All Lines - Adjuster - Manual - PDF

All-Lines
Adjuster Manual
Copyright 2011 ‐ AdjusterPro LLC ‐ All‐Rights Reserved 
www.adjusterpro.com
214-329-9030
Chapter 1.1 - What Is Insurance? 1
Chapter 1.2 - Types of Insurers
Chapter 1.3 - Characteristics of Insurance Contracts
Chapter 1.4 - Important Terms
Chapter 1.5 - Risk & Risk Management
Chapter 1.6 - Insurable Risk
Chapter 1.7 - Valuation and Deductibles
Chapter 1.8 - Types of Hazards
Chapter 1.9 - Cause and Loss
Chapter 1.10 - Interest, Subrogation and Claims
Chapter 1.11 - Liability and Law
Chapter 1.12 - Settlement & Release
Chapter 2.1 - Insurance Rules & Regulations
Chapter 2.2 - The Agent & Authority
Chapter 2.3 - Unlawful Behaviors
Chapter 2.4 - Unfair Claim Settlement Practices
Chapter 2.5 - Standards for Claim Filing & Handling
Chapter 3.1 - Dwelling Insurance
Chapter 3.2 - Homeowners' Insurance
Chapter 3.3 - Farm Insurance
Chapter 3.4 - Crop Insurance
Chapter 3.5 - Flood Insurance
Chapter 3.6 - Umbrella and Excess Liability
Chapter 3.7 - Personal Auto
Chapter 4.1 - Commercial Property
Chapter 4.2 - Commercial General Liability
Chapter 4.3 - Professional Liability Coverage
Chapter 4.4 - Commercial Package Policies
Chapter 4.5 - Commercial Crime & Bonding
Chapter 4.6 - Commercial Auto Insurance
Chapter 4.7 - Mechanical Breakdown
Chapter 5.1 - Inland Marine
Chapter 5.2 - Ocean Marine
Chapter 5.3 - Aviation Insurance
Chapter 5.4 - Workers' Compensation
Chapter 6.1 - What is Adjusting?
Chapter 6.2 - Successful Negotiations
Chapter 6.3 - Negotiations
Chapter 6.4 - Ethics
Chapter 6.5 - Settlement
Chapter 6.6 - Practices, Duties & Liabilities
Chapter 6.7 – Fair Credit Reporting / HIPAA / IIPPA
Chapter 6.8 – Insurance Fraud 
 
Copyright 2011 ‐ AdjusterPro LLC ‐ All‐Rights Reserved 
Chapter 1.1 - What Is
Insurance?
Insurance is an economic device utilized by individuals and organizations to
protect themselves against the risk of realizing unforeseen and extraordinary
financial losses. By purchasing an insurance policy from an insurance company,
an individual or organization can transfer the financial risk of a potentially
devastating loss to another party, called the insurer. The Insurer is a company
offering insurance. The Insured is the individual or entity purchasing the
insurance.
Insurance essentially allows individuals and organizations to pay a scheduled and

affordable fee called a premium to an insurance company today, and in turn the
insurance company makes a promise to protect that individual or company
financially if they suffer from a specified unforeseen and devastating economic
loss in the future. Purchasing an insurance policy offers peace of mind to the
policyholder by relieving the potential financial burden of unexpected
occurrences, such as: What would we do if our house were destroyed by a
hurricane? How would I cope with the enormous expense of a serious automobile
accident?
An insurance company operates by spreading the risk of experiencing a large

unforeseen financial loss amongst a large group of people. An insurance company
collects premiums from its group of policyholders, and places those premiums
into a large pool of money. When a policyholder experiences an unforeseen loss,
that policyholder makes a claim against their insurance policy. The insurance
company then pays the claim of the policyholder from funds collected in the large
pool of money.
Since only a small fraction of an insurance company's policyholders will

experience a devastating loss over the course of their policy term, the pooled
money should always be sufficient to pay for the individual losses amongst the
group of policyholders. For example, while an insurance company may collect
premium payments from 100,000 auto insurance policyholders over a one-year
period, odds are that only 3,000 of those policyholders will actually file a claim
due to an auto accident. The insurance company then uses the premiums
collected from 100,000 policyholders to pay the claims of the 3,000 people
actually involved in accidents. An insurance company ensures this pool of money
is always sufficient by managing risk, which we'll explore a little later.
Copyright 2011 ‐ AdjusterPro LLC ‐ All‐Rights Reserved  3  
Insurers select certain types of risks based on the potential for that risk to
produce a profit even if there is a loss. A good risk selection is one where the
profit collected is greater than the loss and expenses. This produces a profit for
the insurer. The process of selecting these “profitable” risks is called
Underwriting.
What is a Contract?
A contract is defined as a legally enforceable agreement between two or more
persons or parties. In order for a contract to be legally binding, all the following
conditions must be met:
Agreement- all parties to a contract must agree to the terms of a contract. This
is usually specified by a signature to the terms of a contract.
Consideration- each party must contribute something of value to the contract

(for example, Bob transfers ownership of his car to Kate and in exchange she
gives Bob $5,600).
Competent Parties- both parties must have the legal capacity to enter into a
contract (for example, both parties must be 18 years of age for a contract to be
enforceable, and both parties must be of proper mental capacity when they sign
the contract).
Legal Purpose- the subject / subjects of a contract must be of legal purpose (for
example, there can be no legally-binding contract to enforce the terms of a drug
deal!).
Parts of the Contract:

Now we're going to take a quick look at the various components of an insurance
contract.
An insurance policy begins by declaring exactly what it covers, and then proceeds
to restrict, limit and exclude various coverages in the contract.
Remember, nearly every insurance contract shares a similar method of
construction and almost identical components, so it's very important you become
familiar with each section of the insurance policy.
"Must Have" parts of a policy:
All (or at least most) insurance policies will have these four components:
• Declarations Page
• Insuring Agreement
• Conditions
• Exclusions
These parts can be easily remembered with the acronym "D.I.C.E"
Declarations Page
The declarations page is always the first page of an insurance policy, and
provides a general overview of the policy. Often referred to as the "dec page", the
declarations page will include:
• The named insurer and insured party.

• The policy number.
• The location and description of the insured item.
• The value and replacement value of an insured item.
• The inception and expiration dates of the insurance policy.
• The amount and limit of insurance coverage.
• The deductibles on the policy.
• The premium on the policy.
Definitions Page
Although not technically one of the "essential" elements of an Insurance Policy,

the definitions page is a common part of most policies. It carefully reviews all the
terms used in an insurance contract to ensure both parties agree to the
assignment of terms in the contract language.
Nearly every definitions page will begin by clarifying the “you”, “we” and “us”,
and who it specifically refers to in terms of the contract.
The definitions page will also explicitly define important terms applicable to the
policy. You may see heavily worded definitions for such simple terms as
"collision", "decay", or "like, kind and quality."
While the definitions page may on the surface appear to be just a formality,
adjusters need to learn the specifics of policy language. When cases go to court,
decisions often depend on the exact wording in the definitions page.
Conditions Page
The conditions page contains provisions inserted in the policy that qualify or
place limitations on an insurer's promise to pay or perform.
If certain policy conditions or obligations are not met by the policyholder, the
insurer establishes its right to deny a claim.
For example, if a jewelry store wants to purchase an insurance policy, the

conditions page may stipulate that the store must have a security guard present
in the store during hours of operation.
The conditions page will also outline the requirements for filing a proof of loss
with the insurer, the requirements regarding the protection of property after a
loss, and the requirement that the policyholder cooperate with the insurer during
the investigation of a loss or a lawsuit.
Insuring Agreement
The insuring agreement summarizes the major promises of the insurance

company, and states exactly what is covered. The insuring agreement is found at
the beginning of each "coverage form", which we'll learn more about later in this
class.
The insuring agreement contains a general description of the coverage provided,

and what perils are covered by the insurance policy. The insurer will agree to
indemnify the policyholder for financial losses to an insured item caused by the
explicitly defined perils. The insurer will also agree to provide certain services, or
agree to defend the insured in a liability lawsuit.
The insuring agreement also states that the policy doesn't cover exclusions, and
that it will only provide coverage up to the policy limits stated in the declarations
page.
Exclusions; The exclusions page specifically lists what occurrences and perils
are not covered under the insurance policy.
In essence, the exclusions page reduces the coverage provided in the insuring
agreement by describing people, property, perils, hazards or losses arising from
specific causes which are not covered by the contract.
We'll be dealing with various forms of property insurance during this class, and
you'll find nearly every property policy will explicitly exclude coverage from
damages caused by:
• earthquakes
• flooding
• war
• nuclear hazards
• intentional acts
Endorsements
Endorsements are written provisions that add to, delete, or modify the provisions
in the original insurance contract.
An endorsement can add or subtract coverage. It can add insurance coverage for
certain perils, add coverage for defined occurrences, add individuals or
organizations to the coverage of a contract, or add items for coverage not listed in
the original contract.
For example, an endorsement could add earthquake coverage for your home, or
take away coverage for hurricane damage. An endorsement that adds coverage
increases the premium; one that takes coverage away reduces the premium.
Because premiums cannot be increased mid-policy period, endorsements are also

sometimes used by insurers to change the premium price after the policy period
expires.
Endorsements are also sometimes called riders, addendums, or attachments.
Endorsements can be added to an insurance contract at any time during a policy

term, but only by agreement of both the insured and the insurer.
Chapter 1.2 - Types of
Insurers
There are many types of insurance providers. In this next section we
will review the types of insurers and discuss the differences between
them.
First, insurance companies are classified according to their location per below:
1. Domestic Insurer - is an insurance company that adheres to the laws of a

particular state and which is housed in that state.
2. Foreign Insurer - is an insurance company that adheres to the laws of the
United States or one particular state but is not necessarily housed in that
state.
3. Alien Insurer - is an insurance company that adheres to the laws of
another country other than the United States and its territories.
Private Insurers
Private insurance generally refers to stock or mutual insurance providers who

sell an array of insurance products to consumers based on their individual buying
preferences. Consumers seek out private insurance companies to purchase
insurance policies based on their own lifestyles and insurance needs and
preferences. Private insurance companies are generally in business to turn a
profit or supply insurance needs to their subscribers only.
Government Insurers
Government insurance, commonly referred to as social insurance, is a program

(usually mandatory) where risks are transferred to and pooled by a governmental
entity that is then legally required to provide certain benefits. Government
insurance is always a non-profit program.
Social insurance programs are characterized by:
1. Mandatory participation.
2. The benefits are prescribed by federal law.
3. They are designed to meet the best needs of the general public as a whole.
4. There is monopolization by a government entity.
Some examples of government insurance include Social Security, Medicare,

Medicaid, and the Federal Deposit Insurance Corporation.
Private Commercial Insurers
Private commercial insurers are insurance companies that operate in order to

return a profit.
Private commercial insurers are required to keep a defined amount of the

collected policyholder premiums in reserve to pay for claims against their
insurance policies.
Monies collected over and above the required reserves are returned to the
insurance company as operating profit.
Examples include Aetna Insurance, Allstate Insurance, and Nationwide

Insurance.
Private Non-Commercial Insurers
Private Non-Commercial Insurers operate on a non-profit basis, and return

profits to their policyholders through reduced premiums or expanded benefits.
Examples include Blue Cross and Blue Shield.
Federal Government
The Federal Government is considered a special non-profit provider, and

provides many types of insurance. Examples include Medicare, Medicaid, and
the Federal Deposit Insurance Corporation.
As we stated earlier, government insurance programs are always non-profit

enterprises, and is often referred to as social insurance.
Insurance companies can act as stock insurance companies or mutual insurance

companies.
Stock insurance companies operate like any other publicly traded company.
Examples would include any insurance company traded on the New York Stock
Exchange, such as AFLAC, Allstate, Fidelity, Progressive to name a few.
Stockholders provide capital for the insurance company, and in turn the
stockholders participate in the profits or losses of the company in the form of
dividends.
Stock insurance companies are sometimes referred to as non-participating

insurance companies, because the policyholders do not receive any dividends
from the operation of the company.
Many private commercial insurers are stock insurance companies.
Mutual insurance companies are owned by the policyholders of the

company. The capital is not provided by stockholders.
The policyholders act like stockholders in that they elect a board of directors to
run the company, and participate in any profit or loss through policy dividends.
Because the policyholders get the benefits of dividends, mutual insurance

companies are known as participating insurance companies.
A risk-purchasing group refers to a number of parties with similar insurance

needs coming together to form an organization for the sole purpose of purchasing
commercial liability insurance on a group basis.
A purchasing group does not take on the role of an insurer, and is therefore is not
exposed to risk like an insurance company.
A purchasing group simply consists of a number of parties interested in

purchasing insurance together. Members of a purchasing group must operate in
similar or related businesses which expose them as a group to similar-type risks.
For example, a group of independent grocers may elect to establish an

organization, or risk purchasing group, for the sole purpose of purchasing
liability insurance for their small grocery stores. Independent grocers new to the
business may then reach out to the risk-purchasing group in order to learn about
their insurance needs, and purchase insurance through the organization.
The Federal Liability Risk Retention Act of 1986 authorizes risk-purchasing

groups.
Fraternal Benefit Societies or Fraternal Associations are non-profit, mutual

aid organizations that offer insurance to members and their families against
death, disease and disability.
They primarily exist as social organizations that engage in charitable or

benevolent activities. Fraternal benefit societies generally recruit their members
through lodges, fraternal organizations and a variety of social groups who share
common interests such as religious beliefs, occupations or ethnicities.
The Elks, the Masons, The Catholic Aid Association and Sons of Norway are
examples of fraternal benefit societies. The altruistic efforts of fraternal benefit
societies are primarily funded by the sale of financial services and life insurance
to their members.
Fraternal benefit society insurance benefits are required by law to be assessable.

The members are both providers and recipients of the benefits as a whole, and if
the society's claims-paying ability becomes impaired, the members may be
required to pay their share of the deficiency.
A reciprocal insurer is an unincorporated group of subscribers operating

individually and collectively through an attorney-in-fact to provide reciprocal
insurance benefits amongst themselves. More simply put, it is a group of people
or organizations that insure each other. Reciprocal insurers are non-profit
entities.
Essentially, each member of a reciprocal insurer pays their premium into an

individual account. If any one of the members of the insurance group makes a
claim for a loss, the cost of that loss is spread equally among all the other
members of the group.
Each reciprocal insurer generally maintains an advisory group composed of

subscribers who hire an attorney-in-fact to handle the administration,
underwriting, sales, promotion and claims handling of the reciprocal insurer
group.
A risk retention group does not offer insurance in and of itself; rather it
facilitates a group of its member individuals and/ or organizations who wish to
offer insurance by providing their own capital. By providing their own capital,
they risk losing their money or profiting personally if a claim is made against the
policy issued.
The most famous example of a risk retention group is Lloyd's of London.
Essentially, a number of wealthy individuals and/ or organizations will come

together and form a syndicate.
This syndicate will then amass a pool of capital from voluntary investors, and
utilize a risk retention group underwriter to write insurance policies against that
pool of capital. The members of the syndicate are personally and financially
responsible for paying out any claims against their pool of money, or collecting
the profits.
The risk retention group simply provides a market and support for the insurance
policy. It provides agents, brokers, underwriters and other administrative
professionals, and assures full and adequate financial performance by its
members.
Self-Insurers:
Some individuals and companies opt to self-insure. These entities usually have
found that their rate of claims is very low and they have the financial where-with-
all to withstand the loss if there is a claim.
Chapter 1.3 - Characteristics
of Insurance Contracts
Insurance contracts are contracts where an insurance company promises to pay

an insured party if certain defined events occur.
Insurance contracts are designed to meet very specific needs, and thus have many
characteristics not commonly found in non-insurance contracts.
In this section, we will examine some of the unique characteristics of insurance

contracts.
Personal Contracts
An insurance contract is considered a personal contract.
While we often describe insurance in terms of "insuring our car" or "insuring

our home," insurance contracts actually cover the person and their economic
relationship with the insured item.
While technically you may agree purchase insurance on an "item", the insurance
contract actually protects you, as a person, from the economic hardship of
realizing financial damages to, or a loss of, the insured item.
Think about it this way. If you sold your car, does your insurance coverage follow
your car, or does it follow you?
It follows you as a person. Hence, an insurance contract is considered a personal

contract.
Contracts of Adhesion
An insurance contract is classified as a contract of adhesion.
A contract of adhesion is a contract between two parties that offers the consumer
little to no leeway to negotiate the terms of the contract.
A contract of adhesion implies an unequal balance of power in the creation of the

contract. In the insurance industry, the insurer alone dictates the terms of the
contract, and the consumer only has the option whether to take it or leave it. The
consumer has no leeway in making material changes to an insurance contract.
Fortunately for the insurance consumer, this balance of power shifts to the
insured during legal matters regarding the execution of the contract. Any
ambiguities in a contract of adhesion generally favor the insured party. Since the
insurer enjoys the balance of power in the creation of the contract, they are
expected to cover all their bases. Any holes in coverage, or discrepancies in the
contract, will benefit only the consumer.
Utmost Good Faith Contracts
An insurance contract is considered a contract of utmost good faith.
Insurance contracts are agreed upon assuming the utmost good faith of each
participating party. In insurance contracts, this particularly applies to the
insured party. While the insurance company simply promises to pay, the insured
has a duty to disclose, be truthful about, and be honest regarding all material
facts related to the risk of being covered by an insurance contract.
Insurers deal with thousands of applicants for insurance policies, and couldn't
possibly research the relevant details to every contract they sign. As such, they
must trust that the applicant has utilized utmost good faith in revealing the true
nature of the insurance risk.
If an insurer discovers the applicant has not utilized utmost good faith in
divulging the full extent of the risks to the insurer, the insurer can void the
contract.
Aleatory Contracts
An insurance contract is considered an aleatory contract.
Insurance contracts are considered aleatory contracts because the amounts

exchanged over the course of the contract are usually unequal and depend upon
the timing of the occurrence of unforeseen events.
The performance of the insurer is contingent upon the loss of, or damage to, an
insured "unit." Once an insured unit has been damaged or destroyed, the insurer
is contractually obligated to immediately respond to the insured party.
When the "specified event" actually occurs determines who benefits from the
contract.
For example, a policyholder may pay premiums for years, yet never make a claim
against their insurance contract. In this situation, the insurer benefits from the
contract.
Conversely, a policyholder may make only one or two premium payments, and
then make a claim worth hundreds of thousands, if not millions, of dollars to the
insurance company. In this situation, the policyholder benefits from the policy.
Unilateral contracts
An insurance contract is considered a unilateral contract.
Most contracts are considered bilateral contracts, where both parties make
promises to deliver to one another. For example, in a bilateral contract to sell a
house, one person might promise to deliver $500,000 to the owner, and in turn
the owner promises to turn over the title to the house.
A unilateral contract is a contract where only one of the participating parties

makes a promise to perform.
Insurance contracts are unilateral contracts in that only the insurer makes a
promise to pay on a claim, if only the relevant unforeseen event occurs.
An insurance contract essentially exchanges an act from the policyholder (paying

a premium) for a promise, and the insurer may never have to perform on its end
of the contract.
Conditional Contract
Insurance contracts are considered conditional contracts because certain
conditions must be met in order for the contract to be enforceable.
Insurance contracts are conditional upon the insured upholding their end of the
contractual agreement.
After a loss the insured must, for instance, file a claim in a timely manner, must
protect their property from further damage, etc. as outlined in the policy or the
insurer may not be obligated to pay the claim. Another example - the payment of
claims is conditioned on the insured paying his/her premiums!
Chapter 1.4 - Important
Terms
In order to understand how risk management works, we first need to understand

some important terms associated with risk management.
Risk - To an insurance company, the risk pertains to the actual item, person, or
organization that has been insured.
For example, when you purchase auto insurance, the insurance company would
define the car as the risk.
When you purchase professional liability insurance, the insurance company

would define you and your professional behavior as a risk.
When you purchase homeowners insurance, the insurance company defines your
house and possessions as a risk.
Remember, the insurance company views a risk as the potential for a

financial loss. In any of the above cases, insuring the item, person, or
organization presents an opportunity for a financial loss if defined events
transpire in relation to the risk and it is damaged or destroyed. Or, in the case of
liability insurance, an individual unwittingly causes damage or destruction.
Loss - In insurance terms, loss refers to the ascertained financial liability of the
insurer to indemnify (make whole) the policyholder.
More simply put, loss refers to the amount of money an insurance company will
have to pay to an individual to meet the promises outlined in the insurance
contract.
If a tornado travels directly through your property, any damage or destruction to

your home is considered a loss to the insurance company, as they now must pay
you for the repairs needed to replace your damaged home.
Direct Loss – A loss that is a direct consequence of a particular peril Fire
damage to an apartment building is an example of a direct loss.
Indirect Loss – A loss that is a result of a covered peril but is not caused
directly and immediately by that peril Loss of an apartment building by
fire is a direct loss. The loss of rental income as a result of the fire is an
indirect loss.
Hazard - A hazard refers to an instance, behavior or environment that increases

the likelihood of a loss on an insured item.
An insurance company would, for instance, consider storing fuel tanks in your
garage a hazard, because the presence of the fuel tanks increases the likelihood
that a damaging fire could break out in the home and cause a loss.
As another example, if you have flood insurance, a nearby river would be

considered a hazard, because your proximity to the river increases your
likelihood of loss in the event of a flood.
Smoking is considered a hazard to your health, as it increases the chances of

incurring medical bills.
Exposure - For an insurance company, exposure refers to the state of being

subject to the realization of a loss.
For example, if an individual wants to purchase hurricane insurance, the

insurance company would be concerned where that individual lives in order to
determine their exposure to a loss.
If the individual lived in southern Texas, the insurance company would have
tremendous exposure to a loss due to the frequency of hurricanes in southern
Texas.
If the individual lived in Michigan, the insurance company would have very little
exposure to a loss, as hurricanes have never historically affected Michigan.
Determining the exposure of an insured risk helps an insurance company

determine the likelihood of a loss on that risk. The more exposure an insured
item has to various hazards, the more likely the insurer will experience a loss on
that item.
Peril - A peril refers to the actual cause or source of an incidence of destruction,

injury or loss.
If lightning hits your home and ignites the home on fire, lightning would be
considered the peril because it was the actual cause of the fire that damaged your
home.
If hailstones damage your car, then hail is considered the peril.
Some other types of perils include wind, fire, tornadoes, flooding, civil
commotion and malicious mischief.
Insurance policies can be written in one of two ways:
Named peril policies specifically name which perils an item is insured against.
Open-peril or all-peril policies cover all instances of damage to an item (unless

specifically excluded in another section of the policy).
Salvage - The remaining part of an insured item. This becomes the property of
the insurance company after they paid a loss on behalf of the insured.
Pair and Set Clause – This clause states that if part of a pair or set is lost or
damaged, the loss will be valued as a proportion of the total value of the set
considering the importance that the damaged item has to the set.
Deductible - is a pre-defined monetary portion of an insurance claim paid by a

policyholder Deductibles were originally established to avoid processing minor
and easily affordable claims through an insurance company.
Co-Insurance - Let's say Roger, with the $500,000 house, has the option of
insuring his house for $400,000 or, to save money, just insure it for $50,000.
Obviously, Roger's premiums will be much lower if he only insures his house for
$50,000.
By insuring his home for only $50,000, Roger is considered underinsured,

because if the home were destroyed, the insurance company wouldn't provide
enough indemnification to replace the home.
Roger then suffers $25,000 in damage to his roof. Whether Roger has insured his
home for $400,000 or $50,000, Roger theoretically has enough insurance
coverage to pay for the $25,000 in partial damages, right?
However, the insurer will collect much less in premium on a $50,000 policy than
they would on a $400,000 policy. So much less in fact, that an insurer will very
likely lose money on Roger's $50,000 insurance policy if he makes a claim for
$25,000.
Now, if all of the insurance company's policyholders suffered partial losses like
Roger, and all the policyholders underinsured their homes, it's easy to see that an
insurance company wouldn't stay in business very long.
To combat policyholders from underinsuring their homes, insurance companies
will only pay a percentage of partial damages when a home is underinsured.
For example, let's say Roger's home is worth $500,000. But Roger can't afford to
fully insure his home, so he only purchases $250,000 worth of insurance, or 50%
of the home's value.
If Roger suffers partial damages, the insurance company will now only pay 50%
of the damages to Roger's home, because he has only insured it to 50% of it's
value. This guarantees the insurance company that they will collect an adequate
amount of premium for the risk they take in insuring the home.
But if Roger insures his home to 80% of it's value, thereby acquiring co-insurance
in the home, his partial damages will be indemnified 100%.
In summation, insurance companies don't want policyholders to be

underinsured. Since most losses are partial losses, a home insured for under its
value (and therefore a lower premium for the insured) could cause an insurer to
realize significant financial losses on the policy, as they do not collect enough
premium to cover multiple partial losses on a home.
A homeowners' policy is considered “fully insured” at 80% of the home's value.

