Class 10 Insurance and Risk Management

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Class 10Insurance and RiskManagement

• George D. Krempley
• Bus. Fin. 640
• Winter Quarter 2007

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Mortgage clauseprotects the mortgagees interest

• Under the mortgage clause, the mortgagee is
  entitled to receive a loss payment from the
  insurer to the extent of its interest regardless
  of any policy violation by the insured.
• Even if the insured violates a policy provision,
  the insurer must make a loss payment to the
  mortgagee. Thus, the mortgagees insurable
  interest is protected.

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Review of HO 3 Coverages

• Section I Property Coverages
• Coverage A Dwelling
• Coverage B Other Structures
• Coverage C Personal Property
• Coverage D Loss of Use
• Additional Coverages
• Section II Liability Coverages
• Coverage E Personal Liability (100,000 per
  occurrence)
• Coverage F Medical Payments to Others (1000
  per person)

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Additional Coverages

• cost of debris removal
• repairs needed to prevent further damage
• limited coverage of trees, shrubs, plants, and
  lawns
• up to 500 for a fire department service charge
• loss of credit cards, electronic fund transfer
  cards, forgery of checks, and counterfeit money
  up to 500
• broad coverage of property removed from premises
  threatened by a covered peril for up to 30 days
• loss assessment charge up to 1000
• certain collapse losses
• coverage for glass or safety glazing material
• coverage for landlords furnishings up to 2500
• limited coverage for increased construction costs
  because of some ordinance or law
• coverage of grave markers up to 5000.

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Exclusions Which Apply to Coverages A and B

• Collapse, except collapse losses covered under
  additional coverages
• Freezing of plumbing, heating, air conditioning,
  or automatic fire protection sprinkler system
  unless heat is maintained or the water supply is
  shut off and drained.
• However, if the building has an automatic
  sprinkler system, the insured must continue the
  water supply and maintain heat in the building.
• Damage to pavements, patios, swimming pools, and
  similar structures from ice, water pressure,
  freezing, and thawing

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Exclusions Which Apply to Coverages A and B

• Theft of materials and supplies from the
  construction site
• Vandalism, malicious mischief, and glass breakage
  if the dwelling is vacant for more than 60
  consecutive days immediately before the loss
• Mold, fungus, or dry rot losses
• Other exclusions

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Additional exclusions applying to Coverages A, B,
and C.

• Ordinance or law
• Earth movement
• Water damage, such as flood, sewer back up, and
  seepage
• Power failure off the residence premises
• Neglect of the insured to save and preserve the
  property after a loss
• War

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Additional exclusions applying to Coverages A, B,
and C.

• Nuclear hazard
• Intentional loss
• Government action
• Weather conditions that otherwise are excluded
• Failure to act by any person, group, or
  government body
• Faulty, inadequate, or defective planning and
  design

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Coverage E Personal Liability

• Protects insureds against the financial
  consequences of their liability to others for
• Bodily injury
• Property damage
• Minimum Limit 100,000 per occurrence
• Single limit that applies to both bodily injury
  and property damage per occurrence

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Coverage E Personal Liability

• Coverage is triggered by notice to the insurer of
  potential or actual allegations of the insureds
  liability.
• Legal defense will be provided, even if the suit
  is groundless, false or fraudulent

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Coverage E Also Pays for Legal Defense at
Insurers expense

• Costs of defense are provided in addition to the
  Coverage E limit.
• Does not reduce the amount of insurance that can
  be used to pay damages arising from covered
  liability
• However, insurer is not obligated to provide any
  further defense after it has paid damages equal
  to the limit of liability

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Coverage E Personal Liability Insurance

• Very broad coverage Examples
• Guest in your home trips on torn carpet and sues
  you for bodily injury
• While burning leaves in your yard, you
  accidentally set fire to your neighbors house
• Your dog bites a small child while you are taking
  it for a walk
• You are shopping and carelessly break an
  expensive vase

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Personal Liability Insurance

• Applies to most of the insureds exposures
  relating to
• Premises (which fit definition of an insured
  location)
• Personal activities
• Employment of domestic workers
• Incidental contracts
• Other incidental exposures
• E. g., Host liquor liability

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Personal Liability Insurance

• Limited protection also provided for
• Boats
• Snowmobiles
• Other vehicles besides automobiles

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Personal Liability Coverage Trigger

• To trigger personal liability coverage, the suit
  or claim must
• Allege bodily injury or property damage
• Be caused by an occurrence to which coverage
  applies

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Meaning Bodily Injury Property Damage

• Definition of Bodily Injury
• Bodily harm, sickness or disease, including
  required care, loss of service and required care
• Definition of Property Damage
• Physical injury to, destruction of, or loss of
  use of tangible property

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Definition of Occurrence

• An accident, including continuous or repeated
  exposure to the same harmful conditions, which
  results, during the policy period, in
• Bodily Injury, or
• Property Damage.

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Meaning Occurrence (cont.)

