....................................................36Pro Rata...................................................................33Producer...................................................................12Producer Relationships............................................19Producers...........................................................18, 19Proof of Loss...........................................................34Property Coverages..................................................50Protective Safeguards..............................................79Proximate Cause......................................................30Purchasing Groups...................................................16Pure Risk.................................................................11Rates........................................................................28Re-Authorization Act of 2007..................................41Reasonable Expectations.........................................22Rebating...................................................................23Reciprocal Companies.............................................16

Redlining.................................................................24Reduction.................................................................15Regulations..............................................................35Reinsurance.............................................................15Released Bills of Lading..........................................65Renter's Coverage..............................................49, 52Replacement Cost..............................................31, 53Reporting Form........................................................46Representations..................................................22, 70Required Provisions.................................................35Resale Value............................................................31Residual Markets.....................................................85Responsibilities to the Applicant.............................20Retention.................................................................15Risk..........................................................................11Risk Management Agency.......................................86Risk Management Key Terms..................................11Risk Retention Groups.......................................16, 17RMA........................................................................86Robbery...................................................................14Salvage....................................................................35Scheduled Personal Property...................................55Selected BOP Endorsements....................................79Selected Commercial Property Endorsements.........62Selected Endorsements................................46, 55, 66Self-Insurance..........................................................12Sentimental Value....................................................31Separation of Insureds.............................................70Sharing.....................................................................15Signs........................................................................64Smoke Coverage......................................................51Special Form................................................44, 48, 51Special Peril.......................................................48, 51Special Peril (Previously All-Risk)..........................44Special Provisions....................................................55Special Provisions for States....................................46Specific Policy.........................................................30Speculative Risks.....................................................11Spoilage...................................................................62Standard Fire Policy................................................36Standard Fire Policy Perils.......................................43Standard Mortgagee Clause.....................................35State and Federal Laws............................................35State Changes..........................................................79Stated Amount.........................................................31Statutes of Limitations.............................................37Stock Companies.....................................................16Strict Liability..........................................................30Subrogation..............................................................34Supplementary Coverage.........................................32Surplus Lines Insurer...............................................17Syndicate Insurers....................................................17


Tenant................................................................49, 52Terrorism Risk Insurance Act (TRIA).....................39The Federal Crop Insurance Corporation.................86Theft........................................................................14Third Party Provisions.............................................35Tort..........................................................................14Transfer...................................................................15Transfer of Rights of Recovery................................70Transit Coverage......................................................64Transit Coverage Forms...........................................65Transportation Coverages........................................64Turbine Objects Form..............................................66Types of Construction..............................................30Types of Insurers.....................................................16Underwriting............................................................28

Unfair Policy Replacement......................................23Unilateral Contract...................................................22Unoccupancy...........................................................34Unscheduled Farm Personal Property......................67Utility Services........................................................79Utmost Good Faith..................................................22Vacancy...................................................................34Valuable Papers and Records...................................64Value Reporting Form.............................................62Valued policy...........................................................31Vicarious Liability...................................................30Waiver.....................................................................12Warranties................................................................22Water or Steam........................................................52


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