When a policyholder insures their home to 80% of it's value, they have co-
insurance in their home.
Insured parties with mortgages are required to fully insure their homes. If a
property is valued at $500,000, the owner must insure the property for
$400,000. When a homeowner is fully insured (meets the 80% requirement), his
partial losses would be 100% covered minus the deductible.
Insurance companies will encourage policyholders to maintain an adequate level

of co-insurance by offering a discounted premium to insure their property 80%+
of the value.
Conversely, if the 80% is not met, an insurance company may assess penalties for
being underinsured, and will only cover a percentage of partial losses.
Elements of the Contract:
In the next few sections, we are going to study some of the basic elements of an
insurance contract. We'll analyze the purpose of an insurance contract, the
various sections of an insurance contract, and some of the frequently used
terminology used in insurance contracts.
Insurance contracts - are binding contracts where an insurance company

promises to reimburse an insured party for financial losses if certain defined
events occur. In turn the insured party, or policyholder, agrees to pay a fee called
a premium to the insurance company.
The insurance contract determines the legal framework under which the tenets of
an insurance policy are enforced. The components and structure of an insurance
contract are very similar among different types of insurance policies. Insurance
contracts are designed to meet very specific needs, and thus have many features
not found in many other types of contracts.
As such, over the course of your adjusting career, you'll realize that there is little
substantial difference between an insurance contract offering commercial
insurance, homeowners insurance, auto insurance or airplane insurance.
Indemnification - The concept of indemnification is the basis of all insurance

contracts.
To indemnify means to “make whole," or to restore the insured party, in part or

in whole, to the condition he/ she enjoyed just prior to a specified loss.
In other words, indemnification simply means that an insurance contract intends

to return you to the same financial condition you were in before you experienced
some type of damage or loss.
For example, let's say a tree landed on you roof during a violent windstorm. The
tree crashes through the roof, and allows rain to pour into the upper floors of
your house. As a result, you can't live in the house until repairs are made, so you
have to move into a hotel.
Because of the damage to your roof, you have to pay for a new roof, the water
damage from the rain, and the hotel stay. However, since you have insurance, the
insurance contract promises to indemnify you for all these costs associated with
the damage caused by the falling tree.
The roof will be fixed, the water damage will be repaired, and the hotel stay will
all be paid for by the insurance company. In effect, you will enjoy the same
financial position you had prior to the tree falling through your roof.
Indemnity - In insurance, an indemnity is the actual sum paid by the insurance

company to the insured party for damage, and is synonymous with the word
compensation or reparation.
When an insurance company issues you a check for the sum total of your
damages, the amount of the check is considered your indemnity.
Indemnify - The financial restoration of an insured party to a level just prior to

a specified loss.
Principle Of Indemnity
The principle of indemnity is an insurance principle stating that an insured party

may not be compensated by the insurance company in an amount exceeding the
insured party's economic loss.
An insured party cannot EVER profit or realize any type of financial

gain from an insurance contract!
This is a very important principle to understand, as you'll undoubtedly come

across a similar situation during your career. A quick example:
Amy is driving down the street and runs a red light, running over a pedestrian
named John Doe. John suffers $15,000 in injuries to his back.
Amy has insurance, the accident is a covered loss, and her insurance company
issues John a check for $15,000. John has been properly indemnified for his
damages by Amy's insurance company, right?
What if John decides to now sue Amy for the same $15,000 in a civil court? In
this case, John would attempt to collect $15,000 twice, and would realize a profit
from his injuries.
Insurance contracts contain language expressly prohibiting this practice, but we'll
get into that more a little later.
Insurer
The insurer always refers to the insurance company.
In the definitions page of an insurance contract, the insurer will always be

referred to as "we", "us" and "our “.
Insured
The insured refers to an individual or organization purchasing an insurance

policy.
In the definitions page of an insurance contract, the insured party, or

policyholder, will always be referred to as "you" and "yours".
First Named Insured
The first named insured refers to the first person named in the declarations page,
or the organization listed on the declarations page.
Policy Period
The policy period refers to the inception and expiration date of an insurance
policy. The policy will always be listed on the declarations page, and also in the
insuring agreement.
By Texas state law, all policies begin and end at 12:01 am.
Lawsuits
By state law, an insured party has exactly two years and one day from the date of
filing an insurance claim to file a lawsuit against an insurer regarding that claim.
Insurance Contracts- Important Terms
Now that we have a basic understanding of the construction of an insurance

contract, we need to go over some important terms relating to the insurance
contract itself.
You'll undoubtedly come across these terms numerous times during the course of
your adjusting career, so it's important to fully understand them, and how they
relate to the execution of an insurance policy.
Utmost Good Faith - An insurance contract is considered an “utmost good

faith contract.”
When two parties enter into an insurance contract, both parties agree to act in
utmost good faith at all times in relation to the contract.
Utmost good faith entitles each party to the contract to assume all
representations relating to the contract made by the opposite party are truthful
and factual, without any attempts to deceive, distort, withhold or conceal
information.
Thus, the insured must reveal the exact nature and potential of the risks that he
transfers to the insurer, while at the same time the insurer must make sure that
the potential contract fits the needs of, and benefits, the insured.
Representations - Representations are the factual statements upon which an

insurance policy is based.
When an individual or organization applies for an insurance policy, any facts,

statements or other information provided on the application for the insurance
policy are considered representations of the applicant.
Because an insurance contract is a contract of utmost good faith, the applicant

for insurance is required to be truthful to the full extent of his/ her knowledge in
their representations of the insured item, as well as the representations they
make about themselves as an individual.
Applicants cannot distort, deceive, withhold or provide false information.
Misrepresentations - Misrepresentations include any deceptive, distorted,

factually incorrect or plain false statements provided by an insurance applicant
regarding any materially relevant information to the insurance contract.
Because an insurance contract is considered a contract of utmost good faith, any

and all misrepresentations made on an insurance application could possibly
nullify the contract in the event of a claim by the policyholder.
Misrepresentations of facts, whether intentional or unintentional, and if material

and relevant to a loss, may allow the insurer to declare the contract void
immediately. Facts are demonstratively provable items of information.
Misrepresentations of opinions on an insurance application can also allow an
insurer to void a contract, if the insurer can show that the applicant
misrepresented their opinion with intent to deceive the insurer. Opinions are
formulated ideas based upon the accuracy and relevancy of surrounding facts.
Warranty - A warranty is an ongoing assurance made by one party to another

that certain facts and/or conditions in an insurance contract are promised and
guaranteed to be true, to be met, or to occur.
Exercising the provisions of an insurance contract may become contingent upon

the assertions made in a warranty. If a warranty is not upheld, the insurer may
nullify or void the contract.
Warranties are found in the conditions page of an insurance policy.
For example, a warehouse owner may decide to purchase an insurance policy on

a large inventory of electronics stored inside his warehouse. In the insurance
application, the warehouse owner states he will have a burglar alarm that he will
activate every day during off-business hours. This assertion is called a warranty.
The insurer agrees to write the insurance policy, contingent upon the warranty
that the owner utilizes an operational burglar alarm, and activates it when there
are no employees on the premises.
If the warehouse is burglarized, and the burglar alarm is found to have been
nonoperational, the insurer can deny coverage based on the warranty.
Warranties are found in the conditions page of an insurance policy.
A jewelry store owner stating in his insurance contract that he intends to have a
security guard present during all hours of business operations is also considered
a warranty.
Concealment - Concealment pertains to knowingly preventing disclosure of or

recognition of materially relevant facts or information in an attempt to deceive or
defraud a relevant party to an insurance contract.
For example, if you have been repeatedly arrested for driving while intoxicated,
yet don't explicitly reveal your arrest on an auto insurance application, you are
guilty of concealment. You know the facts exist and you know the facts are
relevant to the subject of your insurance policy, yet you choose to not disclose the
pertinent information in an effort to acquire insurance.
As an adjuster, you may also find individuals practicing concealment out in the
field.
If a policyholder accidentally started a fire in their garage while working on an

automobile, they may choose not to reveal the source of the fire for fear it may
affect their insurance coverage. Because the information is materially relevant to
the insurance contract, the policyholder is practicing concealment.
Fraud - Fraud occurs when an insured party intentionally perverts, alters, or

misrepresents the truth, or willfully utilizes any manner of deception or
misrepresentation in order to wrongfully realize a financial gain from an
insurance company.
Insurance fraud can range in severity, from slightly exaggerating the value of an
insurance claim, to the deliberate destruction or arranged theft of valuable
property. Policyholders have been known to burn down their own homes or
report their automobiles stolen in an effort to collect a large and unwarranted
insurance settlement. Insurance fraud has become a huge issue for the insurance
industry, which loses hundreds of millions of dollars each year to fraudulent
insurance claims.
Fraudulent activities directly affect the premiums of innocent policyholders,

whose insurance rates increase due to the rising claims costs of the insurer.
Hard fraud occurs when someone deliberately plans or invents a loss, such as a
collision, auto theft, or fire that is covered by their insurance policy in order to
receive payment for damages. One of the most frequently seen examples of hard
fraud is the staging of auto accidents.
Soft fraud or opportunistic fraud is far more common than hard fraud and
involves the policyholder exaggerating an otherwise legitimate insurance claim in
an attempt to profit from an insured loss.
Waiver - A waiver is a voluntary act of relinquishing or abandoning a known

right, claim, or privilege. Waivers can either be expressed or implied.
Express Waiver
An express waiver occurs when an insured or an insurer knowingly gives up a

known right under the insurance contract.
For example, when you purchase automobile insurance in the State of Texas,
insurers are required to offer you $2,500 in personal injury protection insurance
coverage. If you don't want the coverage, you must sign a document stating that
you elected not to purchase the coverage. This signature constitutes an express
waiver on the applicants part, whereby they are acknowledging they are giving
up a known right of the insurance contract.
Implied Waiver
An implied waiver can occur when an insurer takes no action upon realizing
material changes in a contract.
For example, a homeowners insurance policy may require that the homeowner
notify the insurer if there is an increase in hazards. The policyholder needs to
store some explosives in his garage, so he notifies the insurer of the increase in
hazards. The insurer accepts the information, but doesn't make any material
changes to the contract. This lack of action constitutes an implied waiver. They
can no longer deny coverage to the policyholder on the basis of the stored
explosives.
Binder - A binder is an oral or written statement providing immediate insurance

protection, valid for a specified period only.
A binder is designed to provide temporary insurance coverage until an insurance

policy can be issued or "written", or until an applicant is denied an insurance
policy.
When an applicant applies for a policy, the applicant provides all the general
information needed to form the basis of an insurance contract. But the insurer
often wants more information about the applicant, such as their credit history,
driving history, insurance history or criminal history. After the insurer gathers all
the information necessary to make a decision whether or not to provide insurance
coverage, they can either replace the binder with an insurance policy, issue
another binder, or deny the applicant coverage.
Binders are used to provide expedient insurance coverage to consumers who

need it, and guarantees all the protections of an insurance policy until it expires.
Estoppel - Estoppel occurs when an action or practice of the insured party is

permitted to continue because any defense against a continuation of said action
or practice has been effectively waived by the insurer. For example, if an insurer
has regularly accepted payments 2 weeks late while not interrupting policy
coverage for the insured, the insurer cannot later deny coverage because a
payment was received 2 weeks late. The principle of estoppel also applies when
an insurance company, or any of its representatives, make statements to the
insured construed as facts, or take actions that cause an insured to believe that
something is true, and later the insurer denies such statements are true. For
example, let's say an insurance agent sells you an insurance policy and assures
you your house has insurance coverage from the peril of hail. Your home is then
severely damaged during a hailstorm and the insurance company denies
coverage. The agent’s statements have estopped the insurance company from
denying the claim. Because the agent implied the insured party had hail coverage,
the principle of estoppel prevents the insurer from denying the claim. In
essence, estoppel prevents insurers from re-asserting any rights previously
waived, or from changing policy regarding previously accepted conduct which the
insured had begun to rely and act upon, especially if doing so would prove
harmful to the insured party. The principle of estoppel prevents an insurance
company from behaving differently from its expressed words and actions, as their
actions are equivalent to an "implied waiver."
Chapter 1.5 - Risk & Risk
Management
Risk is defined as the potential for loss or injury.
Risk can have both positive and negative outcomes.
For example, every time we drive to the store we are taking a risk because we
have the potential to get injured in an auto accident. By assuming the risk and
driving to the store, we experience a positive outcome when we get to the store
and back with the supplies we needed without an auto accident.
But if we had been involved in an accident during our trip to the store, our risk of
driving obviously had a very negative outcome.
We will now analyze two different classifications of risk.
Speculative risk
Speculative risk is a risk undertaken that results in an unknown degree of gain

or loss. Speculative risks are conscious choices made by an individual. Investing
in the stock market and gambling are considered speculative risks because we
choose to enter into a situation that involves risk. We fully expect a negative
outcome, but hope for a positive outcome.
Consider the purchase of a lottery ticket. When we purchase a lottery ticket, we

make a conscious choice to purchase the ticket even though we have a very high
risk of experiencing a loss. But, we also have the potential to experience a
tremendous gain if we win the lottery.
Insurance companies do not insure speculative risks!
Pure Risk
The second type of risk is called pure risk. Pure risk is a risk where a loss is the
only possible outcome. Pure risk is related to events that are completely out of
the risk-takers control. You do not choose to participate in a pure risk.
For example, if you choose to build a home in the State of Texas, you run a pure
risk of having your home destroyed by a tornado. You don't choose to build your
home in the path of a tornado, yet you still run a pure risk of a tornado destroying
the house simply because tornadoes are prevalent in the State of Texas.
In our earlier example of driving to the store, we run a pure risk of having our car
damaged during the drive. While we may experience a positive outcome by
gathering our supplies, simply driving the car is a pure risk because the car itself
will not benefit from the drive. Loss is the only possible outcome for the car
during the drive.
Insurance companies only insure pure risks!
From an insurance company perspective, risk is always defined in terms of the

potential for financial losses. The greater the potential financial loss, the
greater the risk to the insurance company.
When we apply for an auto insurance policy from an insurance company, the
insurer will always check our driving record to analyze our history of driving
infractions. If one has a long list of speeding tickets, the insurer may realize that
he/she engages in poor driving behaviors.
If one has a record of engaging in poor driving behavior, one's risk of being
involved in an auto accident climbs proportionately. As such, the insurance
company realizes a much greater chance of having to pay for his/her poor driving
habits, and will consider him/her a high risk to insure.
Insurance companies utilize risk management to determine whether or not to

write an insurance policy.
When an individual applies for an insurance policy, they are asking an insurance
company to take on a financial risk. Now the insurance company must decide if it
wants to take on that risk by assessing the possibility of taking a financial loss on
the insured item.
Since most insurers are in business to make a profit, an insurance company

obviously won't take on the financial risk of something very likely to be lost or
destroyed. By insuring these high-risk items, the insurer would not collect
enough in premiums over the life of the policy to equal the amount of money paid
out on the policy, and the insurer would lose money on the policy.
As such, insurers analyze risk to determine the likelihood whether or not they
would lose money on a policy.
Risk Management
Now that we have reviewed some relevant terms regarding risk, we are ready to
examine risk management.
Risk management is the means by which an insurance company assesses,

mitigates and monitors the items of risk that potential customers want to insure.
An insurance company wants to determine:
What are the chances that the insurance company will take a loss by writing an
insurance policy on a particular item?
How can the insurance company reduce the risk of taking a loss on an insured
item?
Remember, the main goal of the insurance company is to keep the pool of
premiums collected from policyholders large enough to pay out all of the claims
filed against their insurance contracts.
If they insure too many high risks (or high probabilities of loss), the insurance
company will end up paying out more in claims than they collect in premiums,
resulting in a loss for the company.
When an individual applies for an insurance policy, they are asking an insurance
company to take on a financial risk. As such, the insurance company must then
decide if it wants to take on that risk by assessing the possibility of taking a loss
on the insured item.
Once risks to the insured items have been identified and assessed, all techniques
in managing insurance risk fall into one of the four following categories:
• Risk Avoidance
• Risk Reduction
• Risk Transference
• Risk Retention
We will examine these risk management techniques briefly in the next few
sections.
1. Risk Avoidance
Risk avoidance is a risk management tactic that completely eliminates risk.
Risk avoidance simply means that an insurance company will refuse to write an
insurance policy to an applicant for insurance. Insurers may utilize risk
avoidance for a variety of different reasons, but primarily the insurer has
determined that they will end up paying more in claims on the insured item than
they will gather in premiums over the course of the policy, resulting in a loss of
money.
Insurers may practice risk avoidance simply because of the high exposure to a
loss of the insured item. For example, an insurance company would likely not
provide flood insurance to someone whose home was built right on a riverbank.
The potential for a damaging flood is simply too great for the insurance company
to ignore, and they would almost certainly lose money on the policy. By refusing
to issue a flood policy on the home, the insurer has utilized risk avoidance.
Insurers may also practice risk avoidance simply because of the particular
individual or organization attempting to purchase the insurance policy.
For example, imagine someone approaching an insurance company to purchase

insurance on a new home in a nice neighborhood. The insurer would normally
have no qualms about issuing such a policy, until they discover the individual
purchasing the insurance has a history of insurance fraud convictions. Chances
are the insurer would not take the risk of insuring such a person, and would
eliminate their exposure to financial losses by utilizing risk avoidance.
We can also apply this situation to a factory with a history of employee injuries.
An insurer would most likely not willingly write a worker's compensation
insurance policy for a company that does not take the safety of its workers
seriously.
2. Risk Reduction
Risk reduction is a risk management practice that mitigates, or reduces, the

financial risk of the insurance company in providing insurance for an item.
An insurance company may decide to take on the risk of issuing an insurance

policy on an item, but will simultaneously minimize their exposure to financial
losses by charging higher premiums on the insured item.
For example, insurance companies will often charge drivers with poor driving
records substantially higher premiums because the insurance company faces a
significant risk that your poor driving behavior will lead to an accident in the
future.
By charging you a higher premium for your insurance policy, the insurer will
collect more money from you over the course of the policy, thereby offsetting the
costs of a loss. This risk management technique is called risk reduction.
Insurers may also practice risk reduction by providing less coverage on an

insured item. An applicant for boat insurance, for example, may want $1 million
worth of insurance for their boat, which the insurer may deem too risky to insure.
But the insurance company may be willing to reduce their exposure by issuing a
policy for $500,000, thereby practicing risk reduction.
3. Risk Transference
Risk transference is a risk management technique that transfers risk to another

party.
Sometimes an insurance company will be willing to take on an insurance risk

only if they are able to share, or transfer, some of that risk with another party,
called a re-insurer.
A re-insurer basically acts an insurance company for insurance companies. In re-

insurance, an insurance company will buy insurance to reduce their own
exposure to a loss.
For example, an insurance company may pay a premium to a re-insurer to
protect the insurance company from a widespread catastrophic loss, such as a
severe outbreak of tornadoes.
The re-insurer in turn agrees to pay a percentage of losses, or any losses over a
pre-determined amount.
4. Risk Retention
Risk retention is a risk management technique whereby an insurance company

agrees to assume the financial risk of an insured item.
By signing an insurance contract with an applicant for insurance, an insurer

practices risk retention. The insurer agrees to accept a specified premium in
return for insurance coverage, and deems the insured item as an acceptable risk.
Summary of Risk Management Techniques
Risk Avoidance eliminates risk.
Risk Reduction mitigates or reduces risk.
Risk Transference transfers or shares risk.
Risk Retention is an assumption or acceptance of risk.
Chapter 1.6 - Insurable Risk
In order for an insurance company to maintain an efficient business operation,

all policies written must cover insurable risks only.
What is an insurable risk?
As we studied earlier, a risk is an item, person or organization that has been

insured. But we can't just insure anything. Could we, or would we, insure a
chocolate bar or a bus pass? Obviously we wouldn't because the loss of these
simple items certainly wouldn't have any drastic effect on our lives.
In the next two sections, we will briefly examine what qualifications a risk must
meet in order to be considered insurable.
Qualification #1
In order to qualify as an insurable risk, an insurer must be able to charge policy

premiums high enough to cover the claims expenses against its policies, in
addition to covering the operating expenses realized in maintaining those
policies.
In other words, the risk cannot be so catastrophic that no insurer could ever hope
to cover the costs of a substantial loss and simultaneously remain in business. An
insurance company must, in perpetuity, charge enough in premium income to
absorb the cost of all claims, plus the operating expenses of the company.
We've seen this in Florida recently, where many insurers stopped offering
homeowner's insurance. Why? Because Florida's exposure to hurricanes was so
great, insurers realized they could never charge premiums high enough to cover
their expenses if a catastrophic hurricane destroyed the homes of their
policyholders.
Qualification #2
An insurer must be able to define the exact parameters of the risk covered in the
policy, and must have a solid quantitative financial value of the risk insured. In
other words, an insurable risk should leave no room for argument as to whether
or not payment is due on a policy, and should definitively quantify the exact
amount of payment due in the event of a claim.
In simpler terms, an insured item has to be definable. While you can insure a
"car" or a "home", you cannot insure a "lake" or a "riverbed."
Once an item has been defined, an insurer must be able to ascertain an exact
monetary value for that item. You can insure an item with an established value of
$125,000, but you can't insure an item worth "somewhere between $500-
$5,000," like, for example, a share of stock whose value fluctuates.
Qualification #3
The nature of the loss must be due to a chance occurrence or wholly uncertain
circumstance. In other words, the losses must be completely random in nature.
An insurance company's intention is to protect policyholders from unforeseen

and circumstance events that no one could have possibly predicted. If an insurer
knew an item were to suffer from damage or destruction, why would they insure
it? They would certainly take a loss on the insured item.
Therefore, insurance is designed to only cover the unexpected, such as:
The sudden theft of an automobile from your home.
A tornado damaging the roof of your house.
An inadvertent spark that causes a fire which engulfs a ship.
Qualification #4
The nature of the loss must cause substantial economic hardship on an applicant
for insurance.
When we define insurance, we often mention that an insurance policy is designed
to protect against "catastrophic" or "devastating" losses for a policyholder.
Insurance was created specifically to protect individuals and organizations
against financial losses that would have a profound if not unbearable effect on
their lives.
What would you do if your house burned down? What would you do if your new
car was suddenly destroyed in an accident? Most people do not have the financial
resources to simply run out and buy a new car or purchase a new home.
Insurance products provide this safety net, and provides consumers with the
ever-valuable "peace of mind." You are protected from losing everything simply
because you are the victim of random circumstance.
In addition, if a loss didn't present a significant economic hardship to the

consumer, it wouldn't be worthwhile financially for the consumer to purchase an
insurance policy. Consumers would not choose to continually pay out premiums
on items they could reasonably afford to replace if damaged or destroyed.
Qualification #5
The insurance company must insure a large number of similar type risks.
When an insurance company writes insurance policies covering a large number of

individual “units”, the insurance company can accurately quantify the risk of
those insurance policies by applying historical loss figures to future loss
possibilities, and set premiums accordingly.
When too few units are insured, it is nearly impossible to effectively quantify risk,
thereby exposing an insurer to potentially huge losses.
For example, lets say an insurance company knows, on average, that 10% of all
cars are stolen each year. If an insurance company only insured 10 cars and one
was stolen, they'd likely break even. But statistically there's a 25% chance that 2
of those 10 cars will be stolen, and the insurance company would experience a
significant loss.
But if that same insurance company insured 100,000 cars and the 10% rate still
applied, on average they could expect 10,000 cars to be stolen. But the odds of
more than 10,200 cars being stolen falls to 1% due to the Law of Large
Numbers. The larger number of units insured significantly reduces the potential
for a significant variation from the norm.
Qualification #6
The insurance company must be able to exclude significant disasters and / or

catastrophic events. Some large scale events are so unpredictable and could prove
so costly that insurance companies specifically exclude them from insurance
coverage. Most policies will generally exclude such occurrences such as warfare,
terrorist attacks, nuclear and missile attacks, earthquakes and even floods from
coverage in their policies. These type of events have the potential to cause such
catastrophic and widespread damage that no insurance company could possibly
hope to ever cover the costs of the resulting claims. Historically, earthquakes in
California have caused hundreds of billions of dollars in damages, and more
recently several insurance companies stopped providing insurance to
homeowners in Florida simply because the potential damage is so catastrophic.
As such, insurers must exclude certain defined events and natural disasters.
Chapter 1.7 - Valuation and
Deductibles
As discussed earlier, insurance companies can only write insurance policies on
insurable risks. In order for a risk to qualify as insurable, the insurance company
must be able to assign a quantifiable value to the risk being insured.
In this section, we will analyze the following methods an insurer will use to
determine the value of an insured item:
Actual Cash Value
Replacement Cost Value
Actual cash value - is a loss settlement valuation utilized by an insurer to

reflect the depreciated value of an item at the time it was damaged or destroyed.
Once the actual cash value, or depreciated value, of the item has been
determined, the insurer will then indemnify the policyholder for the reduced
value of the damaged / destroyed item.
Actual cash value is computed by subtracting the depreciation on an insured
item, based on its age and condition, from the cost of replacing the item at today's
prices.
Put into formula, we have the following:
Amount of indemnification = Replacement cost of an insured item - depreciation

on the insured item.
Or more simply:
Actual Cash Value = Replacement cost - depreciation.
ACV valuations provide a general reflection of what you might expect to receive
on the open market for an insured item before it was destroyed. In other words,
the ACV valuation will indemnify a policy holder for what the insured item was
worth when it was destroyed.
As you can imagine, insurance policies utilizing actual cash value valuations
generally do not provide the financial resources a policyholder might need to
replace destroyed items.
For example, if five appliances were destroyed in a fire, an insurer will indemnify
you for the depreciated value of those five appliances. But replacing those
appliances with new appliances would cost the policyholder significantly more
out of pocket. As a trade-off, ACV insurance policies have substantially reduced
premiums to reflect the significant reduction in potential losses for the insurer.
If it would cost more to repair a damaged item than it is worth, an insurer has the
option to the pay the policyholder for the actual cash value of the item rather than
repair it.
Take, for example, an old car involved in an accident. If the car is worth $5,000,
and sustains damages totaling $6,000 in an accident, the insurer will pay the
policyholder for the actual cash value of the car ($5,000) rather than the cost of
the repairs ($6,000).
Actual Cash Value Valuation - Example 1
Jim had owned a specialty camera for five years, and it was recently destroyed by
a fire. Jim had an insurance policy that covered the camera, and files a claim with
his insurer for the loss of the camera.
Jim purchased the camera new for $5,000, and Jim's insurance company has
determined that over the past five years, the camera has depreciated in value by
$3,000. If Jim were to replace the camera today, a new camera would cost
$6,000.
The replacement cost of the camera is $6,000.
The depreciation on the destroyed camera is $3,000.
ACV = replacement cost - depreciation, or:
ACV = $6,000 - $3,000 = $3,000.
With an actual cash value policy, Jim's insurance company would be required to
indemnify Jim for $3,000 for the loss of his original camera.
Actual Cash Value - Example 2
Frank has a tractor that he uses to excavate hillsides. One evening, a hillside
collapses onto the tractor and destroys it. Frank has an actual cash value policy
on the tractor, and files a claim with his insurer for the loss.
Frank purchased the tractor 5 years at a cost of $20,000. The tractor depreciates
in value $2,000 every year. The cost of replacing the tractor today would be
$24,000. How do we determine the actual cash value of the tractor?
Replacement cost = $24,000
Depreciation= $2,000 a year X 5 years = $10,000
Actual Cash Value = Replacement cost- depreciation, or:
$24,000 - $10,000 = $14,000 Actual Cash Value.
Frank's insurer would indemnify Frank for the actual cash value of the tractor,
which in this case is $14,000.
Replacement Cost Value:

In insurance, the replacement cost value refers to the cost of repairing or
replacing an insured item to its original state at current prices.
Utilizing a replacement cost valuation in an insurance policy dictates that a

policyholder will be indemnified for a loss at the cost of replacing the item at a
comparable level of quality and material today, rather than the value of the
insured item when it was destroyed.
For example, let's say a large industrial printing company in Houston has a large
machine that prints magazine inserts. The printing company purchased the
machine 5 years ago for $175,000. A new machine that accomplishes the same
tasks costs $235,000 today. One day a tornado hits the company headquarters
and completely destroys the old machine. The printing company had used the
destroyed machine for 5 years, and due to depreciation, the value of the machine
was obviously less than the $175,000 they paid. But because the printer
purchased a replacement cost policy, the insurer will indemnify the printer for
$235,000, the cost of replacing the old printer with new machine of comparable
quality and material.
Replacement Cost Value - A replacement cost value insurance policy is

always preferable and beneficial for the insured party. Rather than take the
reduced value, or depreciated value, of an insured item, a replacement cost policy
will provide a new or like-new item of similar quality, material and purpose to the
policyholder.
As such, replacement cost policies cost more than actual cash value policies, as
the insurer faces an increase in costs associated with the higher price of
indemnifying their policyholders for new or like-new items, rather than the
depreciated value of the destroyed or damaged item.
Most property policies issued today provide replacement cost valuations to their
policyholders, rather than actual cash value valuations. Policies that do offer
actual cash value valuations can usually be upgraded by the policyholder to
replacement cost valuation for a nominal increase in premium.
Replacement cost valuations may seem to violate the "principle of indemnity",

which states that an insured cannot "profit" from an insurance transaction. If an
old item is replaced with new, isn't that sort of "a profit"?
Insurers safeguard this problem by requiring policyholders to replace insured

items themselves, followed by indemnifying the policyholder upon proof of
replacement. This disallows the policyholder from simply pocketing the benefit.
Insurers also may refuse to provide replacement cost valuations on certain items.
Valued policies - are insurance policies where the insurer and the insured
agree to a specific value of an insured item. When that item is lost or destroyed,
the insurance company must pay out the exact amount of previously agreed upon
value.
If a tavern wants to insure an antique jukebox for $25,000, they may elect to
purchase a valued policy on the jukebox. In the event of a total loss, the tavern
would then be indemnified for exactly $25,000, regardless of the true,
depreciated or appreciated value of the jukebox.
Valued policies are typically used to provide insurance coverage to items whose
value is difficult to quantify, such as antiques or pieces of fine art. Does the value
of the insured item appreciate (gain in value) or depreciate (decrease in value)
over time?
A valued insurance policy removes the difficulty in assessing value. The value is
determined prior to the issuance of a policy by an agreement between the insured
and the insurer.
Deductibles:
In this section we are going to briefly analyze a deductible, and how it applies to
the execution of an insurance contract.
A deductible - is a pre-defined monetary portion of an insurance claim paid by

a policyholder. Deductibles were originally established to avoid processing minor
and easily affordable claims through an insurance company.
While this still holds true, deductibles are also used today to provide consumers
more choice in the amount of risk they are willing to take on with an insured
item. A policyholder may elect to take on more risk, thereby reducing the risk for
the insurer. As such, the policyholder can reduce their premiums on an insurance
policy substantially, yet must pay more to activate the financial benefits of their
insurance policy.
The higher the deductible a policyholder agrees to pay, the lower the premium
the insured will have to pay on their policy, and vice versa.
In calculating the amount an insurance policy will pay, the deductible which will
be paid by the insured party is always subtracted from the total potential claim.
For example, the total damage the policy will cover is $10,000. However the
deductible is $1,000. Thus the amount the policy will pay is $9.000.
There are three types of deductibles: Fixed deductibles, percentage deductibles,

and franchise deductibles.
Fixed deductibles - A fixed deductible is a pre-determined and fixed amount of
money an insured must pay before the financial benefit of an insurance policy
kick in.
Let's use an automobile policy as an example.
Tom purchases an automobile insurance policy that includes insurance coverage

for damages to his own car. One night Tom spins out his car on a slick road, and
his car ends up rear-ending a tree.
The car suffers $3,600 worth of damage as a result of the spin out. Tom elected to
have a $500 fixed deductible on his auto insurance policy.
Tom will take his car to an auto body shop to have the damage repaired. Tom will
have to pay $500 toward the repairs of his own vehicle before the insurance
policy will kick in and pay the remaining $3,100
Percentage deductible - Percentage deductibles are relatively new, but their

use has been increasing rapidly throughout the United States, particularly with
homeowners’ insurance policies.
Percentage deductibles require the insured party to pay a deductible equal to the
percentage of the value of the insured risk.
For example, let's say a homeowner insures their home for $500,000, and the
deductible on the homeowner’s policy is set at 3%. If we multiply $500,000 by
3% (.03), we can determine the deductible on the policy is $15,000. Therefore,
the policyholder will be responsible to pay the first $15,000 of a damage claim
against their insurance policy.
If total damages are less than $15,000, the policyholder will be responsible for
100% of the damages and must pay those damages out of pocket.
Some policies will use a combination of fixed and percentage deductibles. An

insurer may allow a $500 fixed deductible for fire and hail damage, but charge a
percentage deductible for wind or tornado damage.
Franchise deductible- a franchise deductible states that an insurer will not

cover any losses unless the losses exceed a pre-determined amount. When a loss
equals or exceeds the pre-determined amount, the insurer pays in full.
Franchise deductibles are primarily used in very large insurance contracts, so for
simplicity sake we're going to use a very easy theoretical example.
Let's say an insurance policy comes with a $1,000 franchise deductible. If the
insured item experiences loss or damages of $700, the policyholder would be
required to pay the full $700 out-of-pocket, and the insurance policy would not
activate. The insurer would pay nothing. If the insured item experiences a loss of
$1,200, the insurance policy would kick in as the damages exceed the deductible,
and the insurance company would be required to pay the full $1,200. The
policyholder would pay nothing out-of-pocket.
Franchise deductibles are applicable up to the limits of the insurance policy. In

our example, if the insured item experienced $500,000 in damages, and the
policy limit was $500,000, the insurer would be responsible to pay the full
amount.
Franchise deductibles are rarely used, primarily in marine insurance.
Chapter 1.8 - Types of
Hazards
Earlier in our studies, we discussed the notion of a hazard.
A hazard refers to an instance, behavior or environment that increases the

likelihood of a loss to an insured item.
Obviously, insurance companies are very concerned about the number and type
of hazards affecting the items they insure. If an insured item is exposed to many
hazards, the insurance company has a much greater likelihood of experiencing a
loss on that item.
In this section, we're going to briefly describe three different types of hazards:
Moral hazards
Morale hazards
Physical hazards
Moral Hazard - A moral hazard is a hazard that results from a conscious

decision made by an insured party to participate in a manner or behavior more
likely to result in a loss because they have insurance.
In other words, because an individual has the financial protection of an insurance

policy, they will consciously decide to participate in a behavior they likely would
not participate in without the benefit of insurance protection.
For example, a driver may feel less inclined to have to drive safely because they
have insurance. Armed with the financial security of an insurance policy, a driver
may partake in riskier driving behavior such as speeding or reckless driving,
because they know if an accident occurs, the insurer will be responsible for
indemnifying the driver for the resulting damages.
In a more extreme example of a moral hazard, consider a man who owes a

finance company much more on his car than it is worth. In an attempt to have his
car stolen, he leaves the keys in the ignition, the doors unlocked, and parks the
car in a neighborhood notorious for a high rate of car theft.
He would not normally behave this way, but since he has the financial protection
of an insurance policy, he is comfortable knowing he will be indemnified for the
full amount of the car if his car is stolen.
Therefore, a moral hazard occurs when the conscious behavior of the insured
party changes in a way that raises costs for the insurer, since the insured party no
longer bears the full costs of that behavior.
Morale hazard - A morale hazard is a hazard that results from an unconscious

decision made by an insured party to participate in a manner or behavior more
likely to result in a loss because they have insurance.
A morale hazard, therefore, is an increase in the risk arising from the insured's
indifference to loss because of the existence of insurance.
For example, a man who frequently visits his new girlfriend overnight in an
apartment complex with a high rate of auto theft increases the chance that his car
will be stolen. He doesn't leave his car there with the intention of having the car
stolen, but simply the fact that he does leave his car in a high crime area is
considered a morale hazard.
If he had no insurance, he may have decided to not leave his there car overnight
for fear it might get stolen and he would have to pay the full cost of replacing the
car. But since he has the full protection of insurance, he feels more comfortable
with leaving his car there overnight. After all, if it is indeed stolen, the insurer will
be responsible for the cost.
Morale hazards differ from a moral hazards in that in a morale hazard, there is
no conscious or malicious intent to cause a loss. Rather, their normal behavior
can change ever so slightly because of the comfort of insurance protection.
Physical hazard - A physical hazard is a physical condition that increases the

chance of a loss,
A physical condition can include the environmental, material, operational, or

occupational threats to an insured item.
Every insured item is exposed to a wide variety of physical hazards.
In auto insurance, a lack of maintenance to an insured automobile presents a
physical hazard, in that any type of mechanical breakdown can increase the
chance of a loss. An improperly inflated tire could rupture, causing the insured
automobile to crash. Poorly maintained brakes could fail, or an engine could
ignite and torch the whole car.
Commonly traveled roads can present physical hazards as well. Potholes, debris
and easily flooded roads all present physical hazards to an insured driver.
Other examples of physical hazards include heavy machinery in the workplace, a

dilapidated home, or a slippery bridge an individual has to cross to get to work
every day.
Chapter 1.9 - Cause and Loss
Proximate Cause - The doctrine of proximate cause in the insurance industry
states that when there is an unbroken chain of events between an occurrence and
a loss, then the loss is said to be part of the original occurrence.
When we use the term "occurrence", we are referring to an event or circumstance

that causes damage. A lightning bolt is an occurrence, as is a fire, a hailstorm or
incidence of malicious mischief, all of which are unexpected events that cause
damage.
An occurrence can cause initial damage, which in turn can directly cause or lead
to a number of other subsequent damages (or losses). The original occurrence is
the proximate cause of all the subsequent damages.
For an example of how proximate cause works, let's say a car crashes into a home
and catches fire. While the fire department extinguishes the car fire with their
hoses, the influx of water causes thousands of dollars in water damage to the
flooring in the home.
According to the doctrine of proximate cause, the car crashing into the house was
the proximate cause of the all the resulting damage. This includes the hole in the
wall, the fire damage to the home, the smoke damage throughout the residence,
and the water damage to the flooring.
The doctrine of proximate cause is very important in the insurance industry. If an

insurer guarantees protection from damages resulting from a specified peril, then
the insurer must indemnify the policyholder all of the damages caused by the
occurrence of that peril.
Proximate cause therefore dictates what damages will be covered. All losses
associated from the unbroken chain of events originated by the covered peril will
be covered, as the covered peril was the proximate cause of all the losses.
Direct loss - Technically defined, a direct loss means physical harm to tangible
property caused by a peril. In insurance, a direct loss is a loss to property or
person in which a covered peril is the proximate cause of damage or destruction.
In our earlier example, we looked at a car crashing through a house. In that
example, a hole was formed in the home, part of the home was burned by fire,
there was smoke damage throughout the house, and water destroyed the flooring.
All these damages are considered a direct loss of the car crashing into the house.
In another example, if lightning strikes a house and the roof catches on fire,
which then collapses onto and ignites the furniture and floor below it, then the
roof, furniture and floor are all considered direct losses of the peril.
Indirect loss - An indirect loss is an economic loss that arises as a consequence

of the direct, or physical, loss.
In our example of the car crashing into the house, the inhabitants of the house
might have to rent an apartment or a hotel room to live in while their home is
being repaired. This is considered an indirect loss, as the hotel bill is an economic
consequence of the direct losses to the house.
In another example, let's say a fire burns down a warehouse where a bakery
stores all their delivery trucks. The loss of the delivery trucks is, of course, a direct
loss.
But the bakery still has to deliver their baked goods to stores, so they have to rent
a fleet of trucks to deliver their products. The cost to rent these trucks presents an
economic loss to the bakery, and therefore would qualify as an indirect loss of the
warehouse fire.
Verifying insurable interest eliminates the incentive for individuals to purchase

insurance and then intentionally cause losses or damage to the insured “unit" in
order to realize a financial gain from the insurance policy.
For example, a woman can buy an insurance policy on her own house because she
has a direct financial interest in preserving the house from damage or
destruction. She has an insurable interest.
But she cannot buy insurance on her friend's house, because she has no financial
interest in preserving that house. If her friend's house is destroyed, she suffers no
direct economic hardship.
Chapter 1.10 - Interest,
Subrogation and Claims
Lender Interests - Lender interests represent a lender's financial stake in an

insured item.
A large majority of insured property is purchased with credit through a lender. A

mortgage company is used to secure a home loan, and a bank or credit union is
often used to secure an auto loan.
Lenders require insurance policies from their borrowers in order to protect the
lender's financial stake, or insurable interest, in a home or car. That way, a lender
will be assured they will be indemnified for losses or damage to property
purchased with the lender's money.
Virtually all insurance policies contain special lender interest provisions in the
conditions page of the policy.
These provisions ensure the lender will be listed as a payee under the policy in
the event of a loss or damage, and paid directly by the insurance company to
cover their financial interest in the property.
The lender interest provisions in the conditions page will allow the
following participations in a borrowers insurance contract:
Allows a lender to be listed as a payee on the insurance policy.
Promises to give the lender notice if the policy is canceled, reduced or has
expired without payment.
Provides indemnification for the lender in the event of an act or an omission by

the insured party. (For example, if the insured burns down his OWN house, the
lender can collect indemnification up to the limit of their insurable interest.)
Permits the lender to pay the policy premium if the insured fails to do so to
maintain coverage.
Lenders are never allowed to interfere with a borrower's insurance contract
outside the provisions specifically outlined in the conditions page. For example,
an insurer would never allow a lender to cancel an insurance policy on a
borrower.
Subrogation - When an insurance company indemnifies a policyholder for a

loss, or pays on behalf of an insured party, the insured party or policyholder
automatically transfers their rights to recover financial damages from the
negligent party to the insurer.
The insurer has already paid for the damages caused by the negligent party, so
the insurer has the right to collect financial reimbursement for monies paid from
the negligent party.
Once an injured party is paid by an insurer for the injuries caused by a negligent
party, the injured party no longer has any legal right to collect money from the
negligent party. This right is automatically transferred to the insurer, or
subrogated to the insurer, who then can go after the negligent party to recoup
their losses.
Subrogation is most easily understood when analyzing a car accident.
Let's say Beth is driving down the street and is suddenly struck by a car that runs
a red light. Beth suffers severe injuries and files a claim with her own insurance
company to pay for $25,000 in medical expenses. Beth's insurance company pays
her bills.
When Beth accepts the $25,000 indemnification from her own insurer to pay her
medical bills, she automatically transfers, or subrogates, her rights to collect
$25,000 from the negligent party to her insurer.
In turn, the insurance company can now demand a $25,000 payment from the
negligent party. Or, if the negligent party had their own insurance, Beth's insurer
can demand payment from his / her insurer.
Subrogation can be complex, so let's take a look at another quick case with a twist
of information at the end.
Let's say John has auto insurance with XYZ Insurance. While John is out driving,
he is struck by Steve who ran a red light, causing $4,000 in damages to John's
car. Steve has no insurance on his car. XYZ Insurance pays John for the damages
to John's car. By paying John, John's legal rights are automatically subrogated ,
or transferred, to the XYZ Insurance Company. Now, XYZ Insurance has the right
to go after Steve in court to collect the $4,000 they had to pay John because of
Steve's negligence.
You must remember subrogation only applies up to the extent of

payment by the insurance company!
So if Steve caused John $65,000 in bodily injury, and John's insurance policy
maxed out at $50,000 worth of coverage, then John would subrogate his rights
on the $50,000 to the insurer, and John would still have the right to go after
Steve for the remaining $15,000.
Subrogation prevents injured parties from collecting multiple damages on a

single loss, which would violate the principle of indemnification.
An insurance claim - is a request for indemnification from a policyholder

under the terms of his / her insurance contract.
We'll further define an insurance claim in the next few sections, and look at the
different kinds of claims.
An insurance contract guarantees the indemnification of an insured party for

losses incurred by the policyholder due to specified events.
When a policyholder realizes damages or losses that may fall under the terms of
an insurance contract, they have an immediate right to demand payment from
their insurance company according to the terms of the contract. A demand for
payment is called a claim.
A claim is the official notification issued to an insurance company

requesting the payment of an amount due under the terms of a
policy.
Filing a claim does not result in the immediate indemnification of a policyholder.
A claim is simply an assertion of the policyholder's rights against the terms of a

contract, whereby the policyholder alleges they are due payment from the
insurance company according to the terms of a contract.
The claim may not be valid, or may not even fall under the terms of the contract.
By filing a claim, a policyholder has simply stated they believe they have a legal
right to indemnification. Once a policyholder has filed a claim, they are
considered a claimant.
There are two types of claims: First Party Claims and Third Party
Claims.
First Party Claim - A first party claim, is legally defined as, "a claim that is
made by an insured or policyholder under an insurance policy or contract or by a
beneficiary named in the policy or contract; and must be paid by the insurer
directly to the insured or beneficiary."
That's a bit complicated; so let's make it a little easier.
A first party claim is a claim filed by the policyholder against his / her own
insurance company under a policy listed in their own name.
For example, let's say Company X has an insurance policy with ABC Insurance.
One day a fire burns down one of Company X's retail outlets. Company X will
then file a claim with ABC Insurance to seek restitution for their damages.
Company X is filing a claim with their own insurance company, ABC Insurance,
so this claim is considered a first party claim.
If you file a claim with your insurance company after your car skids off an icy
road into a telephone pole, your claim is considered a first party claim.
Third Party Claim - A third party claim is a claim made against your
insurance policy by a third party who alleges that you caused them damages.
If you run a red light and collide with another automobile, the driver of that
automobile may file a third party claim with your insurance company.
If a customer slips in a puddle of water in a grocery store and breaks his leg, the
man may file a third party claim against the insurer of the grocery store.
Simply put, a third party claim is a claim filed against an insurance policy by
anyone other than the person named on that insurance policy.
An insurance claim can be filed with a local representative of an insurance

company, such as an insurance agent, or it can be filed directly with the insurance
company whose policy they seek reparations against.
Most States require insurance companies to respond to all claims within 15 days.
Within the 15 day time frame, the insurance company must:
1. Acknowledge receipt of the claim.

2. Commence an investigation of the claim.
3. Request from the claimant all items, statements, and forms that the
insurer reasonably believes, at that time, will be required from the
claimant.
Once a claim is officially acknowledged by an insurer, the insurance company will

send out an insurance adjuster to investigate the claim.
An insurance adjuster acts as a representative of the insurance company, and is

responsible for objectively investigating and evaluating the circumstances
surrounding an insurance claim.
If the insurance adjuster feels the claim absolutely has no merit, or does not fall
under the coverage of the insurance policy, the insurance company will
immediately deny the claim.
Otherwise, the insurance adjuster will continue an investigation into the claim to
determine:
• whether the insurer will deny the claim

• whether the insurer will accept the claim
• if an insurer accepts a claim, how much will the insurer agree to pay on the
claim
Most States require an insurance company to accept or reject payment on an

insurance claim "not later than the 15th business day after the date the insurer
receives all items, statements, and forms required by the insurer to secure final
proof of loss."
If the insurer accepts a claim and agrees to payment, the insurer shall pay the
claim not later than the fifth business day after the date notice is made that the
claim will be paid.
If the insurer denies payment on the claim, the insurance company must
explicitly state the reason why the claim was rejected.
Chapter 1.11 - Liability and
Law
Liability Insurance:
In this section, we're going to examine some important concepts behind liability
insurance.
Whereas property insurance is intended to protect various forms of physical

property, liability insurance is designed to protect an individual or organization
from the property damage or bodily injury they cause to a third party.
The term liable is defined as "obligated according to law or equity." If you injure
someone or damage an item of their property, you are said to be liable for the
damage. You are obligated, either by law or by the concept of equity, to correct
the damage you caused to another person.
Liability insurance offers protection against any damage or injuries you may
cause to another party. If you injure someone or damage an item of their
property, liability insurance will step in and indemnify the third party to whom
you caused damage. Liability insurance always indemnifies a third
party!
Liability insurance only provides indemnification when the insured is legally

liable for a loss.
An insured party doesn't necessarily have to go to court to be found legally liable

for a loss; rather, the facts and circumstances behind a loss, combined with an
analysis of legal precedents and local laws pertaining to the facts around the loss
may be enough to prove someone legally liable.
For example, if a driver runs a red light and crashes into someone, he is
immediately legally liable for the damages he caused, as there is no question as
to whether he broke the law when he ran through the red light.
Three types of Liability:
Public liability - is our liability towards members of the general public. When
we use the generic term "liability insurance, " we're usually referring to public
liability insurance. Public liability insurance is designed to protect a policyholder
from any property damage or physical injury they may inadvertently bring upon
members of the general public. The policyholder doesn't even necessarily have to
interact with another person to be considered liable for their damages; simply by
owning a piece of property, a policyholder can be held liable for anything that
occurs on that property that causes harm to another. Individuals, and
commercial interests in particular, participate in a wide variety of processes and
activities every day that have the potential to cause injury to others.
Commercial ventures such as stadiums, shopping malls, restaurants, bars and

hotels provide access to their property to hundreds, if not thousands, of members
of the general public every day. They make food, they coordinate activities, and
they host events, all of which have the potential to cause harm to the people they
interact with. Liability insurance is designed to protect these commercial
ventures from damages caused by their activities, and damages that occur on
their properties.
Individuals are also exposed to numerous liability risks on a daily basis. Not only
do individuals own property, but they partake in activities such as driving and
working that can inadvertently cause damage to others at any time. Liability
insurance can protect an individual from partaking in these potentially hazardous
activities.
Product liability - insurance protects a policyholder from legal liability for

damages to third parties caused by the manufacturing, merchandising,
distributing, or operation of a product.
Commercial entities that manufacture products for consumption by members of

the general public can be held responsible for the damages caused by those
products.
For example, products may be distributed with design or manufacturing defects

that cause a product to break apart or explode, injuring members of the public.
Edible products could make people sick, products may not work or perform as
intended, or break down nearly immediately after purchase.
Manufacturers may also be held liable for producing inherently dangerous

products that injure a third party simply because the manufacturer failed to warn
the consumer that the product was dangerous, or failed to warn that the use of a
product in conjunction with another product could cause injury.
Product liability insurance is designed to protect these policyholders from

damages caused by their products and services.
Employer liability - insurance protects employers from damages and bodily

injury caused to employees, or by employees, while performing under the scope
of their employment.
Employees are subject to a variety of hazards in the workplace. Consider the

utility employee assigned to repair transformers on telephone poles, employees
that work on fishing or crabbing vessels, or laborers who work in manufacturing
plants filled with dangerous machinery. All these environments present
numerous hazards that could cause damages to an employee, and employer
liability insurance protects the employer from those damages.
Employers can also be held liable for the negligent acts of their employees while
performing in the scope of employment. If XYZ Manufacturing employs a driver
to deliver their products to retail outlets, the XYZ Manufacturing can be held
liable for the driver's actions. Whether the driver runs a red light and causes an
accident, or attacks a retail store employee while making a delivery, employer
liability insurance will protect the employer for the damages caused by their
employees.
Negligence:
Negligence - is defined as the failure to use a reasonable degree of care in a

particular situation, or the failure of a person to do what a reasonably prudent
person would have done under like circumstances.
Negligence is recognized as a legal cause of damages if the negligent act directly

caused those damages, or if damages resulted from a natural sequence of events
that occurred as a result of an act of negligence. In other words, negligence need
not occur in real time. A negligent act can cause property damage and / or bodily
injury in perpetuity.
Liability insurance, in turn, protects a policyholder from their legal liability for
property damage and / or bodily injury caused by acts of negligence on the part of
the policyholder.
Liability insurance does not ever apply to intentional acts of

negligence! Intentional acts of negligence are always excluded from
coverage in the "Exclusions" page of a liability insurance contract.
Vicarious Liability and Negligence - An act of negligence can also be
transferred from one party to another. Called vicarious liability, a person who
has suffered damages as the result of a negligent act of an individual can also lay
blame upon the person or organization responsible for the person that committed
the negligent act.
For example, if an employee of a grocer leaves a mop lying across the floor of the
store, and a customer subsequently trips on the mop and suffers substantial
injuries, both the employee and the employer can be construed as negligent
parties to the customer's injury due to the employer's vicarious liability.
Since negligence is recognized as a legal cause of damages, both negligent parties

are said to be legally liable for the damages caused by the negligent act of the
employee.
Vicarious liability also applies to negligent acts committed by minors. Vicarious

liability allows the parents or guardians of minors to be held legally liable for the
negligent behavior of their children
Negligence should not be construed simply as "carelessness", because someone

might be exercising as much care as they are capable of, yet still fall below the
level of competence expected by members of the general public.
For example, a company may spend years developing and fine-tuning a product
for market. Once the product is released, an unintended consequence of the
construction of the product causes the product to spontaneously catch fire.
The company was not particularly "careless" in the design or construction of the
product, yet the public may find that the company didn't exhibit a level of
competence to safely manufacture and sell the product, and may subsequently
find the company negligent, and legally liable for, the damages caused by the
product.
Elements of Negligence:
Plaintiffs filing for damages in a liability case based on negligence must prove
four elements of negligence to recover damages:
1. the defendant(s) had a legal duty to act (or not act) in a prescribed
manner.
2. the defendant(s) failed to act accordingly (called a breach of duty).
3. the plaintiff suffered actual loss or injury due to the defendant's action or
inaction.
4. the loss or injury to the plaintiff was a direct result of the breach of duty of
the plaintiff.
If a plaintiff cannot prove all four elements of negligence, the causation of their
damages will not qualify as "negligent", and the defendant will prevail.
Legal experts suggest over 90% of liability cases involve unintentional negligence.
As an adjuster, nearly all your liability cases will involve some element of
negligence.
Tort Law - Tort law applies to the body of law that addresses and provides
remedies for any civil wrongdoing performed on another party that does not
precipitate from a contractual obligation. Tort law and Criminal law are different.
A person who suffers harm or damages may be able to use tort law to receive
compensation from someone who is legally responsible, or "liable," for those
injuries. Generally speaking in tort law, one citizen is charging another citizen
and the jury only has to believe that the preponderance of evidence supports the
charge. In a criminal case the crime is defined by statute, "the state" charges a
citizen and the jury has to believe that the charge has been proved "beyond a
reasonable doubt". Tort law covers both intentional acts and acts of
negligence. Intentional tort - In intentional tort is a planned or premeditated
act, which may result in unintended consequences.
• OJ Simpson was sued in a civil court for the intentional torts of battery
and wrongful deaths of Nichole Brown and Ronald Goldman. The jury
only needed to believe that 51% of the evidence pointed to Mr. Simpson as
the person who caused the harms.
Negligent tort - A negligent tort is an act, or an act of omission, that reflects a

refusal to comply with the duty of exercising care in a manner that a reasonably
prudent person would, which results in damages or injury to a third party.
• Mr. Smith supplied Mrs. Jones with an electric drill that had a frayed
electrical cord. Mrs. Jones received a bad shock from the cord and lost
feeling in her right hand. Mrs. Jones could sue Mr. Smith in a civil court
for a Negligent tort.
Tortfeasor - The person or entity that commits an act of wrongdoing or

negligence, leading to property damages or bodily injury to a third party.
Liability insurance claims are always the result of unintentional negligence, as
liability insurance specifically excludes intentional acts of negligence from
coverage.
Plaintiffs in liability cases will seek relief and indemnification under tort law.
Assessing Legal Liability - We've discussed how an act of negligence is just

cause to determine the legal liability of a policyholder. By committing an act of
negligence, a policyholder may be found responsible for, or legally liable for, the
financial damages to a third party.
But an act of negligence often does not make a policyholder wholly responsible
for a loss.
For example, if an auto liability policyholder drove his car around a corner at a
high rate of speed and struck a car on the opposite side of the street, we might
initially determine the speeding automobile has full liability for the damages in
the accident.
But what if the struck car was parked in a "No Parking" zone? The car shouldn't
have been there in the first place, so now whose legally liable for the loss? In this
case, both parties to a loss behaved in a negligent manner.
Tort law resolves these issues by allowing a degree of liability.
Tort law suggests three degrees of legal liability:
1. Full liability- the insured party is 100% at fault for damages to a third
party.
2. Partial liability- the insured party is only partially at fault, or shares

fault, with a third party. The third party participated to some degree in
their own damages.
3. No liability- the insured party has 0%, or no liability in the damages to

a third party.
As an adjuster, one of your primary goals is to keep a liability claims out of the
courtroom. As such, an adjuster will often find themselves tasked with
determining whether a claimant was partially responsible for a loss, had no
responsibility for a loss, or perhaps even has full responsibility for a loss, in which
case the insurance claim would obviously be denied by the adjuster.
An adjuster has four defenses available to adjust a claim of negligence against a
policyholder.
Defenses of Negligence:
When a claimant seeks damages on behalf of the negligent acts of a policyholder,