• Occurrence can also be
• A sudden event or,
• A gradual series of incidents or,
• A continuous conditions, so long as it is
  fortuitous
• Example non sudden occurrence Gradual
  accidental seepage of pollutants from a septic
  tank into the neighbors well

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Example One Occurrence, Two Claimants

• During a windstorm, tree from Insureds property
  falls
• Strikes and injures pedestrian
• Hits and damages home of neighbor
• Both parties sue
• Pedestrian for 125,000
• Neighbor or 35,000

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Example One Occurrence, Two Claimants

• Insured has an unendorsed HO-3. Reports claim to
  insurer
• Insurer treats claim as one occurrence
• Insurer defends
• Insured appears to be negligent
• Failed to remove dead tree from his property,
  even though he has received repeated warnings

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Example One Occurrence, Two Claimants (cont.)

• Pedestrian case is considered first.
• Cost to defend is 40,000
• Court decides in favor of Pedestrian
• Pedestrian receives award if 125,000
• Insurer pays 100,000 for Damages and 40,000 LAE
• Insured pays 25,000

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Example One Occurrence, Two Claimants (cont.)

• Neighbors case is now considered.
• Cost to defend is 35,000
• Court decides in favor of Neighbor
• Neighbor receives award of 35,000
• Insurer pays 0
• Insured pays 35,000 Damages and 35,000 LAE

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Example Defense of Non-meritorious Claim

• Insured was using a welder in his backyard
• Neighbors house catches fire
• Neighbor alleges that fire was caused by sparks
  from the Insureds activity
• Actual cause was sparks from neighbors own
  wood-burning stove
• Insurer still has to defend because claim is
  within scope of Coverage E

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Example Defense of Non-meritorious Claim (cont.)

• Insurer still has to defend because claim is
  within scope of Coverage E
• Cost to defend 25,000
• Case decided in insureds favor
• Insurer pays
• 0 for damages
• 25,000 for LAE

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Meaning Occurrence

• One accident is one occurrence even if it
  involves
• Injury to more than one person, or
• Damage to more than one piece of property
• Occurrence can also be a sudden event or a
  gradual series of incidents, or a continuous
  conditions, so long as it is fortuitous.

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Homeowners Section II

• Coverage F Medical Payments to Others
• Pays for, regardless of whether the insured is
  liable, reasonable medical expenses of another
  person, who is accidentally injured, either on
• An insured location, or
• By the activities of
• The insured
• Resident employee
• Or animal owned by or in the care of the insured
• Limit 1000 per person

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Exclusions Coverages E and F

• Motor vehicle liability
• Watercraft liability with certain exceptions
• Aircraft liability
• Hovercraft liability
• Expected or intentional injury
• Business activities
• Professional services

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Exclusions Coverages E and F (cont.)

• Uninsured locations
• War
• Communicable disease
• Sexual molestation
• Corporal punishment, or physical or mental abuse
• Controlled substances.

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EXHIBIT 9.1 Watercraft Exposures Covered by
Section II of the HO-3 Policy
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Coverage E Exclusions

• Contractual liability Limited exceptions
• Written contracts that relate directly to an
  insured location (example apartment lease)
• Written contracts in which the liability of
  another is assumed before the occurrence of a
  claim (example rental of a power saw)
• Damage to property owned by an insured

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Coverage E Exclusions (cont.)

• Damage to property rented to, occupied or used
  by, or in the care of an insured
• Does not apply to property damage caused by fire,
  smoke or explosion
• Workers compensation claims
• Nuclear energy liability
• Bodily injury to an insured.

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Coverage F Exclusions

• Injury to a residence employee off an insured
  location and not in the course of employment
• Workers compensation and nuclear energy claims
• Injury to persons regularly residing on an
  insured location.
• Coverage F also does not cover the named insured
  and resident family members.

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Impact of /Restrictions on Endorsements

• Endorsement generally takes precedence over the
  conflicting terms of the contract
• Unless a law or regulation requires that a
  standard policy contain certain provisions
• An endorsement cannot be used to circumvent the
  purpose of legislation by modifying the terms of
  a standard contract required by law

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Endorsements to Homeowners Policy

• Scheduled personal property endorsement (with
  agreed value loss settlement)
• Inflation-guard endorsement
• Earthquake coverage endorsement
• Personal property replacement cost loss
  settlement endorsement
• Personal injury endorsement
• Watercraft endorsement
• Home business insurance coverage endorsement

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Recall Special Limits of Liability in Homeowners
Insurance

• 200 on money, bank notes, bullion, gold, silver,
  platinum, coins, medals, stored value cards, and
  smart cards
• 1500 on securities, valuable papers,
  manuscripts, passports, tickets, and stamp
  collections
• 1500 on watercraft of all types, including their
  trailers and equipment
• 1500 on trailers not used with watercraft
• 1500 for theft of jewelry, watches, furs,
  precious and semiprecious stones
• 2500 for theft of firearms and related equipment
• 2500 for theft of silverware, goldware,
  platinumware and pewterware
• 2500 on business property on the residence
  premises
• 500 on business property away from the premises
  (except adaptable electronic apparatus)
• 1500 on electronic apparatus while in or upon a
  motor vehicle
• 1500 on electronic apparatus used primarily for
  business while away from the premises and not in
  or upon a motor vehicle

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INSIGHT 8.4 The Big Gap Between Replacement Cost
and Actual Cash Value Can Empty Your Wallet
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EXHIBIT 9.4 Tips for Buying a Homeowners Policy