an adjuster has four defenses to a claim of negligence:
1. Assumption of risk
Assumption of risk dictates a claimant knowingly participated in an act or activity

that had the potential to cause injury or damage, and therefore has no right to
recover damages.
2. No negligence
The defense of no negligence simply states that the policyholder holds no

responsibility in the damages caused to the claimant.
3. Comparative negligence
The comparative negligence defense suggests that the claimant was partially
responsible for their own damages, and is qualified with a percentage of
responsibility for the claimant vs. the policyholder.
· For example, an adjuster may seek to suggest a claimant was 75% responsible,
and the policyholder was 25% responsible for damages.
4. Contributory negligence
The contributory negligence defense suggests that because the claimant was
partially responsible for their damages, they shall receive no indemnification for
their damages.
· Essentially, contributory negligence says: "if you hadn't played your part in the
negligence, you would have experienced no damages at all. Therefore, you will
receive no indemnification at all." The claimant would not receive any money.
Contributory negligence - is not allowed at all in some jurisdictions, and

frowned upon in most others, as it is often seen as a "bullying" tactic by the
Tortfeasor.
As we have learned throughout the course of this test, an insurance policy is
designed to indemnify a policyholder for financial damages.
Liability insurance, however, is specifically designed a to protect a policyholder

by indemnifying third parties for damages caused by a policyholder.
In this section, we will take a brief look at the definition of damages, and how
they apply in a liability insurance claim.
Liability insurance is specifically designed to indemnify third parties for damages

caused by a policyholder. When a third party files a claim for damages from an
insurer, the claimant is stating he / she is seeking monetary compensation for
some type of harm done as a result of the policyholder's actions. Liability
insurance therefore, is only concerned with the monetary aspect of a claim. Once
a dispute enters the courtroom, the claimant becomes the plaintiff in an
insurance case. The harm done to the plaintiff may be physical, purely economic,
both physical and economic (including loss of earnings following a personal
injury), emotional or reputational (as in a defamation case).
The plaintiff always bears the burden of proving they suffered financial damages.
The plaintiff must not only prove their damages, but must establish a direct link
between the defendant (policyholder) and the causation of loss.
Damages:
1. Compensatory Damages
Compensatory damages - awards money for the tangible and intangible

economic loss suffered by the plaintiff.
Tangible losses - are losses that are capable of being quantified at an actual or
approximate value.
Intangible losses are determined by the court.
To distinguish between tangible and intangible losses, compensatory damage

has further divided into two components: Special damages and general damages.
Compensatory damages are split into two classifications:
Special Damages - Special damages reflect the tangible, or precisely

quantifiable, losses of the plaintiff up to the trial date.
Special damages may include such items as medical bills, repair or replacement
bills, and lost wages.
A plaintiff who is physically injured by the negligent conduct of the policyholder

may exhibit proof of medical expenses to the court, or if his property has been
damaged, he can show he lost income because he could not use the property, or
had to replace the damaged or destroyed property.
General Damages - General damages reflect the intangible, or non-

quantifiable, losses of the plaintiff, including expected future losses expected to
accrue after the trial. General damages includes such intangible losses as pain
and suffering, mental anguish, permanent injury and disfigurement, loss of
reputation, and future damages due to loss of employment.
General damages are determined by the court.
2. Punitive Damages
Punitive damages - are monetary damages awarded to the plaintiff to reflect

heinous or anti-social behavior on behalf of the defendant, or extreme
indifference to harm. Punitive damages are frequently added to a decision when
compensatory damages are deemed inadequate to remedy the plaintiff.
Punitive damages are generally not awarded in contract disputes, with the sole
exception of insurance cases where the insurer has been proven to not act in
accordance with the doctrine of utmost good faith.
When an insurer's breach of contract is alleged to be so egregious as to amount to

a breach of the "utmost good faith" covenant of an insurance contract, it is
therefore considered to be a tort cause of action eligible for punitive damages (in
excess of the value of the insurance policy).
Punitive damages are awarded not only to prevent repeat behaviors by the
defendant, but to prevent similar behaviors amongst members of the general
public in general.
Dangerous Instrumentality Doctrine or Inherently Dangerous

Activity Doctrine
When we studied the concept of negligence, we discovered that negligence was

defined as the failure to use a reasonable degree of care in a particular
situation.
Some instances, activities or professions are so dangerous however, that no
matter what standard of care is taken, the individual or organization partaking in
the dangerous activity are deemed strictly or absolutely liable for any damages
they may cause in the execution of that activity.
Strict liability - holds a party wholly responsible for damage and loss caused by
his/her acts without regard to a standard of care.
The Dangerous instrumentality doctrine - states that anyone that

possesses, holds, stores, maintains, transports or interacts with inherently
dangerous objects or activities will be held strictly liable for any damages that
result.
For example, a demolition company regularly uses explosives in the implosion of

buildings. Regardless of the due care the demolition company takes in the
implosion of the building, the demolition company will be wholly responsible for
any damages extraneous that result. If the building falls in the wrong direction, or
debris injures someone during the implosion, the demolition company will be
held strictly liable for the damages.
Some examples of dangerous instrumentalities include toxic gases and chemicals,

explosives, guns, exotic or wild animals, and, in the State of Florida, automobiles
are considered dangerous instrumentalities.
Complaint vs. Answer -
While an insurance adjuster must always strive to settle an insurance claim

before it reaches a court of law, you will find over the course of your career that
some cases just doesn't work out that way. Sometimes a court of law will be
required to determine liability.
To begin the legal process, the claimant will initiate a complaint with the court
seeking financial reparations for damages suffered, otherwise known as a
lawsuit. The claimant will then become the plaintiff in the case.
After a complaint is filed with the court, the party with whom the complaint is
filed against (the defendant) must submit an answer to the court. The defending
party may either accept the allegations in the complaint, accept the allegations
but allege new matters pertinent to the court, or outright deny the allegations.
Simply put, the defending party may either accept and pay the complaint, deny
the complaint, or accept the complaint with a right to insert evidence into the
case.
The defendant must answer the complaint in a timely manner to avoid a default
judgment on the case. A default judgment immediately allows the plaintiff to
collect the full amount of requested damages from the defendant without proving
their case.
Common Law vs. Statutory Law -
Liability in an insurance case is determined in accordance with a combination of

common law and statutory law.
Common law - refers to law and the corresponding legal system developed
through decisions of courts and similar tribunals (called case law), rather than
through legislative statutes or executive action.
Common law is constantly refined by judges; a decision in a currently pending

legal case depends on decisions in previous cases and affects the law to be applied
in future cases. When there is no authoritative statement of the law, judges have
the authority and duty to make law by creating precedent.
Common law decisions are often influenced by statutory law.
Statutory law - is any written law set forth by a governing authority, including
federal laws, state laws, and city laws. Statutory laws are often known as statutes
or ordinances.
While adjusters may consider both common law and statutory law principles
while working liability claims, statutory law must always take precedence over
common law, as statutory law frequently governs the formation of common law.
Legal Liability:
In this section, we're going to take a brief look at some of the laws that may
influence the liability cases you will be working on in the near future.
These include the Statute of Limitations, the Wrongful Death Act, Worker's
Compensation, Automobile No-Fault laws, Breach of Product Warranty and the
Waiver of Sovereign Immunity.
A statute of limitations - is a statute in the common law legal system that

specifies the maximum period of time, after certain events occur, that legal
proceedings based on those events may be initiated.
Once the statute of limitations expires, a claimant loses the legal right to file a
lawsuit seeking monetary damages.
Here's a sampling of some statutes of limitation in the State of Texas:
Personal Injury: 2 years.
Product Liability: 2 years.
Fraud: 4 years.
Defamation of Character: 1 year.
So, in the case of personal injury, a claimant has two years from the date of injury
to file a lawsuit seeking damages for that injury in a court of law.
Wrongful Death Act - The Wrongful Death Act defines the recovery rights of
individuals associated with a deceased person killed because of the negligent act
of a third party.
The Wrongful Death Act may compensate for loss of companionship, loss of
income, and pain and suffering.
Waiver of Sovereign Immunity - Sovereign immunity disallows an

individual from suing a governmental entity.
The Waiver of Sovereign Immunity therefore allows individuals to sue

government entities for damages in certain cases.
In the State of Florida, for example, the Waiver of Sovereign Immunity allows an
individual to file tort suits of up to $100,000 against the government for each
incident, or $200,000 for all individual claims against the government for one
incident.
Worker's Compensation and Automobile No-Fault Laws - Both these

laws outline restrictions regarding liability lawsuits.
Worker's compensation laws restrict the right of an employee to sue his / her
employer for injuries sustained in the course of employment-related activities.
Automobile no-fault laws restrict the rights of individuals to sue owners and
drivers of automobiles or other motorized vehicles in a court of law.
Both these provisions restrict the rights of individuals to file lawsuits, but not
wholly preclude them from doing so. Each state allows exceptions that would
enable individuals to file a lawsuit when warranted.
Breach of Product Warranty - A product warranty is a guarantee that a

manufacturer provides to ensure the quality of their products. Most liability
claims involving a breach of product warranty fall under contract claims, but
occasionally product liability claims are brought up as tort cases, usually when
the plaintiff ascertains a manufacturer had strict liability in the performance of
their product.
Umbrella & Excess Liability - Umbrella and excess liability insurance policies
are designed to provide additional liability protection over and above what their
standard liability policy offers. The reasoning is clear; in today's lawsuit saddled
legal system, a policyholder can easily find themselves buried under a mountain
of debt after an unfavorable ruling in a liability case.
Assuming one has $500,000 in liability coverage, a judgment against them for $1
million would deplete their liability coverage of $500,000, and they would be
held personally responsible for the remaining $500,000. And some court rulings
may award far more than $1 million; this is what umbrella and excess liability
coverages are designed to protect.
Umbrella and excess liability insurance protections are not designed as stand-
alone policies. They are designed to provide additional coverage over and above
liability policies that an individual or commercial enterprise already has in place.
Excess liability insurance coverage comes in one of two forms: follow-form and
stand-alone.
Follow Form Excess Liability - A follow form excess liability policy provides
the exact same coverage as the liability policy that precedes it. For example, your
basic auto liability policy will offer protection for certain named insureds, provide
a certain number and type of insurance coverages, and a list of exclusions.
A follow form policy "follows" your base insurance policy to the letter; it provides
additional liability coverage under the exact same provisions of the base policy.
The policy will cover the exact same named insureds only, the same coverages,
and the same exclusions.
If the base policy applies protection against a loss, then the follow form policy will
always apply protection against the loss as well.
Stand Alone Excess Liability - Like a follow form policy, a stand alone excess
liability policy mimics the type of coverages of the base policy, but includes its
own set of limitations and exclusions. So while a base policy may provide
protection against a loss, the stand alone excess liability policy may not.
For example, let's say you are a structural engineer that designs walkways. You
have a liability policy that protects you from being sued for the structural collapse
of walkways you design in hotels, convention centers and stadiums.
In a follow form excess liability policy, you would automatically have the same
protections afforded by your base liability policy: you have protection against the
structural collapse of walkways in hotels, convention centers and stadiums.
But in a stand alone excess liability policy, the insurer may provide you
protection for structural collapse, but it may exclude the walkways you design
for use in stadiums.
A stand alone liability excess policy provides the same type of coverage, but can
limit or exclude certain instances of damage.
An Umbrella liability policy - acts as an "umbrella" to your base liability

policies. Umbrella liability provides extra protection against legal liability over
and above the policies you already have in place, and often provides additional
coverages to your base policies.
For example, let's say you have liability protection with your homeowners policy
and your auto policy. An umbrella policy would kick in after your benefits were
exhausted on either policy; it isn't limited to one policy. It can provide additional
coverage for any number of policies.
Because of the way an umbrella policy is structured, the deductibles will appear
astoundingly high. This is because the umbrella policy is designed to kick in only
when your other policies have paid out up to maximum policy limits. Therefore,
the deductible on an umbrella policy will always equal the maximum limits of
protection on your existing policies.
If your standard policy provides $100,000 in liability protection, your umbrella

excess liability coverage will have a deductible of $100,000. Your standard policy
will pay out the maximum amount of the policy ($100,00), and that amount will
pay the deductible on your umbrella liability policy. Then you are further
protected by the maximum limit on your umbrella liability policy.
Liability insurance policies carry a specific set of rules, duties and obligations that
must be followed.
In this section, we'll briefly examine the duties of the insured and the insurer, the
obligations of the insurance company, an insurer's reservation of rights and right
to settlement.
Duties as an Insured Party - As a liability policyholder, the insured party has

a duty to immediately alert his / her insurance company that the insured party
has been named as a defendant in a lawsuit.
In addition, the insured must immediately forward every piece of information

received from the court, including but not limited to every process, demand,
notice or summons to appear.
As we'll see in a minute, the insurer has an obligation to defend its policyholder,
and therefore requires all court materials received by the defendant in order to
allow timely preparation for a court hearing.
The policyholder also has a duty to fully cooperate with the insurer (and the
adjuster) in all matters pertinent to the claimant's case, including releasing all
relevant information and allowing time to deal with court matters. The
policyholder must play an active role in the lawsuit when required by the insurer.
Obligations as an Insurer - The insurer is obligated to defend the insured

against lawsuits brought against the policyholder seeking damages payable under
the terms of the insurance policy.
Regardless of whether the lawsuit has any merit or even if the lawsuit is
completely untrue, the insurer is still obligated to defend the insured.
The insurer is responsible for all defense costs, court costs and expenses, and
court fees of the insured party, in addition to settlement amounts up to policy
limits.
Some liability policies include court costs as part of the policy limits, and some do
not. As an adjuster, it is very important that you ascertain whether the court costs
are included in the policy limits.
Reservation of Rights - Sometimes there is a question whether a liability
lawsuit against a policyholder falls under the coverage of the policyholder's
liability insurance contract. If the lawsuit brought against the insured doesn't
apply to coverage in their liability insurance, naturally the insurance company
will not want absorb the cost of defending the insured.
In such cases, the insurance company will issue a reservation of rights to the
insured, notifying them that insurance coverage may not apply to their lawsuit.
A reservation of rights allows the insurer to investigate further whether coverage

applies in the lawsuit without waiving it's right to later deny coverage, and also
provides notification to the policyholder that they might need to start preparing
their own defense.
As such, the insurer may even begin defending their policyholder in a court of
law, but later withdraw if it is determined that insurance coverage does not apply
to the case.
Liability Insurance – Duties and Obligations
A settlement - is an agreement, or a resolution of a dispute.
An insurer has a right to establish settlement with the claimant
as long as the settlement is reached in good faith. The insured party cannot deny
a settlement; the decision to reach settlement is a matter for the insurance
company and a claimant.
Settlement allows the insurer and the claimant to resolve their case before it
reaches a court of law. The insurer and the claimant may agree on a specified sum
of payment, and in return the claimant agrees to drop the lawsuit against the
policyholder.
Settlement allows an insurer to avoid court and defense costs, and also may
protect the insurer from paying a much larger verdict awarded by the court.
Liability Policy Limits:
In this chapter, we're going to take a brief look at liability policy limits. "Limits"
establish the maximum payout value of an insurance policy.
Liability policy limits can be expressed in three ways:
Single limits, split limits, and aggregate limits.
Single Limit Liability Insurance - establishes a single limit, or maximum
payout, as per terms of the policy.
Single limit figures are typically used in homeowners insurance policies, where
liability insurance can protect the homeowner from bodily injury or property
damage caused by the named parties in the policy, or protect the policyholder
from bodily injury or damage that occurs on the policyholder's property.
Single liability limits are easy to read, and will look something like this:
• Bodily Injury Liability: $150,000
• Property Damage: $50,000
This particular policy provides $150,000 in liability coverage for bodily injury,
and $50,000 for property damage.
The limit applies to the maximum payout of the insurance policy for any one
occurrence or incident.
Split limit liability insurance establishes three different limits of payouts in the
policy.
Split limits are typically used in automobile liability insurance policies, which is
designed to protect the insured driver from bodily injury and property damage
caused by the insured while operating a motor vehicle.
Split limit liability policies indicate three different limits, separated by slashes,
and will look something like this:
• 10 / 20 / 10
• 50 / 100/ 50
The first number in a split limit policy indicates the maximum payout for bodily
injury for any one individual.
The second number in a split limit policy indicates the maximum payout for
bodily injury to multiple persons in any one accident or occurrence.
The third number in a split limit policy indicates the maximum payout for
property damage in any one accident or occurrence.
Split limits designate the maximum policy payout per incident or occurrence.
Aggregate Limit Liability Insurance - establish two liability limits.
Aggregate limits are typically found in commercial liability policies, which are
designed to provide liability protection to businesses and their operations.
Aggregate limit policies will indicate two limits, separated by a slash, and will
look something like this:
500,000 / 1,000,000
The first number will indicate the maximum payout for bodily injury or property
damage for each incident or occurrence, and the second number indicates the
maximum amount the policy will pay per policy term.
For example, if the policy term is one year, then the maximum available payout
on the policy over the course of one year will be $1,000,000.
Chapter 1.12 - Settlement &
Release
Settlement & Release Options:
Now that we're done looking at liability concepts and terms, we're going to take a
look at the various settlement options available to insurers.
A settlement occurs when two parties to a dispute reach an agreement.
In insurance, a claimant files a claim for monetary damages against an insurer for
payment against an insurance policy.
The settlement to the claim occurs when both the insurer and the claimant reach
a resolution as to how much money will be paid out to a claimant, under what
terms and conditions that payment will be made.
In turn, the claimant will relinquishes some or all of his / her rights to seek
further damages against the insurer, in addition to relinquishing their right to sue
the insurer provided the insurer follows the terms of the settlement.
In this section, we'll provide a brief analysis of some commonly used settlement
techniques employed by insurers to settle claims against their insurance policies.
Full Release Settlement -Often called a "Full Release of All Claims and
Settlement Agreement", a full release settlement allows the insurer to make one
immediate lump sum payment to the claimant to settle all claims and damages
brought forth by the claimant.
Once the amount of monies due for the full release settlement is determined, the
claimant will accept the settlement by signing a document stating they have
received payment as a full settlement, and further discharge all claims against the
insurer and relinquish their right to sue the insurer.
The insurer will cut a check for the settlement amount, and the dispute is
resolved in total.
Scheduled Payment Release -A scheduled payment release, or "open-ended

release", is a settlement technique whereby the insurer agrees to pay all special
damages (tangible, documentable financial losses) and general damages
(intangible losses such as pain and suffering, mental anguish) accumulated by
the claimant up until the point of the settlement.
In addition, the insurer agrees to provide indemnification for future "incidentals"

or "special circumstances" accrued by the claimant, which are very specifically
outlined in the settlement contract.
Usually, the "incidentals" include ongoing physical rehabilitation costs or visits to

a physicians office. The future payments relate only to general damages,
whereby the claimant must provide documentable verification of expenditures to
the insurer.
Payment of Property Damage; Bodily Injury Pending -Many claims will

seek damages for both property damage and bodily injury. Property damages are
much more easily quantifiable than bodily injury damages, and therefore much
easier to negotiate.
In the payment of property damage, bodily injury pending settlement option,

the insurer agrees to indemnify the claimant for all property damages in lieu of
settling the claim in full until damages for bodily injury can be negotiated.
The payment of property damage settlement option offers some financial relief
to the claimant, while not yet settling the claim in full.
The claimant must be fully capable of understanding this settlement option.

Obviously, if the claimant is still under severe mental duress due to pain or
injury, or mentally incapacitated by injury, insurers cannot employ the payment
of property option.
Advance Payment Settlement -The advance payment settlement option

allows the insurer to make partial payments to the claimant in lieu of a final
settlement amount.
When a final settlement figure is negotiated, the amount of the advanced
payments are then subtracted from the final settlement figure.
The advanced payment settlement technique allows financial relief to the

claimant, and is most often used when a claimant suffers bodily injury and has
mounting medical bills or other financial responsibilities. Since the claimant
likely has been unable to work due to his / her injuries, an advanced payment
settlement option allows the claimant to cover necessary costs while injured.
The advance payment settlement option also reduces any antagonistic feelings
the claimant has towards the insurer, decreasing the chances of a lawsuit.
Of course, the insurer must also ascertain the terms of the advance payment
settlement so the costs of the advance payments do not exceed the potential final
settlement amount.
No Release Settlement -A no-release settlement, also known as a "walk-away"

settlement, means the insurer simply pays the bills submitted by the claimant.
A no-release settlement offers no separate release form, though the checks issued
to indemnify the claimant often act as a substitute for a release form.
For example, the back of an indemnification check may contain legal language
that states "By endorsement, the payee on this check agrees to release XYZ
Insurance from all further payments ... "
After the indemnification checks are negotiated / cashed with the claimant's
bank, the claim file is considered closed.
Rehabilitation Settlement -A rehabilitation settlement is very similar to a

"Scheduled Payment Release."
In a scheduled payment release the insurer agrees to provide indemnification for

future "incidentals" or "special circumstances" accrued by the claimant, which are
very specifically outlined in the settlement contract.
A rehabilitation settlement includes provisions that allow the claimant to seek

indemnification for continued medical rehabilitation costs related to bodily
injury claims.
A rehabilitation settlement may also include a time frame, in which the
agreement to indemnify the claimant for medical rehabilitative costs eventually
expires.
Chapter 2.1 - Insurance
Rules & Regulations
Insurance Regulation
The regulation of Insurance is handled by both the Federal and State

Governments. In 1945, Congress passed the McCarren-Ferguson Act which
granted individual states the duty of the regulation of insurance. The Federal
Government maintained the authority over Fair-Labor and Anti-Trust. The state
now regulates the practices of insurance by all insurance professionals: agents,
adjusters, etc.
This role of the state creates a huge role for the state Insurance commission and
their directors. Their main focus is on the protection of the public. Insurance
regulation covers:
• The financial solvency of insurance companies

• Agent & Adjuster conduct
• Rates, Regulations, Policies, Forms
• Assuring the availability of insurance
Purpose of Regulation
State law sets out five purposes which guide the Department of Insurance:
• promote the public welfare by regulating insurance rates to prohibit

excessive, inadequate, or unfairly discriminatory rates;
• promote the availability of insurance;
• promote price competition among insurers to provide rates and premiums
that are responsive to competitive market conditions;
• prohibit price-fixing agreements and other anti-competitive behavior by
insurers; and
• provide regulatory procedures for the maintenance of appropriate
information reporting systems.
How Regulation Works
When an insurance company plans to change its rate, it must file the change with
the Department of Insurance for review. In any given year, the Department of
Insurance actuaries review several hundred rate filings for homeowners
insurance alone.
Sometimes not all the information that supports a rate change is filed and the
Department actuaries must request additional information. If the filing is
determined to be unreasonable, then the Department takes action and puts a
company on notice that the filed rates are unjustified. Many times, companies
adjust their rate filing to avoid a regulatory proceeding. For the most part,
companies file their rates with the necessary information.
The benefit for consumers is a more responsive market that offers a variety of
products and prices. To take advantage of these choices, it pays for consumers to
shop around to find the coverage that best fits their needs.
In addition to the above regulations that are set by the Department of Insurance,
there are several organizations that analyze insurance companies to determine
their strength as a company. Analysis is done of their performance, experience,
management etc. to determine their financial health. One of the most widely used
rating systems is that of A.M. Best which classifies various qualities of insurance
companies into the below rating system:
A++, A+ Superior – strongest position

A, A- Excellent
B++, B+ Very good
B, B- Good
C++, C+ Fair
C, C- Marginal
D Below minimum standards
E Under state supervision
F In liquidation
Premiums and Ratings:

Additional rating that is regulated by law is ratings for personal insurance. Some
individuals are considered a higher risk.
Rating is defined as a method of measuring hazards of individual risk in a given
area.
There are specific factors involved in rating automobile liability coverage.
• Location / Territory: This is described as the county in which the vehicle

is garaged.
• Use - This is determined by how the vehicle is primarily used. Is it used
for pleasure; to drive to work; etc?
• Demographics of Driver - Age, Gender, and Marital Status are all rating
factors.
• Driving Record: Each driver is rated based on their driving history.
Accidents and Violations will negatively affect the driver rating.
In the case of Physical damage coverage, in addition to the above, there are
unique additional rating factors:
Let's take the example of an auto policy. The following

would be factors in the policy rating:
• Where is the vehicle used
• What is the Make and Model of the vehicle?
• Age of the Vehicle
In practical terms, the insurance company is rating the risk involved in insuring
an individual in the location that they live in and taking into account the car that
they drive.
For example, an 18-year-old male who just received a brand new red corvette for
his birthday after totaling his first pick-up will most likely be considered more of
a risk than a 43-year-old mother of 4 whose daily routine includes carpooling in
the family minivan. The insurance premium of the teenage boy will certainly be
higher - and rightly so.
In a Workers Comp example:

Some employees are “high risk” (e.g. loggers or roofers), and some are low-risk
(e.g. accountants, receptionists); they therefore fall into different
“classifications”. For each classification, a rate is applied for each $100 of payroll.
Types of Ratings:
• “Experience rating”: Insureds with large premiums are eligible.
Premiums can be lowered if the three-year loss history prior to the policy
term is below average for the classification, or raised if there have been an
above average number of losses. This is called a “Premium Modification
Factor” (a Premium Modification Factor of 1.20, for example, would
indicate a 20% rate surcharge due to higher than average losses).
• “Schedule rating” is a judgment rating by the underwriter, and takes

into consideration unique characteristics of the employer (e.g. exceptional
management, premises upkeep, bill paying history, etc.)
• “Retrospective rating”: Employers can enroll on their own or in group

plans sponsored by trade associations and/or professional organizations
that can get them discounts (or increases depending on performance).
Chapter 2.2 - The Agent &
Authority
The Agent - An agent is technically defined as one who is authorized to act for,
or in place of, another.
Licensing Requirements:
1. In most states, applicants must be 18 years or older

2. Reside in the Licensing State
3. Be Trustworthy
4. Have no criminal history that includes a felony and has not had their
license revoked in another state.
5. Satisfy all licensing requirements including exams.
Insurance companies sell the majority of their insurance policies through an

agent. Insurance adjusters that settle claims for an insurance company also act as
an agent for the insurance company. In order to represent an insurance
company, agents sign a contract with an insurer and are bound by the terms of
that contract to represent the insurer.
The contract will spell out an agent's specific duties, guidelines and
responsibilities in conducting business on behalf of the insurer and the insured.
Agents must always be careful about his / her words and actions in representing
an insurer, because, as we will see later, anything an agent says or does may bind
the company they represent to a decision based on their actions and words. As an
agent, your actions are construed as the actions of the company you represent.
Contracted agents have three major responsibilities:
Adhere to the contract at all times when representing the insurer, and act in the
insurer's best interests in relation to the contract.
Utilize reasonable judgment and care when conducting insurance

transactions on behalf of the insurer and insured parties.
Fully supply any and all pertinent information regarding a potential client
or an insurance case to the insurer.
Once an agent has come to an agreement on a contract with the insurer, the agent
may conduct business transactions on behalf of the insurer.
When an agent sells a policy on behalf of an insurer, the agent then becomes the
liaison between the insured party and the insurance company.
When an insurance adjuster takes on a claim, he / she is the primary liaison

between the claimant and the insurance company.
Types of Agents:
Independent Insurance Sales Agents
Independent insurance sales agents are self-employed agents offering insurance

products from multiple companies simultaneously. An independent insurance
agent can compare and contrast rate quotes and policies from several insurance
companies to provide a best-fit policy for the consumer.
Exclusive Agents
Exclusive agents or captive agents are commissioned agents that represent the
products of one insurance company.
General Agent
General agents train and supervise other exclusive agents, and work for one
company.
Direct Writer
Direct writers are salaried employees who work for one company.
Agency Authority:
When an agent signs a contract with an insurer, the insurance company then
grants the agent official authority to conduct business on behalf of that insurer.
There are three types of authority granted in agency relationships:
1. Express Authority
2. Implied Authority
3. Apparent Authority
Express Authority - Express authority refers to actions specifically granted in

writing in the agency contract.
An agent might have express authority to write policies on behalf of the insurer,
to collect premiums, and to cancel insurance policies.
Let's say Sarah decides to visit her local XYZ Insurance office. She meets with
Jack, who sells her a new automobile insurance policy.
Jack helps Sarah select all the coverages available with her new policy, collects a
check from Sarah for her premium payment, and issues Sarah a binder.
Jack then explains that he can offer her a discount on her homeowners’ policy,
because XYZ Insurance discounts premiums for consumers who package all their
insurance needs with XYZ Insurance.
These are all examples of Jack's express authority. Jack's contract specifically
grants in writing that Jack can sell policies, establish premiums within certain
limits, and offer discounts for purchasing multiple insurance policies.
Implied Authority - Implied authority refers to what the public reasonably

views as your authority to conduct business on behalf of an insurer.
Because an agent portrays himself / herself as a representative of the insurance

company, anything the agent says or does is implied to be representative of the
insurance company.
For example, if you're wearing a nametag bearing the XYZ Insurance company
logo, a member of the public could reasonably assume you are acting as a
representative of XYZ Insurance. And as a contracted agent of XYZ Insurance,
your words and actions represent those of XYZ Insurance.
When an agent of Insurance Company X says he can write you an insurance

contract for $500, any member of the public has reason to believe the agent
because he acts as a representative of the company. The agent has the implied
authority to write that contract whether or not he has the express authority to do
so, and can his actions can bind the insurance company to his decision.
Apparent Authority - Apparent authority describes a situation in which the

insurance company leads a third party to believe that an agent has authority to
bind the insurance company, even when the agent lacks the authority to do so. In
addition, the insurance company must act upon the authority, or be held
complicit with the execution of authority by the agent.
For example, let's say an agent writes an insurance policy for automobile
coverage on a Ferrari and takes a premium payment from the consumer.
However, in the agent's contract with the insurance company, he was expressly
not allowed to write insurance contracts on exotic cars such as a Ferrari.
The insurance company temporarily overlooks this fact, and cashes the premium
check the client wrote for coverage on his Ferrari.
When the insurance company cashes the premium check, they automatically
grant apparent authority to the agent. By cashing the premium check, they have
become complicit in the authority of the agent to grant an insurance contract for
the Ferrari owner.
The Agent Authority includes:
• selling insurance
• collecting premiums
• servicing the contract
• issuing policies
• act as the representative of the insurance company
Once the license has been issued, the agent and company are monitored by the
State to ensure the safety of the public. Agents are expected to adhere to state
laws that dictate the conduct of the agent. We will discuss in detail the
expectations of the insurance professional - including Unfair Trade Practices and
Unethical Situations - later in the course.
Chapter 2.3 - Unlawful
Behaviors
Unethical behaviors
Insurers are also expected to behave ethically at all times when issuing insurance
policies to consumers. Below, we'll take a brief look at a few behaviors that state
regulators deem unethical.
Misrepresentation
Misrepresentation applies to both an insurer and the policies an insurer offers.

An insurance company cannot misrepresent itself to any member of the public,
nor make misleading statements regarding its insurance policies.
This includes making untrue or misleading statements about their insurance

products or their insurance company, omitting or failing to disclose relevant facts
about an insurance product, or purposely leading the public to false conclusions
about an insurance company and its products.
For example, if an applicant asks an insurance agent for XYZ Insurance about the
benefits of XYZ Insurance, the agent cannot reply, "unlike our competitors, we
pay out on 97% of our claims.”
Such a statement causes consumers to believe that they would have a greater
chance of successfully filing a claim with Insurance Company X than they would
with any of Insurance Company X's competitors, when in fact Insurance
Company X has no factual basis for such a statement, nor do they payout on 97%
of their claims.
Insurers also cannot induce members of the public to cancel or let lapse existing
policies in order to sell a new policy.
False Information and Advertising
False information and advertising relates to an insurance company or its

representatives disseminating false information or falsely advertising facts about
an insurance company or policy that is untrue, deceptive, or misleading through
any media channel.
For example, XYZ Insurance cannot produce a radio or television spot for the
public proclaiming that XYZ Insurance sells a $250,000 auto insurance policy for
$2.99 a month, when they in fact do not offer such a policy.
Nor could XYZ Insurance advertise a $250,000 auto insurance policy for $2.99 a
month even if they did offer such a policy, without mentioning the fact that the
policy has a $200,000 deductible. Such a statement would be intentionally
deceptive.
Rebates and Insurance "Kickbacks"
Insurers cannot offer rebates or "kickbacks" in the sale of insurance policies, nor
can they provide kickbacks to vendors or contractors.
A kickback is any kind of compensation given to someone else, such as an

insurance broker, contractor, or vendor, etc. with the intent to gain favorable
treatment in the insurance transaction or interaction at hand.
Concerning the sale of insurance policies, insurance companies are not permitted
to engage in providing kickbacks to insurance brokers to push consumers into
certain policies they may not need or desire.
Kickbacks are also often found in corporate and government insurance contracts,
where an insurer agrees to "kickback" a certain amount of money to an individual
who makes the decision regarding which insurance policy to purchase. An
insurance specialist for XYZ Materials, for example, may take a $5,000 kickback
from ABC Insurance to ensure that XYZ Materials will only buy insurance from
ABC Insurance.
Insurance companies are also not allowed to provide kickbacks to contractors or

vendors to "lowball" damage estimates or repair costs.
Defamation of Insurers
Insurance companies cannot make false, maliciously critical or derogatory

statements about other insurance companies or their representatives in order to
benefit themselves.
For example, XYZ Insurance or any of its representatives cannot claim to

prospective policyholders that they should not go with ABC Insurance because
ABC Insurance "is going broke", "doesn't pay their claims", or "doesn't care about
their policyholders."
Insurers cannot make such claims to individual persons or insurance applicants,

nor can they use such statements in any form of advertising, promotion or public
relations.
Boycott, Coercion or Intimidation
Insurance companies cannot participate in boycotts, nor coercive or intimidating

trade practices in the sale of insurance.
For example, an XYZ Insurance cannot strike a deal with an auto sales dealership
that will restrict a consumers access to an auto loan on the condition that the
consumer purchase auto insurance from XYZ Insurance.
In a similar situation, ABC Insurance cannot strike a deal with a real estate
company that allows real estate agents to only sell properties to home buyers that
agree on the spot to sign an ABC Insurance contract as a condition of buying the
home.
Unfair Discrimination
Insurance companies may not discriminate between individuals of the same class
and of equal life expectancy in any premiums charged, dividends paid, or any
other policy terms and conditions.
Insurance companies may also not discriminate on the basis of race, sexual
preference, religion, language, or disability if not applicable to the insurance
policy.
Insurance companies may charge different premiums based upon age or gender,
if evidence can prove a statistical difference in the number of claims. For
example, younger drivers tend to cause more accidents and drive recklessly.
Conclusion
A successful and prolonged career in insurance adjusting requires an individual

to maintain high ethical standards and exhibit strong moral character at all
times. The power of the position is immense, and the temptations to stray from
our ethical principles abound.
While the State provides a rudimentary set of guidelines to keep us on track, only
our own behaviors will determine our personal success in the industry. We are
required to investigate, evaluate and settle cases promptly and efficiently and
according to contract, without succumbing to numerous outside influences.
Nothing more, nothing less.
Chapter 2.4 - Unfair Claim
Settlement Practices
Unfair Claims Settlement Practices
Every state has enacted a series of regulations laws prohibiting unfair,

discriminatory, or deceptive insurance practices. Included in these are Unfair
Claims Settlement Practices.
For example, if an unscrupulous insurer makes a habit of drawing out

claims, making late payments, or allowing cases with clear liability to
advance to a court of law, the State has a right to censure the insurance
company for their behavior.
In this section, we're going to take a brief look at the examples of Unfair Claim
Settlement Practices.
1. Misrepresenting to claimants pertinent facts or policy provisions

relating to coverages at issue.
Insurers cannot enforce material changes to a contract without providing the

insured adequate notice as prescribed by law.
Rather, insurers and adjusters must provide full and honest disclosure of
pertinent policy coverages and adhere to them as prescribed in the policy.
2. Failing to acknowledge with reasonable promptness pertinent and

open communications with respect to claims arising under its
policies.
The State has determined that an insurer's acknowledgment of a claim within 15

business days of receiving that claim is presumed to be "reasonably" prompt.
Insurers must open a direct line of communications with a claimant within 15

days of receiving a claim.
3. Failing to adopt and implement reasonable standards for prompt
investigation of claims arising under its policies.
Insurance companies and adjusters have a responsibility to fully investigate

claims in a timely manner.
After receiving to the claim, an insurer has 15 days to begin an investigation of

the pertinent facts and important issues surrounding a claim, and must conduct a
thorough, orderly investigation when required.
4. Not attempting in good faith to effectuate prompt, fair, and

equitable settlements of claims submitted in which liability has
become reasonably clear.
Insurance companies and its affiliates cannot "stonewall" policyholders with

endless claims of "investigations" and "processing" when liability is not
questioned.
5. Compelling policyholders to institute lawsuits to recover amounts

due under its policies by offering substantially less than the amounts
ultimately recovered in suits brought by them.
In other words, insurance companies cannot make a habit of "lowballing" its

policyholders, who then in turn must fight insurance companies in court to
recover the proper amount of damages.
States have a concerned interest in not allowing an insurer to clog the State's
legal system with frivolous lawsuits with civil cases where insurers have clearly
not demonstrated a willingness to fully indemnify policyholders.
6. Failure of any insurer to maintain a complete record of all

complaints which it has received during the preceding three years, or
since the date of its most recent financial examination by the
commissioner of insurance, whichever time is shorter.
Insurance companies are required by law to maintain all complaints against the
company at all times for a period of no less than three years.
The record must indicate:
• the total number of complaints
• the nature of the complaints
• the classification of complaints for each line of insurance an insurance
company offers
• the amount of time spent processing each complaint
• the disposition of the complaint
7. Failing to provide promptly, when provided for in the policy, claim

forms when the insurer requires such forms as a prerequisite for a
claim settlement.
Some insurers have a history of delaying claims payments by continually

requiring the claimant to fill out a series of redundant or unnecessary claims
forms, pointless financial paperwork, or requiring claimants to "prove their
losses" when the losses are in reality crystal clear.
Insurance companies cannot delay prompt claims settlements by requiring

excessive, unnecessary or redundant claims forms or unnecessary "proof-of-loss"
requirements.
8. Not attempting in good faith to settle promptly claims where

liability has become reasonably clear under one portion of the policy
in order to influence settlement under other portions of the policy
coverage.
In essence, insurance companies cannot say to policyholders "We admit to our

liability in this portion of your insurance coverage, and we are willing to pay you
what you are owed. But, by admitting our liability in this portion of our coverage,
we want you to settle for less in other portions of our coverage."
Insurers must make good on all promises contained with in an insurance

contract, and not break certain promises in order keep other ones.
9. Failing to provide promptly to a policyholder a reasonable

explanation of the basis in the insurance policy in relation to the facts
or applicable law for denial of a claim or for the offer of a compromise
settlement.
Simply put, an insurance company must provide, in reasonable and

understandable terms, the exact reason why a claim is denied, or why a
compromise settlement was offered.
An insurer must be able to specifically point out the supporting facts for their
decision to deny a claim in the applicable insurance policy, and must be able to
clearly explain to the claimant the specific methods they utilized to compute the
corresponding settlement amount.
Insurers cannot simply come to decisions based on opinions, nor may they
simply pull settlement figures "out of thin air."
10. Failing to affirm or deny coverage of a claim to a policyholder

within a reasonable time frame.
Once an insurer receives all the items, statements, and forms required by the
insurance company to secure a financial proof of loss, the insurance company
then has 15 business days to come to a decision regarding payment on the loss.
If an insurer cannot come to a decision with in 15 days, they must notify the
claimant that the insurer needs additional time to make a decision, along with an
explanation of why they need additional time. After such notice is made, the
insurer has an additional 45 days to make a decision on the claim.
If the insurer ultimately rejects the claim, they must provide in writing why they
rejected the claim.
In cases where arson is suspect, an insurer has 30 days to affirm or deny

coverage.
11. To refuse, fail, or unreasonably delay offer of settlement under

applicable first-party coverage on the basis that other coverage may
be available or third parties are responsible in law for damages
suffered.
Insurers cannot deny first party coverage to their own policyholder on the basis
that a third party is liable for the damages caused to the policyholder.
Subrogation allows an insurer to file a lawsuit against a third party to recover

monies paid to their own policyholder if they feel a third party is indeed liable for
the damages caused to their policyholder.
Therefore, an insurance company cannot deny coverage to their own policyholder

based on a third party's liability.
12. Undertaking to enforce a full and final release from a policyholder

when, in fact, only a partial payment has been made.
Insurance companies must uphold their side of the contractual promise in full
faith; they cannot make a payment to a policyholder and try to "trick" them into
releasing the insurance company from further reparations.
Remember, an insurance contract requires the element of "utmost good faith" by

both parties participating in the insurance contract. The insurance company must
perform to it's stated obligations just as a policyholder must perform to his /
hers.
13. Refusing to pay claims without conducting a reasonable

investigation based upon all available information.
Insurance companies and the adjusters that represent them must ensure that
every claim is thoroughly and adequately investigated for the benefit of the
claimant.
Adjusters must give adequate measure to not only to their own investigative
results, but to the statements of the claimant and all relevant witnesses as well.
Only after a thorough investigation has been completed may an insurer formulate
an adequate basis of information with which to deny a claim.
14. Failing to respond promptly to a request by a claimant for

personal contact about or review of the claim.
Insurance companies must always provide open lines of communication with

claimants in the resolution of claims.
If a claimant requests personal contact regarding the claims process, an

insurance company cannot deny or stall such requests, unless a claimant has
already been provided with an adequate number of opportunities to have his /
her questions answered.
15. Requiring from a claimant, as a condition of settling a claim, to

produce the claimant's federal tax returns for examination or
investigation purposes.
Insurers are not permitted to require a claimant to produce a recent federal tax
return unless the tax return has a specific relevance to a claim.
The Unfair Claim Settlement Practices Act allows three exceptions to this
provision:
• a court may order the claimant to produce a tax return.
• an insurer may request a tax return if the claim involves a loss due to fire.
• an insurer may request a tax return if the claim involves lost profits or
income.
16. Failing to provide promptly, when provided for in a policy, claim

forms when the insurer requires such forms as a prerequisite for
settlement.
Just as an insurer is not allowed to overload a claimant with paperwork in an

effort to stall the settlement process, insurers are also not permitted to withhold
certain claims or settlement forms in an effort to stall a settlement.
Insurers are required to submit all necessary paperwork to the claimant within 15
days of acknowledging a claim.
17. With respect to the Texas personal auto policy, to delay or refuse
settlement of a claim solely because there is other insurance of a
different type available to satisfy partially or entirely the loss forming
the basis of that claim.
The claimant who has a right to recover from either or both insurers is entitled to
choose under which coverage and in what order payment is to be made.
18. Failing to establish a policy and proper controls to make certain

that agents calculate and deliver to policyholders or their assignees
funds due under policy provisions relative to cancellation of coverage
within a reasonable time after such coverages are terminated.
Simply put, an insurance company must establish a means by which they can
promptly and accurately refund premiums already paid by a policyholder if and
when the policyholder decides to cancel coverage.
A premium is a pre-paid sum of money meant to activate and install an insurance

policy for the length of the policy term; most premiums are paid at the beginning
of a one month, six month, or one year policy term.
If a policyholder cancels an insurance contract, an insurer must have a defined

method in which to promptly, accurately, and fairly refund those premiums paid
for insurance coverage that is no longer provided.
19. Committing another act the Commissioner of Insurance

determines by rule constitutes an unfair settlement practice.
The Texas Commissioner of Insurance has final say whether a settlement practice
is unfair, unethical, or unjustified.
Proper Claims Practices
While the list of unfair claims practices is long and, at points, rather obvious,
insurers in Texas and every state have a duty and a responsibility to deal in good
faith with their policyholders at all times. At a minimum, insurers should:
• Promptly and honestly acknowledge, handle, and investigate claims.
• Foster open communication channels between the insurer and the
policyholder during the claims process.
• Make timely decisions and payment regarding claims.
The encourage timely claims resolution, the State of Texas has set minimum
requirements for insurers to respond to and pay for claims.
Acknowledgement of a Claim
From the moment an insurer receives a claim from a policyholder, the insurer
has 15 days to act. The insurance company must, within 15 days, do the
following:
• acknowledge receipt of the claim
• begin investigating the circumstances of the claim
• provide all necessary forms to the claimant, and request all pertinent
information regarding the claim including but not limited to photographs,
statements, police reports and other evidence.
Decision on a Claim
After an insurer has collected all necessary materials, statements and evidence
regarding a claim, they have 15 business days to notify the claimant whether the
claim has been accepted or denied.
If the claim is denied, they must provide an adequate explanation as to exactly

why the claim was denied.
Occasionally complex investigations cannot be resolved within this time frame.
If a decision cannot be reached, the insurer must notify the claimant within the 15
business day time frame they have not yet reached a decision in regards to the
claim. After notification, the insurer will then have an additional 45 days to make
a final decision and relay that decision to the insured party.
Payment of Claims
Once a decision has been made on a policyholder claim, the insurer has 5
business days to issue payment on the claim. During weather catastrophes
however, insurers have an additional 15 days to issue payment.
All claims 60 days delinquent are subject to 18% interest.
Standards for Releases

The following acts by an insurer, adjuster, or self-insured or self-insurance
administrator constitute unfair settlement practices:
• Requesting or requiring an insured or a claimant to sign a release that
extends beyond the subject matter that gave rise to the claim payment;
• Issuing a check or draft in payment of a claim that contains any language
or provision that implies or states that acceptance of the check or draft
constitutes a final settlement or release of any or all future obligations
arising out of the loss.
Standards for Claim Denial

The following acts by an insurer, adjuster, or self-insured, or self-insurance
• Denying a claim or any element of a claim on the grounds of a specific
policy provision, condition, or exclusion, without informing the insured of
the policy provision, condition, or exclusion on which the denial is based;
• Denying a claim without having made a reasonable investigation of the
claim;
• Denying a liability claim because the insured has requested that the claim
be denied;
• Denying a liability claim because the insured has failed or refused to report
the claim, unless an independent evaluation of available information
indicates there is no liability;
• Denying a claim without including the following information:
o the basis for the denial;
o the name, address, and telephone number of the insurer's claim
service office or the claim representative of the insurer to whom the
insured or claimant may
o take any questions or complaints about the denial;
o the claim number and the policy number of the insured; and
o if the denied claim is a fire claim, the insured's right to file with the
Department of Commerce a complaint regarding the denial, and the
address and telephone number of the Department of Commerce;
• Denying a claim because the insured or claimant failed to exhibit the
damaged property unless:
o the insurer, within a reasonable time period, made a written
demand upon the insured or claimant to exhibit the property; and
o the demand was reasonable under the circumstances in which it
was made.
• Denying a claim by an insured or claimant based on the evaluation of a

chemical dependency claim reviewer selected by the insurer unless the
reviewer meets the qualifications specified in this section. An insurer that
selects chemical dependency reviewers to conduct claim evaluations must
annually file with the commissioner of commerce a report containing the
specific evaluation standards and criteria used in these evaluations.
Chapter 2.5 - Standards for
Claim Filing & Handling
The following acts by an insurer, an adjuster, a self-insured, or a self-insurance
• Except for claims made under a health insurance policy, after receiving
notification of claim from an insured or a claimant, failing to
acknowledge receipt of the notification of the claim within ten
business days, and failing to promptly provide all necessary claim forms
and instructions to process the claim, unless the claim is settled within ten
business days. The acknowledgment must include the telephone number
of the company representative who can assist the insured or the claimant
in providing information and assistance that is reasonable so that the
insured or claimant can comply with the policy conditions and the
insurer's reasonable requirements. If an acknowledgment is made by
means other than writing, an appropriate notation of the acknowledgment
must be made in the claim file of the insurer and dated. An appropriate
notation must include at least the following information where the
acknowledgment is by telephone or oral contact:
o the telephone number called, if any;
o the name of the person making the telephone call or oral contact;
o the name of the person who actually received the telephone call or
oral contact;
o the time of the telephone call or oral contact; and
o the date of the telephone call or oral contact
• Failing to reply, within ten business days of receipt, to all other
communications about a claim from an insured or a claimant that
reasonably indicate a response is requested or needed;
• Unless provided otherwise by this section, other law, or in the policy,
failing to complete its investigation and inform the insured or claimant of
acceptance or denial of a claim within 30 business days after
receipt of notification of claim unless the investigation cannot be
reasonably completed within that time. In the event that the investigation
cannot reasonably be completed within that time, the insurer shall notify
the insured or claimant within the time period of the reasons why the
investigation is not complete and the expected date the investigation will
be complete. For claims made under a health policy the notification of
claim must be in writing;
• Where evidence of suspected fraud is present, the requirement to disclose
their reasons for failure to complete the investigation within the time
period set forth in this section need not be specific. The insurer must make
this evidence available to the Department of Commerce if requested;
• Failing to notify an insured who has made a notification of claim of all
available benefits or coverages which the insured may be eligible to receive
under the terms of a policy and of the documentation which the insured
must supply in order to ascertain eligibility;
• Unless otherwise provided by law or in the policy, requiring an insured to
give written notice of loss or proof of loss within a specified time, and
thereafter seeking to relieve the insurer of its obligations if the time limit is
not complied with, unless the failure to comply with the time limit
prejudices the insurer's rights and then only if the insurer gave prior
notice to the insured of the potential prejudice;
• Advising an insured or a claimant not to obtain the services of an attorney
or an adjuster, or representing that payment will be delayed if an attorney
or an adjuster is retained by the insured or the claimant;
• Failing to advise in writing an insured or claimant who has filed a
notification of claim known to be unresolved, and who has not retained an
attorney, of the expiration of a statute of limitations at least 60 days prior
to that expiration. For the purposes of this clause, any claim on which the
insurer has received no communication from the insured or claimant for a
period of two years preceding the expiration of the applicable statute of
limitations shall not be considered to be known to be unresolved and
notice need not be sent pursuant to this clause;
• Demanding information which would not affect the settlement of the claim
• Unless expressly permitted by law or the policy, refusing to settle a claim
of an insured on the basis that the responsibility should be assumed by
others
• Failing, within 60 business days after receipt of a properly executed proof
of loss, to advise the insured of the acceptance or denial of the claim by the
insurer. No insurer shall deny a claim on the grounds of a specific policy
provision, condition, or exclusion unless reference to the provision,
condition, or exclusion is included in the denial. The denial must be given
to the insured in writing with a copy filed in the claim file
• Denying or reducing a claim on the basis of an application which was
altered or falsified by the agent or insurer without the knowledge of the
insured;
• Failing to notify the insured of the existence of the additional living
expense coverage when an insured under a homeowners policy sustains a
loss by reason of a covered occurrence and the damage to the dwelling is
such that it is not habitable;
• Failing to inform an insured or a claimant that the insurer will pay for an
estimate of repair if the insurer requested the estimate and the insured or
claimant had previously submitted two estimates of repair. (72A.201.4)
Chapter 3.1 - Dwelling
Insurance
Dwelling – 2002 FORM VERSION
Dwelling Insurance is offered under what’s called the Dwelling Program. Here’s a
good way to look at the Dwelling Program; it’s designed for insuring residential
structures that are not eligible for a homeowners policy.
A dwelling policy is the most basic property insurance policy

available.
A basic dwelling policy is a property-only insurance policy (does not include

liability coverage or medical payments except by endorsement) generally sought
by individuals who don’t qualify for homeowners insurance or don't need the
variety of expanded coverages provided by a full homeowners insurance policy.
The Dwelling program does not require the structure to be owner-occupied.

Therefore, if the owner of a property intends to rent to others rather than occupy
it, he/she would not be eligible for a homeowners policy, and would need to
secure a dwelling policy to insure the property.
Eligibility for the Dwelling policy is as follows:
• single-family homes
• 1-4 family dwellings (including duplexes, four-plexes, etc.)
• dwellings under construction
• maximum 5 roomers or boarders are allowed in a DP-insured dwelling
• permanently installed mobile homes are OK
• incidental business risks only (eligibility subject to carrier requirements )
Dwelling policies can be held by individuals, but also by entities such as

corporations, partnerships, etc. Homeowners insurance, on the other hand,
requires that the insured must be a private party. For example, a company that
wants to own a dwelling to house out-of-town employees and visitors would
require a dwelling policy.
Important note – farm properties are not eligible for a dwelling policy (they
require farm & ranch policies).
Examples of properties that would require a dwelling policy because they do not
qualify for a homeowner’s policy are:
a) 1-4 family dwellings rented to others
b) some older homes
c) most mobile homes
d) homes with values under a certain threshold
e) properties with low mortgage balances
f) hunting cabins, bunkers
There are three different policies under the Dwelling Program:
• DP-1 Basic form (cheapest and least coverage)

• DP-2 Broad Form
• DP-3 Special Form (most expensive and broadest coverage)
Let’s take a closer look, staring with the DP-1
DP-1 “BASIC FORM”
This policy provides very basic coverage for direct physical loss. It’s a “named
peril” policy, and only covers loss by one of three perils: fire, lightning and
internal explosion.
For Fire loss to be covered, it must be:
Vandalism and Malicious Mischief (VMM) covers only intentional acts,

does not include losses caused by burglary or theft, and does not cover “vacant”
houses.
NOTE Re. VACANCY: “vacant” means houses that have no contents or

permanent residents for 60 days. Note - an unoccupied house is not necessarily
vacant; if it has contents in it, it’s just unoccupied.
a) unexpected
b) hostile (i.e. not “friendly” such as a contained fire in a fireplace. A
hostile fire is one that has spread beyond its intended confined space).
c) Direct (i.e. must cause physical damage)
Internal Explosion loss does not include:
a) loss due to explosions that occur outside of the covered building
b) loss due to burst water pipes
c) loss due to electrical arcing
d) rupture of pressure-relief devices
e) loss due to explosions of steam boilers or steam pipes owned, leased or

operated by the named insured
NOTE - Many insureds who hold a DP-1 policy add two endorsements at an
additional cost; Extended Coverage (EC) and Vandalism & Malicious Mischief
(VMM) (it’s not hard to see why; they only cover fire, lightning and internal
explosion).
Extended Coverage (EC) – This option adds the following perils:
a) Windstorm (e.g. hurricane, tornado)
b) Civil commotion
c) Smoke (e.g. from forest fire or from a fire at a neighbor’s house)
d) Hail
e) Aircraft (e.g. if a plane hits the house)
f) Vehicles (e.g. if a car swerves off the road and hits the dwelling)
g) Volcanic eruption
h) Explosion (includes external explosion, e.g. a blast from a neighbor’s

house)
i) Riot
NOTE – these perils can be memorized by the acronym “WC SHAVVER” (the
first letters of each of the EC perils)
DP-2 – “BROAD FORM”
The Broad Form is very similar to the DP-1; it just covers more perils. It’s a
“named peril” policy that it covers the same perils as the DP-1 and more. For
instance, the DP-2 automatically includes all of the Extended Coverage (EC) and
Vandalism & Malicious Mischief perils:
a) windstorm – notes:
• No coverage for exterior awnings, signs or antennas.

• Also (and this is kind of important); there’s no coverage for interior
damage unless the wind first damages the exterior, thereby letting
water in, that then causes the damage.
b) hail - important note – interior damage is only covered if the wind or

hail causes an opening that allows rain or hail to enter the house
c) explosion (includes external explosion)
d) riot or civil commotion
e) aircraft - – this is coverage incase someone hits the insured’s property

with an aircraft
f) vehicles – this is coverage incase someone hits the insured’s property

with a car (note – coverage of fences, driveways and walkways are
excluded when caused by an occupant of the dwelling)
g) smoke (includes puff-back, soot, smoke or fumes from a furnace or

boiler, etc, but no coverage for agricultural “smudging” or industrial
operation)
h) volcanic eruption – two notes about volcanic eruption –
• ensuing earthquake is not covered (an earthquake

endorsement would be needed for damaged caused by earth
movement by volcanic eruption)
• multiple eruptions within 72 hours are considered “one eruption”
for claim purposes
The DP-2 also covers:
a) weight of ice, snow & sleet (excludes losses to awnings, fences,

patios, swimming pools, retaining walls, etc.; lots of stuff outside the
dwelling)
b) burglary damage (i.e. property damaged by the burglars, but not the
personal property that’s stolen)
c) glass breakage - coverage for breakage of the building’s glass (if the
dwelling is not vacant – 60 days or more)
d) freezing of pipes (note – in order to have coverage, the insured must

use “reasonable care” to maintain heat or shut off water supply and drain
pipes as necessary according to weather conditions)
e) Electrical damage (artificially generated electrical current) – for

example, this sometimes happens when power is turned back on after a
prolonged outage, and can cause damage to electrical systems and
appliances such as A/C units. This peril also applies to damage to
appliances, computers, home entertainment systems, et al.
f) Falling objects - note - there’s no interior coverage unless the falling

object first damages the exterior; e.g. if a meteor crashed through the roof
and damages the interior, there’s coverage. If a trophy falls off a shelf and
damages the hardwood floor, there’s no coverage.
Two notes re. falling objects; there’s no coverage for:
a) damage to the falling object itself
b) damage to exterior antennas, satellite dishes, awnings, fences,

etc.
g) sudden and accidental tearing apart, cracking burning or

bulging – i.e. of a steam, hot water, A/C or sprinkler system or
appliance.
h) accidental discharge (i.e. loss due to water or steam escaping from a

heating, plumbing, sprinkler or A/C system or appliance). This coverage
includes the tear-out and replacement of any part of a structure on the
premises when necessary to repair the system (for “other structures” –
tear-out and replacement is only covered when the water or steam causes
actual, physical harm to the property – need to see a policy to check this).
NOTE re. accidental discharge – there’s no coverage:
• for sumps, sump-pumps

• for losses due to constant/repeated seepage over time
• for losses to vacant properties (60 days or more)
• for losses caused by or resulting from freezing ( except as
covered under the peril of freezing – need to better
understand this)
• to the system from which the water/steam escaped (e.g. if
the water heater leaks, damage to the floor is covered but
not replacement of the water heater)
• for damage due to accidental discharge that occurs off the
property (e.g. from a neighbor’s house)
• for damage from gutters, roofs and similar systems
i) Collapse – this is “abrupt falling down or caving in” of a building or

part of it (but does not include settling, cracking, shrinking, bulging,
expansion, etc.). Collapse covers losses caused by:
• All perils listed above

• Hidden decay
• Hidden insect or vermin damage
• Weight of contents (furniture, equipment, people during a
party, etc.)
• Weight of rain (e.g. collected on a roof)
• Use of defective materials (if the collapse happens during the
construction or remodel).
Collapse does not cover damage to:
• awnings
• fences
• patios and pools
• underground pipes, drains septic tanks, etc.
• foundations and retaining walls
• docks
DP-3 SPECIAL FORM
The DP-3 is a different animal than the other two; it gives “open perils” coverage
for the dwelling and all structures on the property. This affords much broader
coverage (an open perils policy covers any peril that’s not specifically excluded in
the policy). This is a major improvement over the other two dwelling forms, and
it’s typically more expensive.
Important Note - although the DP-3 covers structures on an open perils basis,
personal property (i.e. contents) is still covered on a named peril basis (the
named perils covered are the same as the DP-2; fire, lightning, EC, VMM, etc.)
Therefore, the DP-3 covers any/all direct physical loss to structures except:
1) Losses excluded in the General Exclusions section of the policy (more

General Exclusions later in this section)
2) Settling, cracking, shrinking, bulging or expansion of patios,

foundations, walls, floors, etc.
3) Damage from birds, rodents, insects and domestic animals
4) Wind or hail damage to antennas, satellite dishes, lawns, trees and

plants (e.g. but a lightning strike or fire damage to an antenna would be
covered).
5) Freezing, thawing or damage caused by the weight of ice, snow, etc. to

awnings, fences, patios, pools, foundations, retaining walls, docks,
footings, and other devices that support a structure
6) Theft of property that’s not actually part of the insured’s dwelling ( i.e.
theft of personal property is not covered unless there’s a theft
endorsement; however, theft of physical parts of the building is covered;
e.g. theft of a stained glass window).
7) Discharge of pollutants
8) Gradual and expected losses such as:
a) wear and tear, deterioration
b) rust, rot, mold, contamination
c) inherent vice (some characteristic of the item that causes it to

self-destruct or gradually deteriorate)
d) latent defect (e.g. defective floor joists that delaminated after a
few years)
e) smoke and smog from agricultural operations
f) mechanical breakdown (e.g. if the A/C compressor seizes during

normal use)
Let’s take a closer look at the parts of a Dwelling Policy. The dwelling policy is
made up of the following sections:
a) Coverages
b) Perils Insured Against
c) General Exclusions
d) Conditions
Coverages (i.e. A description of the five categories of stuff that is

covered in the policy – coverage A, B, C, D and E)
Coverage A – Dwelling
This is coverage for the principle structure on the property; the one described on
the declarations page. Coverage A includes any structures attached to the
dwelling; e.g. attached garages and lean-tos. It also includes equipment used to
service the dwelling, such as the A/C compressor, water softener or the heating
oil tank.
Building equipment and supplies to be used for construction or remodeling of the

property is also covered, if it’s located on or next to the described location.
Coverage A does not cover damage to the actual land itself.
Coverage B – Other Structures
Coverage B (“Other Structures”) is coverage for detached structures on the

premises. These are structures that are physically separated from the dwelling by
clear space. Examples include: detached garages, detached gazebos, detached
sheds, fencing, stand-alone mailboxes, lamp-posts, etc.
There is only 10% of the dwelling coverage allotted to Other Structures. For
example, if the insured has a Dwelling Policy with $100,000 coverage for the
dwelling, there is only $10,000 coverage for any/all losses to Other Structures
(per claim).
Under the DP-2 and DP-3, this 10% is in addition to the Dwelling limit of
liability.
Under the DP-1, the 10% is included in the dwelling limit of liability.
So, using the $100,000 example above, if every structure on the property burned
to the ground, the DP-1 would pay a maximum of $100,000 while the DP-2 and
DP-3 would pay $110,000 (of course a deductible would factor in to each in real
life).
Coverage B does have some exclusions, including:
a) buildings used for business or farming [however – non-business non-

farming buildings that contain commercial, manufacturing or farming
property owned by a tenant or the insured are covered, provided the
structure is not used for the storage of fuel (fuel in vehicle takes is OK)]
b) buildings rented to someone who’s not a tenant of the dwelling (unless

it’s rented solely as a private garage)
c) Gravestones, plots and mausoleums
Coverage C – Personal Property (also called “Contents”)
This is not coverage for buildings; this is coverage for the insured’s belongings.
Because the dwelling policies are so often used to cover rental properties,
coverage for Personal Property is optional, not automatic. A limit of liability
must be chosen by the insured and shown on the declarations page in order for
there to be coverage for contents. This option will of course add an additional
premium. Personal
Property coverage under a dwelling policy is based on Actual Cash Value, not
replacement cost.
Coverage C covers the personal property of the insured, not personal property of
tenants. For example, when an insured rents a house, the rental usually comes
equipped with all the appliances a renter would need. A dwelling policy would
protect these appliances as they are owned by the insured, but would not protect
any personal property of the tenant.
Personal Property of family members residing with the insured and usual to the
occupancy of the dwelling is also covered. Coverage for Personal Property of
guests or servants while located on the premises may be added.
Coverage is primarily for property that is on the premises, but there is an

allowance of 10% of the Coverage C limit of liability for the insured’s Personal
Property that’s off the premises (this does not include the property of guests or
servants).
Coverage C does not include every kind of property. Here’s a list of excluded types
of property:
a) animals, birds or fish
b) Automobiles and aircraft
c) Boats (however, rowboats and canoes are covered, but only while on
the premises)
d) Data (stored on paper or electronically)
e) Credit cards and similar
f) Accounts, bills, evidence of debt, passports, personal records, etc.
g) Money, gold, bullion, silver, stamps, etc.
h) Hovercraft
i) Water or steam (i.e. the value of the water or steam itself)
Coverage A, B and C (above) are examples of “direct loss”. Direct loss is physical
loss to tangible property. The dwelling policy also covers “indirect loss” – indirect
loss is an economic loss that is intangible. For example; if a fire burns a house
down and the owner needs to rent an apartment while a new house is being built,
the direct loss is damage to the house, the indirect loss is the cost of renting an
apartment.
There must first be a direct loss (Coverage A, B and C) for there to be a covered
indirect loss. Here are the indirect loss coverages:
Coverage D – Fair Rental Value
This coverage pays the insured for lost rental revenue. It pays when, for example,
the insured’s rental property is damaged and a tenant has to move out and is
therefore no longer paying rent. The lost rental revenue is paid to the insured.
Note that only the net loss is paid; the coverage is for the loss of rental less any
expenses that discontinue because the tenant is not using them (e.g. utilities such
as water and heat).
Payment is only for the shortest amount of time needed to repair or replace the
building or the part of the building rented.
For example; a tenant has to move out due to a kitchen fire. It takes 3 months to
repair the property. At the end of 3 months, the tenant has found a new rental
property and declines to move back in. it takes another two months to find a new
tenant. Although the insured has lost 5 months of rental income, the dwelling
policy will only pay for 3 months (the time it took to repair the dwelling). There’s
no coverage for cancellation of a lease by a tenant.
If the reason for the loss of rental value is an order by a civil authority (such as a
mandatory evacuation), the insured can receive up to two weeks of compensation
maximum (and only if the civil authority order is due to a covered peril, such as a
fire in the neighborhood).
There is only 20% of the dwelling coverage allotted to Fair Rental Value.
Under the DP-2 and DP-3, this 20% is in addition to the Dwelling limit of
liability.
Under the DP-1, the 20% is included in the dwelling limit of liability.
Coverage E – Additional Living Expense
This coverage pays for additional living expenses incurred by the insured (not the
tenant). Here are some notes about it:
a) payment is only for the time that the property is unfit for use (i.e. the
shortest time it take to repair/replace)
b) only necessary expenses (e.g. the cost to rent an apartment, food, etc.)
c) only the increase of cost is paid (e.g. the cost while out of the house
minus the cost while in the house)
d) payment amount is subjective, because it is based on the insured

maintaining their normal standard of living
e) payment is always incurred (i.e. it is reimbursed after the insured has

had out-of-pocket expenses)
f) this coverage is automatically included in the DP-2 and DP-3, but must
be purchased separately for the DP-1
One final note about Fair Rental Value and Additional Living Expense as a combo
– for the DP-2 and the DP-3, the maximum payable per claim is a combined limit
of 20% of the coverage A dwelling limit of liability.
Additional Coverages
We’ve already discussed coverages A, B, C, D and E. There are, however, several

potential expenses that would otherwise fall through the cracks; Additional
Coverages closes the gaps. Let’s take a look.
Debris Removal.
This is coverage for removal of debris. Important notes:
a) A peril insured against must cause the loss.
b) It covers debris of covered property. To elaborate; if the debris is part

of the property and it’s damaged, removal is covered. But if the debris is
not part of the property – e.g. debris from a neighbor’s property –
removal is not covered unless it is on a structure or obstructing access to a
structure.
c) Removal of tree debris is covered, but only if the tree is on a covered

structure or obstructing access to a covered item. For instance, a fallen
tree lying in the back yard and obstructing nothing would typically not be
covered, even if it were felled by a covered peril.
d) This coverage is included in the Coverage A limit of liability (i.e. it does

not increase it; in other words, it is not additional insurance).
Reasonable Repairs. It’s the insured’s duty under the policy terms to protect
his/her property from further damage after a loss. This is coverage for temporary
repairs made/necessary measures taken solely to protect the property from
further damage after a covered peril. This is not additional insurance; it’s
contained in the Coverage of the damaged property.
Ordinance or Law – this gives an additional 10% of coverage A for increased

costs of repair due to the enforcement of any law or code that regulates
construction, remodeling, etc.
e.g. if repairs to a damaged kitchen require $1,000 in upgraded wiring due to
codes associated with the necessary permits, the $1,000 would be covered under
Ordinance or Law
Notes about Ordinance or Law:
• this is only in the DP-2 and DP-3! – no Ordinance or Law coverage on the
DP-1
• Enforcement of Ordinance or laws that result in a decrease in value of the
property or require testing, monitoring or remediation of pollutants are
excluded.
• Confiscation, seizure, condemnation or demolition of property by the
government is also excluded
Fire Department Service Charge – pays up to $500 if the fire department is

called to protect property from a peril insured against.
Trees, Shrubs and Other Plants – the value of damaged trees, shrubs and
plants are covered up to a maximum of 5% of Coverage A, and a maximum of
$500 for any one tree, shrub or plant, when damaged by a covered peril (note –
windstorm and hail loss to trees, shrubs, etc. is not covered). This
coverage is additional coverage; it can pay up to 5% of Coverage A in addition to a
total loss in Coverage A; e.g. the house and the plants if all destroyed by a covered
fire).
Improvements, Alternations and Additions – there’s an additional 10% in

addition to the coverage C limits for improvements the insured makes at his/her
expense to the dwelling (if he/she is a tenant).
General Exclusions
This section lists a number of perils that are excluded under the Dwelling
Program:
a) War and Nuclear Hazard
b) Flood
c) Water back-up from sewers or drains
d) Water (i.e. water below the surface causing damage, e.g. leaking
through basement walls or floors, seepage, etc.). Also excluded is damage
due to water-borne materials or pollutants from sump pumps
e) Earthquake, landslide, sinkhole, etc. – any earth movement or sinking
f) Power failure off the premises. Power failure caused by damage on the
premises is covered. For example, if a tree falls on the insured’s house and
cuts off power, damage due to power loss is covered. If the power goes off
in the neighborhood, loss due to power failure is not covered.
g) Neglect and intentional loss
Conditions
The Conditions section lays out some very important details, such as the duties of
the insured and the insurer after a loss, how losses are settled, how mortgage
companies factor into a loss settlement, etc. Here’s a list of some of the topics
addressed in the Conditions section:
a) insurable interest (more on this below)
b) insured’s duties after a loss
c) loss settlement (details about how losses get paid)
d) appraisal (how disputes are settled about the dollar amount owed on a
claim)
e) other insurance (how the policy interacts with other policies on the
same property)
f) suit against the insurer (when the insured can sue, etc. – typically
there’s a two-year statute of limitations, but this can vary by state)
g) loss payment
h) abandonment
i) mortgagee clause
j) intentional acts (what happens if the insured caused a loss on purpose)
Insurable Interest – This is about the requirement that the insured must be in
a position to suffer an economic loss if an insured item were damaged. Why you
can’t have a life insurance policy on a stranger or a fire policy on someone else’s
business? You don’t have an insurable interest in your neighbor’s property (you
don’t suffer economically if it burns to the ground), so you can’t insure it.
Often properties have more than one party with an insurable interest (e.g. the
homeowner and the mortgage company). The Conditions section of the policy
states that, if there are multiple parties with an insurable interest, the policy will
never pay any one party more than the amount of their “skin in the game” (i.e.
their insurable interest)
Note – of course, the policy won’t pay over the maximum limit of liability – it
pays whichever is less between insurable interest and policy limits.
Other Insurance – if there is other insurance on the same property that

provides coverage for the same loss, this section specifies how the Dwelling policy
will interact with the other policy; the Dwelling policy will only pay the
percentage of the loss that it’s limit bears to the total limits of all policies covering
the loss.
For example: Say the insured has a Dwelling policy with a limit of $100,000, and
– unknown to him – his wife took out another policy with a limit of $50,000 on
the same dwelling. If the insured suffered a $10,000 covered loss, the Dwelling
policy would only pay $6,666.66 (2/3 of the total loss, since the $100,000 limit of
liability is 2/3 of the total $150,000 of both policies).
Insured’s Duties after Loss – the insurance company is only obligated to pay
on a claim if the insured “follows the rules” after a loss. The conditions section
lays out exactly what these “rules” – more precisely duties - are. Here’s a list of
important duties of the insured after a loss:
a. Give prompt notice of loss – the insured must file a claim within a
reasonable timeframe after he/she discovers the damage
b. Protect property against further damage (e.g. tarp on damaged roof,

board on broken window, etc.)
c. Keep records of expenditures (e.g. receipts for ALE)
d. Cooperate with investigation of the claim (e.g. testify when required,

submit to examination under oath, etc.) – failure to comply relieves the
insurer of its duty to provide coverage.
e. Show damaged property to the insurer (usually to the adjuster)
f. Compile a detailed inventory of damaged personal property
g. Notify police (if the loss is due to theft)
h. Proof of Loss filed within 60 days – sometimes insurers require

that the insured complete a “Proof of Loss” form after a claim. This form
sets forth the details of the claim, including the loss amount, date, cause,
the extent of the insured’s interest, other insurance, etc. Sometimes it’s
the insurers policy to require the Proof of Loss on every claim, other times
insurers use it when there is question about the legitimacy of the claim.
Either way, the insured is required to complete it within 60 days after the
insurer requests it.
Mortgagee Clause.
This section defines how the mortgage company’s rights are protected, etc. (e.g.
the insurance company must notify the mortgage company if the insured’s
coverage lapses. Another example; if the insured burns his own house down, the
mortgage company still gets paid, but the insured doesn’t!).
Note – payouts on claims above a certain dollar threshold have all mortgage
holders listed as payees on the check.
Policy Period – in order to be covered, a loss must occur during the policy
period. All policies expire at 12:01 am.
Liberalization Clause: Sometimes insurance companies make changes to

policies – usually minor ones. Sometimes these changes broaden coverage,
sometimes they restrict coverage. It’s against the law for the insurance company
to take away coverage that they’ve promised at the policy inception, but what
about when the change broadens coverage? The Liberalization Clause says
that any changes that broaden coverage on the edition of the policy
that the insured holds will automatically apply without additional
premiums. This clause simplifies things; it prevents the need to cancel/re-issue
new policies every time there’s a minor change. NOTE – the change has to
happen 60 days prior to or during the policy period in order for this to apply.
Concealment, Fraud or Misrepresentation – If an insured intentionally

conceals or misrepresents facts, the policy is voided and no coverage is given.
This is true regarding the original application for insurance or during a claim,
and includes:
a. intentionally concealing or misrepresenting any material fact or

circumstance
b. engagement in fraudulent conduct
c. false statements relating to the insurance
Recovered Property – if the insured recovers property that’s been paid for by
the insurer after a claim, the insured must notify the insurer, and the claim will
be adjusted accordingly.
Settlement of Claims:
Under a DP-1, claim payments for Dwelling and Other Structures are based on
Actual Cash Value.
Buildings and Other Structures (Coverage A and B) is settled at

Replacement Cost (RC) for DP-2 and DP-3 – that is, the insurance company
pays to replace the building or other structure with no deduction for depreciation
– provided the dwelling is insured to at least 80% of its replacement value
(remember coinsurance?). The insurance company is never obligated to pay more
than:
• The limit of liability of the policy

• Replacement cost of the building or the damaged part of the building with
like kind and quality
• The amount already spent that was necessary to repair or replace the
damaged item
An important note about settlement – in most states in the union (Florida

is one notable exception) – the insurance company will only pay the
Actual Cash Value of the loss until they receive proof that the repairs
have been completed. Let’s take a look at an example:
First, let’s assume Mr. Randy is fully insured, so there’s no issue of coinsurance.
Let’s say Mr. Randy’s house is damaged by hurricane Melissa to the tune of
$100,000. Based on the age and condition of the house, the adjuster determines
that depreciation is 30% - therefore the ACV is $70,000. So Mr. Randy would get
a check for $70,000 (less the deductible, of course). But what about the fact that
his policy promises Replacement Cost coverage for his house? Well, when he
furnishes receipts showing that he’s completed repairs, he’s entitled to up to the
remaining $30,000 “hold-back”. That’s where the term “recoverable
depreciation” comes from – the $30,000 depreciation that’s held back can be
“recovered” when repairs are complete and the cost is actually incurred.
Interesting note – if the cost to repair or replace a damaged structure is less than
5% of the limit of liability on that particular structure, and less than $2,500, the
insurer must pay the full replacement cost (regardless of whether the insured
actually does the repairs or replaces the structure). In other words, if it’s a small
lost and almost a “total loss”, the insurance company must pay up the full policy
limit for that structure.
Again, in summary – DP-1 is Actual Cash Value, while, DP-2 and DP-3 are
Replacement Cost settlement for Structures.
Under the Dwelling Policy, the insured is not required to rebuild on the same
premises after a loss, but payment is limited to the amount it would have cost if
the insured did rebuild on the original property.
All Dwelling policies settle personal property losses at Actual Cash

Value.
Available Dwelling Policy Endorsements
Because the Dwelling Policies are so “bare bones”, there are a number of available
and popular endorsements.
Personal Liability Endorsement – Unlike the homeowners policy, the

Dwelling policy has no liability coverage. This endorsement gives the same
coverage as the Liability portion of a homeowners' policy. Note – this can be
added as an endorsement, or purchased as a “stand-alone” policy called a
“Comprehensive Personal Liability Policy”.
Theft Endorsement – because the dwelling policies do not cover theft, this is a
popular endorsement. For an additional premium, there are two different types
of theft coverage that can be added:
a) Limited Theft Coverage – covers property stolen from the insured

premises
b) Broad Theft Coverage – covers for property that’s stolen either on or

off the premises
Automatic Increase Endorsement – for an additional premium, this

endorsement annually increases coverage A by 4%, 6% or 8%
Dwelling Under Construction – covers a dwelling or building under

Coverage A while it’s being built. Insured must advise the insurer when
construction is complete for an adjustment of premium. Occupancy is permitted
for 30 days after completion.
Chapter 3.2 - Homeowners'
Insurance
INTRODUCTION
Homeowners have a broad range of exposures related to the ownership and

occupation of a home. A homeowner needs protection against damage to his/her
house and outbuildings, as well as his/her personal belongings. Insurance against
this type of loss is called property insurance. Additionally, a homeowner
needs coverage in case a third party is injured (or their belongings are damaged).
Insurance for this type of loss is called liability insurance. The homeowners’
policy is a special “package” policy that bundles property and liability coverage
into one single policy for simplicity and convenience.
ELIGIBILITY
Not everyone can get a homeowner’s policy – one must be eligible, and eligibility
is limited. Here are the basic qualifications:
a) This policy is designed for owner/occupants (i.e. if a person wholly

rents out their house to another, they don’t qualify for a homeowners
policy). There are some exceptions (e.g. renters; see below).
b) This is a “personal-lines” policy – It’s for individuals, not for

businesses (e.g. corporations, associations, government entities, etc.).
Moreover, not every building is eligible. Eligible buildings include:
a) residential dwellings with a maximum of 4 families (e.g. a four-plex can

qualify if at least one of the units is occupied by the owner).
b) residential dwellings under construction.
c) mobile homes (if the proper endorsement is attached – we’ll explain

endorsements later).
d) the dwelling must be used exclusively for residential purposes. That is,
it’s for living in, not for business use. There are some exceptions; e.g.
using a room for a home office, or having a private daycare or school may
be allowed.
Here are some other eligibility facts:
a) tenants (i.e. renters) are eligible for a homeowners policy. This may seem
counter-intuitive, since they are not exactly “homeowners”, but remember
– a homeowners policy is simply a package policy with property and
liability coverage – a renter needs these too! A renter’s homeowner’s policy
(HO-4) is different than an owner’s policy (e.g. HO-3 – we’ll look at the
difference later).
PART I – PROPERTY COVERAGE
Part I - Property – This part of the policy differs from form-to-form (e.g. an
HO-2 give less coverage than an HO-3), but Part II - liability - is always the same
for homeowners policies.
Hint - The essential parts of a policy can be remembered by “D.I.C.E.”
• Declarations
• Insuring agreement
• Conditions
• Exclusions
DECLARATIONS – (D.I.C.E.):
The first page of a policy is called the Declarations or “Dec” page. It lists all the
important facts that are particular to the homeowner and his/her property: e.g.
the address, the premium, the limits of liability, the term (i.e. policy dates), any
endorsements, etc.
DEFINITIONS
Following the Dec page, the very next page of a homeowners policy is typically
the “definitions” section. It’s important for the insurer to carefully define terms,
because a homeowners policy is a “contract of adhesion” (which just means that
the insurer wrote the policy and controlled the wording, so if there’s an
ambiguity, it falls in favor of the insured).
Let’s take a look at some of these definitions (hint – these can be important):
• “you” or “your” means: the insured”
• “we” or “us” means: the insurance company, a.k.a. the “insurer”
• “insured” means:
a) the person or persons named on the declarations page of the
policy
b) residents of your household who are:
a) relatives
b) persons under 21 in the care of the above (e.g. a 19 year

old exchange student would qualify as an “insured” if
under the care of the named insured or the named
insured’s relatives)
c) full-time students who are:
a. under 21 and under your care (e.g. your Swedish

exchange student/border)
b. under 24 and your relative (e.g. your daughter

while she’s in college)
d) Others:
a. Anyone watching your animals or watercraft for

you (e.g. if you go on vacation and your neighbor
watches your dog, she’s an “insured” - i.e. you and
her have liability coverage)
b. Anyone using a motor vehicle on your property

with your consent (i.e. you and they have liability
coverage)
Insured location has a definition, but is surprisingly wide. For all intents and
purposes, there’s no boundary. For example, the liability section of the policy
covers the insured anywhere in the world!
Here are some definition terms from the policy:
a) the “residence premises” (i.e. the dwelling, other structures and

grounds, or that part of any other building where the named insured lives
and which is identified as the residence premises in the policy)
b) the part of other premises, other structures and grounds used by the
insured as a residence, and:
a. shown on the declarations page

b. acquired by the insured during the policy period for the insured’s
use as a residence (e.g. you’ve got liability coverage on that new
fixer-upper house you just bought, in case someone injures
themselves on it)
c. any premises used by the insured in connection with the
premises described in a. or b. above.
d. Any part of a premise not owned by the insured and where the
insured is temporarily residing (e.g. you’ve got liability coverage
in a hotel room)
e. Vacant land (other than farm land) owned by or rented to an
insured
f. Land owned by or rented to an insured on which a one, two,
three or four-family dwelling is being built as a residence for an
insured
g. Individual or family cemetery plots for an insured (e.g. you’re
covered if someone trips on your headstone)
h. Any part of a premises occasionally rented to an “insured”
(unless you’re using it for “business”)
INSURING AGREEMENT – (D.I.C.E.):
This is usually a small paragraph that says “we’ll provide the coverage described
below in exchange for your premium and compliance with the conditions below.”
This may seem insignificant, but it’s the heart of the contract; the remainder of
the contract is just the hashing-out of the details of this agreement – the “fine
print”.
HOMEOWNER FORMS:
There are a number of different homeowner policies, called homeowners “forms”,

and often expressed as “HO” (e.g. “HO-3” is a Homeowners form 3). Remember;
Part Two (liability) is always the same. Therefore, these policies differ in the way
they cover property. Here’s a list of the homeowners forms currently in use:
• HO-2 (the Broad form – usually referred to as the “cheap” form, but it
has more coverage than the HO-8)
• HO-3 (the Special form – the most common, the middle-of-the-road
form)
• HO-4 (the Tenants Form – this is a special contents-only policy for
renters
• HO-5 (the Deluxe Form – a high-end form, more expensive, and gives
the best coverage)
• HO-6 (the Condo form – a policy for condominium unit owners)
• HO-8 (the Modified Coverage form – the most limited coverage form)
There’s a whole bunch of things that make one policy “better” or “worse” than
another, or more or less expensive – we’ll discuss a number of them, but there’s
one primary differentiator:
All-perils vs. named-perils policies – A “peril” is a possible cause of a loss –

e.g. fire, theft, hurricane, flood, hail, etc. So does the policy cover all perils or just
certain “named” perils?
An All-Peril policy (sometimes called “open-perils”) covers all causes of loss

(unless it’s excluded in the exclusions section of the policy).
A Named-Peril policy only covers losses caused by the perils listed in the
policy. A named-peril policy will actually state something like “we cover physical
damage to the property caused by the following perils: fire, lightning, wind, etc.
NOTE – All policies have exclusions, but an All-Peril policy gives broader
coverage and is therefore more expensive than a Named-Peril policy.
ALL-PERIL VS. NAMED-PERIL POLICIES:
The HO-5 is an All-Peril policy for all types of property, whether it’s the
building(s) or the insured’s personal property.
HO-2, HO-4, HO-6 and HO-8 are Named-Peril policies. The basic
covered perils are:
• fire
• lightning
• collapse (abrupt caving in of the structure or part of the structure, e.g.
From an explosion)
• windstorm or hail
• riot or civil commotion
• aircraft (e.g. if a plane hits your house)
• vehicles (e.g. If a car hits your house)
• smoke (but not smoke from “industrial operations – i.e. factories nearby)
• vandalism & malicious mischief
• theft [includes attempted theft (i.e. damage during), and does not include
theft from a building under construction]
• volcanic eruption
• falling objects
• weight of ice, sleet or snow
• discharge of water or steam
• freezing of plumbing
• artificially generated electrical current
The HO-3 policy falls in between the two categories, because the HO-3 gives
all-peril coverage for buildings, but named-peril coverage for the insured’s
personal property.
This information is important. Here’s a summary:
Policy Type: Building: Contents:
HO-2, HO-4, HO-6 & HO-8 Named-Peril Named-Peril
HO-3 (better) All-Peril Named-Peril
HO-5 (best) All-Peril All-Peril
ACV vs. RCV COVERAGE
ACV vs. RC – When there’s a loss, does the policy pay actual cash value (ACV) or
replacement cost (RC or RCV)?
a) Replacement Cost (RC) coverage is more expensive because it pays the

entire cost to replace a damaged item at current market cost.
b) Actual Cash Value (ACV) coverage is less expensive, because it deducts

“depreciation”. That is, if there’s a loss, the insurer deducts a percentage
based on wear, tear and age.
NOTE - Replacement cost (RC) coverage costs more (i.e. higher premiums) than
actual cash value (ACV) coverage. In most policies, RC and ACV coverage are pre-
established, but endorsements are available that can change how losses are
covered (more on that in the Conditions section of this lesson).
Again, ACV vs. RCV has to do with when there’s a loss, is the full replacement
cost paid or is it depreciated for wear-and-tear. The HO-2, HO-3 and HO-5 have
both RC and ACV coverage, depending on what type of loss it is. They settle
claims at replacement cost (RC) for the dwelling and other structures on the
premises, such as detached garages, gazebos, bird-houses and the like. These
policies pay actual cash value (ACV) on losses to personal property, fences,
greenhouses and wall-to-wall carpet.
For example: suppose Jane Hansen has an HO-3 policy. If she had a fire that
damaged her kitchen and her pots and pans, she would be paid the full
replacement cost for her damaged kitchen (RC) but only actual cash value (ACV)
for her pots and pans (i.e. they would be depreciated based on wear-and-tear and
age).
Again, in summary (for the HO-3 policy example):
• Dwelling and other structures: Replacement Cost (RC)

• Personal Property (i.e. contents), fences, wall-to-wall carpeting: ACV
However, there’s a catch – let’s talk about coinsurance. In order for the policy
to pay out full replacement cost for a loss, the insurer requires that the insured is
carrying sufficient insurance. If the insured is “under-insured”, that means that
the amount of insurance that he/she holds on his/her property is less than the
property is worth. Actually, the insurer does not require that the insurance
amount be the same as the full of the value of the property; rather, the
requirement is that the insured have at least 80% of the replacement cost of the
property.
For example, if Bob Williams had a house that would cost $100,000 to rebuild if
it were burnt to the ground, he would have to have at least $80,000 worth of
coverage or he would be under-insured.
If the insured is under-insured, his/her settlement will be diminished by the

percent that he/she is under-insured. Let’s look at a scenario, using the above
example.
Let’s say that Bob Williams – who has a house worth $100k, and who’s supposed
to have $80k worth of coverage – has only $40k. This means he’s 50% under-
insured. So, if he had a loss of $10k, his settlement would be cut by 50%; his
check would be for $5k (minus the deductible, of course). The formula is “had”
over “should” multiplied by the loss, less the deductible. Confusing? Let’s see it
written out:
1. “Had” x loss - deductible
“Should”
2. Had (i.e. the amount the insured had at the time of the loss; $40k) X loss
($10k)
Should (i.e. the amount the insured should have had; $80k)
3. $40,000 x 10,000 = $5000 settlement (minus the deductible)

$80,000
One more note about this issue of the requirement to insure for at least 80% -
this typically applies only to the structures – contents (personal property) is
typically covered at ACV, and there’s no coinsurance requirement for ACV items
in a homeowners policy [this makes sense if you think about it – payment is
never for more than a) the real, depreciated value of the item or b) the maximum
amount of coverage given in the policy, so there’s really no such thing as being
“under-insured”].
A closer look at each of the policies:
HO-2 Broad form: this policy is the basic, no-frills policy.
The HO-2 is a named peril form, covering the perils of:
• Fire
• Lightning (e.g. damage to the house from a lightning strike. If an
adjuster finds evidence of a lightning strike, household electronics and
circuitry are covered)
• Windstorm or hail (damage to the interior is only covered if the
windstorm or hail creates an opening in the exterior of the house through
which water entered. If the wind just blows water through cracks and
openings – a normal occurrence in even the best constructed houses – it is
not covered).
• Explosion (both inside the house an outside the house)
• Riot and civil commotion
• Aircraft (e.g. damage to the house due to a plane crashing into it)
• Vehicle damage (e.g. a car swerving off the road and hitting the house.
Note - damage to the house by vehicles driven by occupants of the house
are not covered)
• Smoke (but not from nearby factories – “industrial operations”)
• Vandalism or malicious mischief
• Theft
• Volcanic eruption (earthquake damage caused by a volcanic eruption
are not covered)
• Falling objects (e.g. a telephone pole falling on a house. Note – damage
to contents in the house are covered only if the falling object makes a hole
in the house and water gets in)
• Weight of ice or snow (i.e. when it damages the property. This
coverage doesn’t cover all damaged items – damage to awnings and
fences, for example, is not covered)
• Accidental discharge of water or steam from a heating, air-conditioning
or plumbing system (e.g. if a water heater bursts or leaks. Note – drywall
damage, etc. is covered, but the water heater is not covered!)
• Sudden an accidental tearing apart, cracking, burning or bulging of a
steam or hot water system, air conditioning system sprinkler system or an
appliance for heating water
• Freezing of a plumbing, heating, air-conditioning, household appliances
or sprinkler systems (provided that the insured winterizes by shutting off
the water and draining the pipes and/or maintains heat in the building)
• Sudden and accidental damage from artificially generated
electrical current (e.g. “power surge” when the power gets turned back
on in a neighborhood – does not cover electronic components or circuitry)
• Collapse (must be abrupt) is covered for:
o perils insured against (i.e. the list above)
o hidden decay
o hidden insect or vermin damage
o weight of contents, equipment animals or people
o weight of rain (e.g. collecting on a roof)
o use of defective material or methods of construction or remodeling
if the collapse occurs during the course of construction or
remodeling
The HO-3 – “Special form” - is the next step up from an HO-2. It covers the
house and outbuildings on an all-peril basis. This means that here’s no list of
covered perils, like in the HO-2; rather, if it’s not excluded, it’s covered. On the
other hand, contents (i.e. personal property), fencing, cloth awnings and wall-
to-wall carpet is covered on a named-peril basis (the perils covered for contents
are the same ones as the HO-2 – fire, lightning, etc.).
Summary: just so we’re clear – there’s broader coverage for the building(s) than
there is for the contents.
The HO-5 – Comprehensive form - is the “Cadillac” policy – it gives all-peril
coverage to the buildings and the structure.
The HO-4 – “Contents form” - seems like it would fit in between the HO-3 and
the HO-5, but it’s entirely different. This policy is for renters. It covers their
personal property in a non-owned house or apartment. Because the tenant has
no ownership of the structure, this policy has no coverage for the building (with
the minor exception of improvements that the tenant might make to the structure
at their own expense). Note that this policy is a named-peril policy.
The HO-6 – “Unit owner’s form” – is designed for condominium owners. A

condo owner is typically responsible for their part of the structure; usually
“finishing surfaces” inward (e.g. the condo association would be responsible for
the studs in the walls, but the condo owner would be responsible for the paint on
those walls). This policy, therefore, covers the part of the structure owned by the
unit owner and the unit owner’s personal property (contents). This policy is a
named-peril policy.
The HO-8 – “Modified Coverage form” – is the most limited homeowner’s

policy. It covers fewer perils than the HO-2, and is designed to cover dwellings
that would cost more to replace than the market value of the dwelling. It’s a
named-peril policy with actual cash value (ACV) coverage for building and
contents.
EXCLUSIONS – D.I.C.E.
As mentioned previously, every homeowners' policy has an exclusions section,

and every homeowners exclusions section has some general exclusions that are
important to note. For instance, no homeowners’ policy covers flood damage (a
FEMA flood policy is needed if a homeowner wants coverage for flood damage).
Here are some other general exclusions that are important to note:
• Nuclear war or fallout (not much sense in covering this now is there)
• Earth Movement (i.e. earthquake)
• Neglect (i.e. an insurance policy is not a maintenance plan)
• Ordinance or law (e.g. if a hurricane erodes your beachfront so that the
distance from your house to the water no longer meets code, the policy will
not cover the loss if the government seizes the house and tears it down)
• Off-premises power outage (e.g. if there’s a general power outage in
the neighborhood, there’s no coverage for losses like spoilage)
• Intentional acts (e.g. arson by the insured)
• Flood
PROPERTY COVERAGES
The major categories of coverages in a homeowners' policy are:
1. Coverage A – dwelling
2. Coverage B – other structures
3. Coverage C - contents (also called personal property)
4. Coverage D – loss of use
Coverage A – dwelling
Basically, this is coverage against loss to the principle structure on the property
(e.g. if you suffer fire loss to the house, it’s covered under Coverage A). Here are
some details about this coverage:
a) It covers the dwelling described on the declarations page

b) It also covers structures attached to the dwelling (e.g. attached garage or
lean-to)
c) It covers materials and supplies located on or next to the “residence
premises” used to construct, alter or repair the dwelling or other
structure on the “residence premises.”
d) It covers items that directly service the principle structure (e.g. the air-
conditioning compressor, heating oil tanks, water softeners, etc.)
e) Under the HO-6 (Condo form); it covers alterations, appliances, fixtures
and improvements that are part of the building contained within the
residence premises (e.g. shelving, faux finishes, hurricane shutters).
Coverage B – Other Structures –
This is coverage for structures other than the principal structure that are located
on the insured premises (e.g. detached gazebo, detached garage, sheds, fences,
mailboxes, etc.). The amount of coverage is a percentage of coverage A. 10% of
the limits of liability (i.e. the dollar amount of coverage) of coverage A is
common.
For example, if Jack Jackson holds a policy that has $100,000 coverage for the
house, he will (typically) have only $10,000 for other structures.
NOTE - The homeowner’s policy states the following about coverage B: “this is
additional insurance”. This means that it can be paid out in addition to the
$100,000 (e.g. Jack’s maximum limit for coverage A). For example, if the house
and the detached garage burnt to the ground, the Jack would get up to $110,000
($100,000 for the house, $10,000 for the garage).
The policy usually states something like “This includes buildings that are
connected only by a utility line, fence or similar connection.” This clause is to
make sure that the insured knows that they’ll only have 10% of coverage A limits,
even if the other structure is connected by a fence or utility line (i.e. just because
they’re “connected” doesn’t make them “attached” and therefore classified as
coverage A - structure).
Detached structures that are used solely for business or buildings rented wholly
to others are not covered (unless the building is rented as a private garage). For
example, if Jack has a detached garage with a mother-in-law apartment above it,
he’s covered if he rents the upstairs but still use the downstairs for his own
personal autos, but if he rents both the upstairs and the downstairs to his
tenants, he would not have coverage.
The HO-6 (Condo Owners) typically doesn’t have coverage B. Coverage for owned
storage sheds, garages, etc. can be added by endorsement and the amount is
typically “stated” (i.e. pre-determined based on an assessment between the
insurer and the insured).
The HO-8 limits the amount of coverage B and no increase is allowed.
Coverage C – Personal Property
This coverage is for property owned or used by the insured.
Most every homeowner has property that is common to home

occupancy. Individually listing (known as “scheduling”) each and every item
owned by the policy holder would be highly impractical. Therefore, homeowners’
policies have this coverage C that gives blanket coverage to all the homeowner’s
“stuff.” Examples include the insured’s dishes, clothing, furniture, etc. (a great
rule of thumb: if you could take the house and magically turn it upside-down and
shake it, everything that would fall to the ceiling is “Personal Property”).
Other names for Coverage C include “Contents” and “UPP”. UPP stands for
“Unscheduled Personal Property” (unscheduled means that it’s not specifically
listed; rather, it’s just under the blanket Coverage C coverage). This is opposed to
“scheduled” items. Scheduled items are specifically listed on the policy, usually
by means of a “rider” (like an endorsement – more on that later). For example;
most homeowners’ policies have very limited coverage for jewelry; often only
$500 max per claim. If the homeowner has an expensive Rolex, he/she would
need to “schedule” it in to the policy if he/she wanted coverage for the full value
(the amount is usually determined by an appraisal).
Property of others: Coverage C can sometimes include property owned by

others. For instance, if the homeowner borrowed his/her uncle’s ladder and it
was destroyed when his/her property was hit by a hurricane, it would typically be
automatically covered under coverage C in the homeowners’ policy. Additionally,
the policy holder can request coverage for property of others while at the
insured’s location (e.g. a live-in nanny’s belongings).
Property off premises: Interestingly, the homeowner’s personal property is

covered anywhere in the world (i.e. even off of the property) under Coverage
C. However, losses to personal property while it’s off the residence
premises are limited per claim to $1,000 or 10% of Coverage C.
The following personal property items are excluded under coverage C
a) Animals, birds and fish

b) Automobiles and motor vehicles (however, these are covered: motorized
vehicles used for maintaining the premises such as riding mowers and
vehicles for the handicapped such as a wheelchair)
c) Property of roomers and/or boarders who are not related to the insured
d) Property located in an apartment regularly rented by an insured other
than the residence premises
e) Electronic apparatus (including accessories, antennas or tapes, wires,
records or discs or other media for use with any electronic apparatus)
designed to be used with a motor vehicle’s electrical system or in or
upon a vehicle. Note: $1,000 coverage is provided when such items are
not in or upon a vehicle.
f) Aircrafts and their parts (hobby aircraft is covered, e.g. model planes)
g) Property rented or held for rental to others off the “residence premises”.
h) Business data, including data stored in:
· Books of account, drawing or other paper records
· Electronic data processing tapes, wires, records, discs or other software
media. The cost of blank recording or storage media and of
prerecorded computer programs available on the retail market is
covered.
· Credit cards (unless coverage is provided under the “Additional
Coverages” section of the policy)
i) Property scheduled elsewhere (i.e. if property is “scheduled” into the policy
via a rider, it’s not covered under Coverage C. For instance, if the
insured’s Rolex is scheduled for $1,500, that’s all the coverage provided;
there is no additional coverage whatsoever under “personal property”
coverage)
j) Loss of water or steam (e.g. loss of steam in a boiler heating system)
Some Coverage C items have a “special limit of liability” - this means two things:
a) That there’s some pre-set maximum payment for certain types of

items. So, even if the value of an item is tens of thousands of dollars,
there’s only a small amount that the policy will pay for them. For
example, jewelry is typically only covered for a maximum of $1,500 per
claim. If an insured experiences a $30,000 jewelry loss, they’d only
receive $1,500 (unless they had added additional coverage via a
rider/endorsement)
b) That some items have limited coverage for losses caused by certain
perils. For example, jewelry is typically only covered for $1,500 for the
peril of theft, but up to the full value of the jewelry if loss is due to
another covered peril (e.g. if it’s stolen the policy will only pay a
maximum of $1,500 for a Rolex, but if it’s destroyed in a hurricane, it
would pay up to its full value).
Here’s a list of the items that typically have special limits of liability:
· $200 max for losses to money, gold, silver and the like
· $1,500 max for losses to deeds, letters of credit, securities, accounts,
etc.
· $1,500 max for losses to watercraft and their trailers (typically only
when the boat and/or trailer is on land and on the property)
· $1,500 max for losses to trailers (i.e. non-watercraft trailers)
· $1,500 max for losses due to theft of jewelry, watches, firs, etc.
· $2,500 max for losses due to theft of guns/firearms
· $2,500 for losses to silverware, goldware, etc.
· $2,500 max for losses for “business personal property” (i.e. personal
property used for business) while at the residence premises
· $500 max for losses to business personal property away from the
residence premises
· $1,500 for losses to electronics and accessories while in/on a motor
vehicle (but only if the apparatus is equipped to be operated by the
power from the motor vehicle’s electrical system while still capable
of being operated by other power sources – e.g. a laptop computer
used in a truck, plugged into a power inverter).
Coverage D – Loss of Use
When a homeowner suffers a loss, such as hurricane damage, they may not be
able to use their property, and - for this reason - they may incur additional
expenses (e.g. hotel, restaurant food, etc.) These expenses fall under Coverage
D - Loss of Use. Other examples of loss of use include loss of rental income; for
example, if a homeowner is renting a room in their house to a roomer and the
roomer must move out because of a fire, the lost rental income is covered under
Coverage D. Sometimes you’ll hear this coverage referred to as “Additional
Living Expense” (ALE) or “Fair Rental Value”, depending on the policy
type.
These types of losses are called “indirect losses”, which means that the loss is an
“intangible”, economic loss (i.e. not the physical damage to an object, but the
economic loss due to that physical damage). So if Duane’s house burned to the
ground and he had to go live in a motel, the burned house would be the direct
physical loss, the expense to pay for the hotel would be the indirect loss. In order
to be covered, these indirect losses must be a result of a covered direct loss.
The amount of coverage D given depends on the form, but it’s common under an
HO-2, HO-3, and HO-5 for it to be a percentage of coverage A, such as 30% (e.g.
if coverage A is $100,000, coverage D would be $30,000).
Loss of Use payment:
a) The expense must be above and beyond normal living expenses. This
means that the insured doesn’t get reimbursed for everything and
anything when displaced from their home; they receive only the
difference between expenses before the loss and expenses after the loss.
b) The expense must be incurred. This means that the insured must actually
spend the money in order to get reimbursed.
c) Must depend on the insured’s “normal” living expenses – this can vary
greatly depending on the insured’s lifestyle (the adjuster often judges
what “normal” living expenses are on a claim-by-claim basis).
d) Is “time-limited”; the amount of time that ALE will be paid is limited to

the amount of time required to complete the repairs. This means that
the insured can’t stay indefinitely in a hotel; they must set about
repairing their home in a timely manner and move back in as soon as
repairs are complete. This is also true, of course, for loss of rental
income.
For example: Juan Rodriguez’s house is damaged due to a kitchen fire. The
roomer that has been renting his upstairs bedroom had to move out. It takes 3
months to repair the damage, and an additional 2 months to find a new tenant.
Juan would only be eligible for reimbursement for 3 months (the reasonable time
to complete the repairs, but not beyond that. It’s easy to see how allowing
indefinite time could be abused).
Additional Coverages:
There are a whole slew of losses that a homeowner can suffer that don’t fall
perfectly or cleanly into the categories of dwelling (i.e. Coverage A), other
structures (i.e. Coverage B), personal property (i.e. Coverage C) or Loss of Use
(i.e. Coverage D). Homeowners’ policies cover these too under “Additional
Coverages” – let’s look at some of them:
a) Debris removal – if a homeowner suffers a covered loss (a “covered loss” is

a loss that is covered under the policy), such as hurricane damage, they may
have to deal with debris. Here are some things to know about this coverage:
·Debris of damaged property: this coverage pays for the cost to remove and
dispose of it. For example, if a tornado damaged a home, this coverage
would pay for the removal and disposal of the damaged roofing, siding, etc.
·Removal of trees, shrubs, etc., but only if/when they fall on or damage
covered property. This is true even if the tree is a neighbor’s tree that falls on
the homeowner’s property. For example, if a tree falls on a fence, the
homeowners’ policy will pay to remove it from the fence. But if the tree had
not fallen on “covered property”, there is no coverage for its removal (e.g. no
coverage if hurricane wind blew a tree over, and the fallen tree is lying in the
yard but not lying on covered property such as a house or fence)
·There’s also coverage if the tree blocks a driveway, walkway or handicap
ramp; the policy will pay to remove the tree to allow ingress/egress.
·Even when tree removal is covered, the disposal of the tree debris is
typically not. This means, for example, that the policy will pay to cut up a
tree that is leaning up against a house and stack the pieces, but it will not pay
for the hauling away and dumping fees.
·The policy will pay for debris removal up to the limit of liability of coverage
A. Moreover, if the loss is so large that it exceeds the policy limits, this
coverage provides an additional 5% (e.g. if it’s a $100,000 policy and that
whole amount is used and there’s debris removal costs, the policy will pay up
to $105,000).
NOTE – coverage that’s additional to the policy limit is known as an
“additional coverage” (a different meaning than the coverage category we’re
discussing).
b) Reasonable repairs. When there’s a loss, it’s the duty of the homeowner
to take reasonable measures to protect their property from further damage.
This “Reasonable Repairs” coverage pays for temporary repairs made to
protect the property until permanent repairs are made (e.g. the cost to
install a tarp on a damaged roof).
c) Trees, Shrubs, etc. – This is different than debris removal. This coverage
is for the actual value of the tree, shrub, etc. (i.e. the cost to buy a new tree,
shrub, etc.). It’s important to know that:
·This coverage is limited in regards to what perils are covered. Fire,

lightning, vandalism, etc. are covered, but wind, hurricane, hail, and
other weather-related perils are not.
·Also, coverage is limited to $500 for any one tree, shrub, etc.
·Coverage is limited to a total of 5% of coverage A for any one claim, no
matter how many trees are damaged.
·This coverage is “additional coverage” – i.e. it gives the insured up to an
extra 5% above the Coverage A limits (if the loss exhausts those limits).
d) Fire department service charge – up to $500 if the insured gets

charged by the fire department (there’s no deductible for this coverage, and
it’s an “additional coverage”)
e) Loss Assessment – when the loss is to a condominium’s common
property, the condo association’s policy responds, but most condo
agreements will turn around and charge the condo unit owner an
“assessment” to cover the deductible (or, if the loss is not covered by the
condo association’s policy, the expense is split up among the unit owners).
A homeowner’s policy will pay up to a given amount of this assessment,
often $1,000 max/claim.
f) Property removed – if the insured moves his/her property to “safety” to
avoid an endangering peril, there’s coverage for that property for up to 30
days (e.g. if stuff is moved into a storage facility to avoid potential damage
from a coming hurricane).
g) Credit Card fraud, forgery, etc. – up to $500 max.
h) Collapse and Glass breakage – although these are part of the structure,
coverage for these perils is found under “Additional Coverages” in named-
peril homeowner policies. Collapse is the “abrupt falling down or caving in”
of a building or part of a building caused by:
• perils insured against,
• hidden decay,
• hidden vermin or insect damage,
• weight of contents (including people),
• weight of rain/snow on roof,
• use of defective materials (if the collapse is during construction)
collapse is not covered if caused by:

• settling
• cracking
• shrinking
• bulging
• expansion
Certain items are excluded from collapse coverage; these include:
• awnings
• fences
• patios
• swimming pools
• underground pipes, drains, septic tanks, etc.
• foundations
• retaining walls
• docs
i) Ordinance or Law – this is coverage for costs such as mandatory
upgrades due to enforcement of a law regarding construction, demolition or
remodeling.
For example, suppose a wall is damaged and requires rebuilding. During

the rebuild, it is found that the wall has antiquated “knob and tube”
wiring, and the permit for remodeling cannot be obtained without
replacing the wiring. This coverage pays for the additional amount to
bring the wiring up to code, while normal coverage A would pay for the
wall repair. Note – this is an “additional coverage” - it can provide up to
an additional10% above Coverage A, if Coverage A limits are exhausted
j) Landlord’s furnishings – an “additional coverage” for up to $2,500 for

loss to furnishings owned by a landlord (e.g. the homeowner rents a
furnished room to a roomer)
k) Building Additions and Alterations – this is for the HO-4 and HO-6
(Renters and Condo owners) only – it provides coverage for structure items
that would not normally be covered under a policy type that deals primarily
with contents protection. This coverage protects the tenant or the unit
owner and is coverage for upgrades and alterations made by the unit owner
or tenant at their own expense.
l) Grave Markers – coverage for up to $5,000 against covered perils at

burial plots or mausoleums at or away from the residence premises.
PROPERTY CONDITIONS – SECTION 1 – (D.I.C.E.)
The Conditions section lays out some very important details, such as the duties of
the insured and the insurer after a loss, how losses are settled, how mortgage
companies factor into a loss settlement, etc. Here’s a list of some of the topics
addressed in the Conditions section:
a) insurable interest (more on this below)

b) insured’s duties after a loss
c) loss settlement (details about how losses get paid)
d) appraisal (how disputes are settled about the dollar amount owed on a
claim)
e) other insurance (how the policy interacts with other policies on the same
property)
f) suit against the insurer (when the insured can sue, etc.)
g) loss payment
h) abandonment
i) mortgagee clause
j) intentional acts (what happens if the insured caused a loss on purpose)
Insurable Interest – This is about the requirement that the insured must be in
a position to suffer an economic loss if an insured item were damaged. Why you
can’t have a life insurance policy on a stranger or a fire policy on someone else’s
business? You don’t have an insurable interest in your neighbor’s property (you
don’t suffer economically if it burns to the ground), so you can’t insure it.
Often properties have more than one party with an insurable interest (e.g. the
homeowner and the mortgage company). The Conditions section of the policy
states that, if there are multiple parties with an insurable interest, the policy will
never pay any one party more than the amount of their “skin in the game” (i.e.
their insurable interest)
Note – the policy won’t pay over the maximum limit of liability, either, of course
– it pays whichever is less between insurable interest and policy limits.
Insured’s Duties after Loss – the insurance company is only obligated to pay
on a claim if the homeowner “follows the rules” after a loss. The conditions
section lays out exactly what these “rules” – more precisely duties - are. Here’s a
list of important duties of the insured after a loss:
a. Give prompt notice of loss – the insured must file a claim within a
reasonable timeframe after he/she discovers the damage
b. Protect property against further damage (e.g. tarp on damaged roof,
board on broken window, etc.)
c. Keep records of expenditures (e.g. receipts for ALE)
d. Cooperate with investigation of the claim (e.g. testify when
required, submit to examination under oath, etc.)
e. Show damaged property
f. Compile a detailed inventory of damaged personal property
g. Notify police (if the loss is due to theft)
h. Proof of Loss filed within 60 days – sometimes insurers require that
the insured complete a “Proof of Loss” form after a claim. This form
sets forth the details of the claim, including the loss amount, date,
cause, the extent of the insured’s interest, other insurance,
etc. Sometimes it’s the insurers policy to require the Proof of Loss
on every claim, other times insurers use it when there is question
about the legitimacy of the claim. Either way, the insured is
required to complete it within 60 days after the insurer requests it.
Loss Settlement
This section details how the policy will pay out when there’s a loss. For instance,
most homeowner policies cover Personal Property (Coverage C) at Actual Cash
Value (ACV), while the dwelling is covered at Replacement Cost (RC). Here’s a
more detailed breakdown:
Buildings and Other Structures (Coverage A and B) is settled at
Replacement Cost (RC) – that is, the insurance company pays to replace the
building or other structure with no deduction for depreciation – provided the
dwelling is insured to at least 80% of its replacement value (remember
coinsurance?). The insurance company is never obligated to pay more than:
· the limit of liability of the policy

· Replacement cost of the building or the damaged part of the building with
like kind and quality
· the amount already spent that was necessary to repair or replace the
damaged item
Personal Property (Coverage C) is typically settled at Actual Cash Value

(ACV). Wall-to-wall carpeting, greenhouses, cloth awnings, outdoor antennas,
fences and appliances is also ACV (note – it’s very common to find an
endorsement attached to a policy that changes this coverage from ACV to
Replacement Cost. More on this below, in the endorsements section of this
chapter).
An important note about settlement – in most states in the union (Florida

is one notable exception) – the insurance company will only pay the
Actual Cash Value of the loss until they receive proof that the repairs
have been completed. Let’s take a look at an example:
First, let’s assume Mr. Randy is fully insured, so there’s no issue of

coinsurance. Let’s say Mr. Randy’s house is damaged by hurricane
Melissa to the tune of $100,000. Based on the age and condition of the
house, the adjuster determines that depreciation is 30% - therefore the
ACV is $70,000. So Mr. Randy would get a check for $70,000 (less the
deductible, of course). But what about the fact that his policy promises
Replacement Cost coverage for his house? Well, when he furnishes
receipts showing that he’s completed repairs, he’s entitled to up to the
remaining $30,000 “hold-back”. That’s where the term “recoverable
depreciation” comes from – the $30,000 depreciation that’s held back
can be “recovered” when repairs are complete and the cost is actually
incurred.
Typically, the insured has 180 days to recoup recoverable

depreciation. This usually means he/she needs to submit receipts or proof of
completion (the 180 day requirement can vary from state to state).
Appraisal. When the insured and the insurance company disagree about how
much is owed for a claim, the policy’s conditions section dictates that either party
can ask for appraisal. Appraisal requires that both parties choose an “appraiser”,
and both appraisers choose an umpire. All three of them get together and a
decision is made about the amount. This decision is binding (typically, this
decision is final; however, sometimes the law still allows the insured to pursue a
lawsuit beyond appraisal).
One note about appraisal – it only deals with the amount to be paid – not issues
like coverage (e.g. how much Bob’s is the siding worth, not whether the Bob’s
siding is covered for flood damage).
Mortgagee Clause.
This section defines how the mortgage company’s rights are protected, etc. (e.g. if
the insured burns their own house down, the mortgage company still gets paid,
but the insured doesn’t!).
PART II – LIABILITY COVERAGE
Part II of the homeowners’ policy is the section that details the Liability
coverage. Here we ought to do a little primer on the difference between the
Property coverage in the first section and the Liability coverage in this section.
The homeowners’ policy has two parts. Part II deals with:
a) liability insurance
b) property insurance
c) casualty insurance
d) excess insurance
Insurance is a two-party contract – the first party is the insured, the second party
is the Insurance Company. There’s never a third party to the insurance contract,
but sometimes there’s a third party to an insurance claim. In liability insurance,
the third party is the injured party that comes after the first party (the insured)
for compensation (who in turn files a claim with the second party, the insurance
company). This third party is sometimes referred to as “the unknown claimant”,
because no one knows who it is until they file a claim.
Property coverage is first party coverage. This means that if there’s a payment on
a claim, the party that gets paid is the insured – the “first party”.
Liability coverage is third-party coverage. This means that if there’s a payment on
a claim, the money goes to the party who suffers a loss because of the first party’s
negligence. This, in a general way, is what Part II – Liability is all
about: coverage for the insured for harm to people other than the
insured who might make a claim against the insured.
In general, liability coverage covers medical bills, lost wages, pain and suffering,
inconvenience, property damage, etc.
Some definitions that will help:
Bodily injury: bodily harm, sickness, disease or death.
Property damage: physical damage to tangible property (including loss of use

of that property)
Occurrence: means an accident, but also includes repeated or continuous

exposure to harmful conditions (i.e. a roomer may sue you for alleged harm due
to fumes)
Now that we’re clear about the difference between liability insurance and
property insurance, let’s take a closer look at Part II. Part two is made up of
coverage E – Personal Liability and section F - Medical Payments. Let’s look at
Coverage E first.
Coverage E – Personal Liability
This coverage pays on behalf of the insured when he/she is legally liable to pay
others for injury to their body or their personal property.
This includes “premises liability” (when someone’s hurt because of your

premises), “personal activity” liability (when someone’s hurt by your personal
activities) and also includes coverage for the acts of the insured’s residence
employees.
In other words, if someone gets hurt (or their belongings are damaged) because
of the insured’s negligence, the insured can file a claim with their homeowner’s
policy and the insurance company will pay the injured party (when the claim is
covered of course).
Stated yet another way: if a third party suffers bodily injury or property damage
due to the negligence of the first party (the insured), the second party (the
insurance company) will respond.
Some important facts about Coverage E – Personal Liability:
• The minimum limit for coverage E is $100,000

• The insured’s actions must be “negligent”, even in some small way, for
this coverage to respond. That is, it must be at least in part the
insured’s fault
• Legal Defense: Coverage E also covers the insured’s legal defense fees
to defend the insured against a claim against them by a third party.
o NOTE - Interestingly, even though negligence is required for
this coverage to pay out on a claim, the insurance company is
obligated to pay for legal defense even if the insured is found not
to be negligent (e.g. if the claim against the insured is
groundless or false). Just the possibility of coverage triggers the
insurance company’s duty to defend.
o There’s no dollar limit to the amount that the insurer might to
pay for legal defense, regardless of the limit of liability of the
policy (it’s easy to see that a claim could cost an insurance
company a whole lot more than the $100,000 maximum
settlement)!
o If the insurance company pays out the maximum amount on a
claim (i.e. the limit of liability), the insurance company no
longer has a duty to defend an insured against additional
lawsuits relating to that claim that may arise in the future.
• The insurer has the right to investigate and settle a claim in any way
they see as most advantageous (for example, they may want to pay a
claim to a third party that the insured thinks is not owed – the
insurance company has the right to settle as they wish).
Coverage F – Medical Payments
Coverage F is “voluntary” coverage; this means that the insurance company can
use it to pay for medical bills incurred by people other than the insured without
regard to the insured fault or negligence. This is sometimes referred to as “non-
legal liability” coverage or “good will” coverage.
Basically, because Liability coverage is strictly limited to situations where the

insured is negligent, the insurance company can’t use it to pay a third party if the
insured was not negligent. However, there are situations where it can be
expedient to pay a third party (e.g. to avoid a lawsuit). With Coverage F, the
insurance company can pay some money towards a third party’s medical bills for
whatever reason they want (e.g. to make them “go away”, or out of the kindness
of their heart). Here are some things to remember about Medical Payments:
a) The minimum limit for Medical Payments is $1,000
b) If the claim is filed within 3 years of the occurance, Medical Payments

may cover:
i. Medical care
ii. Dental services
iii. Ambulance and hospital services
iv. X-rays
v. Funerals
c) Coverage F applies to “social invitees” (i.e. not to injuries to the insured or

the insured’s tenants)
Additional Coverages under Section II – Liability:
This section details some coverages that would otherwise fall through the cracks
between Coverage E and Coverage F:
a) Damage to property of Others – the insurance company will pay up to

$1,000 per “occurrence” for property damage caused by the
insured. This coverage is subject to exclusions:
1. the insurance company will not pay for anything that’s covered under
Section I – Property
2. No coverage for property damaged intentionally by an insured who’s

13 years old or older
3. No coverage for items owned by the insured
4. No coverage to property owned by a tenant or resident of the

household
b) First Aid – the insurance company will pay incurred cost for the first aid
to others (but not first aid for the insured)
c) Claims Expenses – This coverage includes:
a. The cost to investigate the claim

b. Reasonable expense incurred by the insured, including loss of
earnings (e.g. required attendance at a court hearing) up to
$250/day.
c. Interest on judgments that accrue after the judgment
d. Premiums for bonds required in a suit defended by the insurance
company
d) Loss Assessment – Section II provides $1,000 for assessments against

the insured if the insured is a member of a property association (e.g.
condo association). NOTE – this coverage is like the assessment
coverage of Section I – Property, except it kicks in if the assessment is
due to:
i. bodily injury or property damage not excluded under Section II –

Liability, or
ii. liability for an act of a director or officer (provided the

director/officer is elected and not a paid employee of the association).
A final note re. Loss Assessment – there is no coverage for assessments

charged by any governmental body.
Liability Exclusions:
As you might expect, there’s a hefty list of exclusions for the Liability section of a
homeowners policy. Let’s take a look:
Exclusions that apply to both Coverage E and Coverage F:
1. Intentional: losses that are expected or intended (e.g. the insured

intentionally harms someone so the injured person can collect from the
insured’s insurance policy and share the spoils)
2. Business: losses due to the business pursuits of the insured (i.e. if
the insured harms someone due to a business pursuit, they’d need to file a
claim under their commercial liability policy, because the homeowner’s
liability won’t cover it)
3. Professional Services: losses due to the insured’s failure to render
professional services (e.g. suppose the insured is a roofer that fails to
put on a roof properly for a customer; if that customer comes after and
sues the homeowner/roofer, their homeowners policy won’t cover it)
4. Automobiles: the ownership, maintenance or use of motor vehicles
(in general, if someone is hurt by the insured’s the use of a motor vehicle,
their Personal Auto Policy responds but their homeowners insurance
doesn’t). NOTE – however, there are some exceptions. There is coverage
for liability related to the ownership/storage/use of:
a. Vehicles used to service the insured residence (e.g. riding
lawnmower)
b. Vehicles used for the handicapped
c. Vehicles in dead storage (e.g. up on blocks, no engine, etc.)
d. Trailers not being towed by a motor vehicle (e.g. a trailer parked in
the back yard)
e. Recreational vehicles not subject to registration when used off
public roads (e.g. four-wheelers, dirt bikes). For coverage, the
recreational vehicle must be:
i. Not owned by the insured, or
ii. If owned by an insured, only when used on an insured
location
iii. A golf cart used for golf on a golf course
5. Watercraft: the ownership, maintenance or use of watercraft of the
following types:
• Powered by an inboard or outboard motor if owned by the insured
• Powered by an inboard or outboard motor of more than 50
horsepower if rented to an insured
• Sailing vessels 26 feet or more whether rented to or owned by an
insured
• Powered by an outboard motor of more than 25 horsepower if the
motor is owned by the insured
6. Aircraft: ownership or use of aircraft (hobby/model aircraft is covered)
7. War
8. Disease: transmission of a communicable disease by the insured
9. Sexual Molestation: of a third party by the insured
10. Abuse: Corporal punishment or physical or mental abuse by the insured
11. Drugs: The use, sale, manufacture or possession by any person of a
controlled substance
Coverage E Exclusions
The following are exclusions that pertain only to Coverage E – Personal

Liability.
a) Bodily injury or property damage to the insured (remember –
liability only ever pays a third party – never the insured! This is
insurance for harm to others).
b) Workers Compensation: Bodily injury to people covered by Worker’s

Compensation or Disability insurance (e.g. if a roofer falls off the
insured’s roof and they do have workers compensation, they must
collect from their workers compensation).
c) Property damage to property rented to, occupied by, used by or

in the care, custody or control of an insured (unless the damage
is due to fire, smoke or explosion).
d) Contractual Liability. However, contractual liability is covered when:
a. It relates to the ownership, maintenance or use of an insured

location
b. The liability of others was assumed by the insured prior to the

occurrence.
Coverage F – Exclusions
These Exclusions apply only to Coverage F – Medical Payments:
There’s no Coverage F – Medical Payments for:
a) the insured
b) anyone regularly residing on the insured premises
c) harm to anyone due to nuclear reaction
d) hard to anyone eligible for workers compensation or disability (for the

occurrence)
e) a residence employee not sustained in the course of employment or

occurring off-premises
GENERAL CONDITIONS of the HOMEOWNERS POLICY (these apply

to Section I and Section II)
Towards the end of the policy there’s a section called “Section I and II Conditions,
which lists conditions that apply to the entire policy, both Property and
Liability. Let’s take a look:
Liberalization Clause: Sometimes insurance companies make changes to

policies – usually minor ones. Sometimes these changes broaden coverage,
sometimes they restrict coverage. It’s against the law for the insurance company
to take away coverage that they’ve promised at the policy inception, but what
about when the change broadens coverage? The Liberalization Clause says
that any changes that broaden coverage on the edition of the policy
that the insured holds will automatically apply without additional
premiums. This clause simplifies things; it prevents the need to cancel/re-issue
new policies every time there’s a minor change. NOTE – the change has to
happen 60 days prior to or during the policy period in order for this to apply.
Waiver or Change of policy: any change to the policy needs to be in

writing. Changes are typically made by adding an endorsement to the policy.
Cancellation: The insured can cancel the policy at any time, and unpaid
premiums must be returned to the insured. However, to protect the rights of the
insured, local laws dictate that the insurance company can only cancel for
specific reasons [such as failure to pay the premium or too many claims that are
due to the insured’s negligence (the number differs from state to state)]. Please
see the state-specific section of this course for your state’s laws re. cancellation.
Non-renewal: this is similar to cancellation, in that the insurance company has

the right to refuse renewal of the policy, but only under certain
circumstances. Typically, they must have a reason that meets the state
requirements, give 30 days notice, etc. Please see the state-specific section of this
course for your state’s laws re. cancellation.
Assignment: a policyholder cannot transfer the policy to someone else without

written permission from the insurance company (note - there are some
exceptions when a claim has already been filed).
Concealment or Misrepresentation – If an insured intentionally conceals or

misrepresents facts, the policy is voided and no coverage is given. This is true
regarding the original application for insurance or during a claim, and includes:
a) intentionally concealing or misrepresenting any material fact or

circumstance
b) engagement in fraudulent conduct
c) false statements relating to the insurance
Subrogation – This has to do with a claim where there’s a third party that’s at
fault (or partially at fault). For example, if an elderly neighbor falls asleep at the
wheel of his car and hits your house, your homeowners insurance will cover the
damage, but the insurance company will most likely go after the driver (or his
insurance company) to collect what they paid out, since the driver was at
fault. Subrogation means that the insured gives the insurance company the right
to go after the third party, and the insured relinquishes his/her own right to go
after the third party (both parties can’t collect from the at-fault third party). The
conditions pertaining to subrogation are detailed in this section.
Section II – Conditions
Limit of liability – The limit of liability is the maximum amount of “exposure”

that the insurance company has for Coverage E, for all damages from one
“occurrence”. In other words, the insurance company will never pay more than
the maximum amount listed on the policy for Coverage E (even if the insured is
sued for much more than the maximum limit of liability of the policy).
Severability of Insurance - Each insured, as defined in the policy, has the

same rights and obligations that would exist had a separate policy been issued to
each insured. However, this severability does not increase the limits of liability
under the policy. For example, the homeowner and her son may both be
considered “insureds” under the policy. Even if a third party sues the both, the
insurance company will not pay out more than the limit of liability for any one
“occurrence” (i.e. the third party can’t get the limit of liability twice – once for the
homeowner, and once for the son).
Duties after an Occurrence – In this section, the insured’s duties when

there’s a liability are explained. Basically, the insured must cooperate with the
insurer to help the insurer properly defend the claim. This means, for instance,
that the insured must report the claim to the insurer in a timely manner, the
insured must inform the insurer of subpoenas and such, must submit to required
interviews, allow physical examination, etc. (e.g. the insured can’t just throw
away letters from the court because they think it’s the insurance company’s
problem).
Duties of an Injured Person – Coverage F (medical payments to others) The

injured person (or someone acting for the injured person) must give the
insurance company:
a) proof of claim (under oath if required)
b) authorization to obtain medical reports and records
c) submit to a physical exam
Payment of Claim – Coverage F (Medical Payments) – when a payment is

made under Medical Payments, it is not an admission of liability by the insured
or the insurance company (remember, Coverage F – Medical Payments is a
“voluntary” coverage and can be paid without liability on the part of the insured).
Suit against the Insurer – when there’s a lawsuit against the insurer:
· No action can be brought against the insurance company unless there has
been full compliance with all of the terms under section II
· No one will have the right to join the insurer as a party to any action against
the insured
· Also, no action with respect to coverage E can be brought against the

insurer until the obligation of such insured has been determined by final
judgment or agreement signed by the insurer
Bankruptcy of the Insured – bankruptcy of the insured does not relieve the
insurance company of their obligations under the policy (e.g. if someone sues the
homeowner and the homeowner declare bankruptcy, the insurance company is
not off the hook – they still need to pay out if the claim is a covered loss).
Other Insurance – The homeowners’ policy is excess over other valid

insurance (except insurance written specifically to cover as excess, such as an
“umbrellas policy which is only excess). What does this mean? Well, when a
policy holder has more than one policy that covers an insured item, the policies
need to spell out which one is “primary” and which one is “excess” – in other
words, which one pays out first, and which one only pays out if the other one is
used up.
Policy Period – only losses that occur during the policy period are covered.
HOMEOWNER ENDORSEMENTS:
Endorsements are, in general, clauses that can be attached to an insurance policy

that alter the coverage in some way. Typically endorsements broaden coverage or
narrow coverage. Homeowners pay additional premiums for endorsements that
broaden coverage or they receive discounts for endorsements that restrict
coverage. Let’s take a look at some common homeowners endorsements:
Sinkhole – Typically, sinkhole collapse is excluded. However, for an additional

premium, coverage for sinkhole collapse may be added by
endorsement. “Sinkhole collapse” is defined as actual physical damage caused by
a sinkhole (note – this endorsement is mandatory in Florida)
Sewer Backup – coverage for damage due to backup of sewer and drains are
typically excluded. However, for an additional premium, losses due to backups,
even those due to mechanical failure of the sump pump, are covered
· up to $5,000
· there’s a special deductible of $250 for these losses
· there’s no coverage for losses due to the insured’s negligence
· there needs to be a direct physical loss to the property
Earthquake – coverage for damage due to earthquake is excluded in

homeowners policies. However, for an additional premium, earthquake coverage
may be added with this endorsement (note - the cost of the endorsement varies
based on the type of construction of the home).
Personal Property Replacement Cost – homeowners’ policies typically

cover personal property on an Actual Cash Value (ACV) basis. For an addition
premium, a homeowner can add this endorsement. It increases coverage from
ACV to replacement cost settlement on personal property (and also on fences,
wall-to-wall carpeting, etc. - many of the items that are typically ACV)
Hurricane – homeowners’ policies do cover windstorm, hurricane and

hail. However, for a reduction in premium, coverage for windstorm, hurricane
and hail is removed.
Inflation Guard – For an additional premium, limits of liability are

automatically raised at intervals. This endorsement makes sure that the level of
insurance is always adequate, so that a co-insurance penalty never applies.
Ordinance or Law – The typical homeowners policy has only $5,000

Ordinance or Law coverage. For an additional premium, this endorsement
increases the amount of coverage for additional losses based on the enforcement
of an ordinance or law. (e.g. this endorsement would be beneficial if a home is
damaged by a hurricane and local laws require massive code upgrades to repair
it).
Scheduled Personal Property – There are certain types of personal property

that have “special limits of liability” under the homeowners policy; examples
include jewelry, furs, cameras, firearms and certain collectibles. The
homeowners’ policy limits the dollar amount for losses to these items (e.g.
jewelry is limited if the loss is due to theft). This endorsement provides scheduled
coverage for these types of items. The endorsement specifically describes each
scheduled item and the amount of coverage for it.
Chapter 3.3 - Farm
Insurance
Farmers and ranchers are in the business of raising, harvesting and selling a wide
variety of crops and/ or livestock to wholesalers or manufacturers, or for
consumption by the general public. For the purposes of this chapter, we will use
the term “farm” to describe a property where the farmer or rancher both resides
and conducts his/her commercial business.
Because farmers reside and conduct a commercial business on the same

premises, they inherently face a unique set of challenges in purchasing insurance
protection for their assets. Not only do farmers require some form of
homeowners’ insurance coverage to protect their home and personal belongings,
but they also require a variety of commercial insurance protections to protect
their business interests on the same property.
As such, farm insurance coverage is specifically designed to allow farmers to

bridge the gaps between a typical homeowners policy and a commercial lines
policy, and contains characteristics from both types of policies.
Farm insurance policies can include some or all of the following:
·Property insurance for the main dwelling and related contents
·Scheduled and Unscheduled Farm Personal Property Insurance
·Inland Marine Forms for Mobile Agricultural Machinery and

Livestock
·Farm Liability Insurance
Farm insurance policies can apply to nearly any type of farm or ranch provided
the owner both resides and conducts business on the insured property. Please
note:
·Farms that perform manufacturing or processing functions must
utilize a commercial lines policy rather than a farm insurance
policy.
·Farms whose primary business involves raising race or show animals

are not eligible for farm or ranch insurance.
·Vacant farm properties are also not eligible.
Farm Property Coverage Forms
Farm Property Coverage Forms provide insurance protection for direct losses to
physical property on a farm owned and occupied by a farmer or rancher. Each
coverage form provides protection for specific types of property, and in turn an
attached Causes of Loss form will outline the specific perils the property is
insured against.
With a few farm-related exceptions regarding livestock, the Causes of Loss forms
used in farm insurance closely mimic the forms we find in homeowners and
commercial lines insurance (basic, broad, and special form), so we’ll briefly
review those forms later on in this chapter.
Coverage A thru D in a farm policy closely resemble the coverage forms we find
with a typical homeowners policy, so let’s review them here:
Coverage A- Dwelling
Coverage A provides insurance protection for the main dwelling on the insured
farm, and all other structures attached to the main dwelling, and includes
materials located on the premises for use in building, repairing or altering the
main dwelling.
Dwelling coverage generally provides the same coverage extensions we might find
in a homeowners policy, including debris removal, pollution clean-up, reasonable
repairs, fire department service charges and consequential loss coverage.
Coverage A does NOT apply to trees, shrubs, plants or lawns unless a separate
endorsement is added to the policy, which provides named-peril coverage within
250 feet of the main dwelling and is usually limited to a specified dollar amount
or 5% of Coverage A.
***Coverage A provides up to $5,000 insurance coverage for damage and/ or
destruction to grave markers on the insured premises.***
Coverage B- Other Private Structures Appurtenant to Dwelling
Coverage B provides insurance protection for private structures on the insured

farm that are not attached to the main dwelling. This can include detached
garages, guesthouses, detached porches or patios and storage sheds.
Please take note, Coverage B in a farm policy does NOT apply to storage sheds
used principally for farming activities.
As in a typical homeowners policy, Coverage B limits are automatically set at 10%

of Coverage A limits.
For Coverage A and Coverage B, outdoor radio or TV antennae and satellite

dishes are subject to a special limit of insurance of $1,000 per occurrence.
Coverage C- Household Personal Property
Coverage C provides insurance protection for the theft, damage or destruction to

an insured's personal property such as furniture, appliances, electronics and
other items. Coverage C can also apply to the property of family members, and
guests staying at an insured's premises.
Household Personal Property limits are equal to 50% of Coverage A.
Similar to a standard homeowners policy, Coverage C mandates special limits to

insurance coverage for specified items of personal property, including:
· $200 on cash, platinum, and gold other than goldware
· $1,500 on letters of credit, manuscripts, passports and securities
· $1,500 on watercraft and associated engines and trailers
· $1,500 on trailers not used for watercraft or farming purposes
· $2,500 on business personal property while on the insured’s

premises
· $500 on business personal property NOT located on the insured’s
premises
· $1,500 on electronics in or upon a motor vehicle
· $1,500 on electronics used primarily in the operation of a farm or

business
Coverage C also mandates special limits to insurance coverage relating to the

theft of specified items of personal property, including:
· $2,500 for furs, jewelry, precious stones and wristwatches
· $2,500 for pure goldware, silverware, and other items whose value is
principally derived from gold or silver content
· $3,000 on firearms
As with a homeowners policy, special endorsements added to the policy can

increase these limits, or apply replacement cost coverage for certain items.
Coverage D- Loss of Use
Coverage D provides the insured party indemnification for any additional living
costs incurred due to damages to a home by a covered peril. If a dwelling has
been damaged to the extent that the insured party can no longer reside there, loss
of use coverage will pay any additional living expenses incurred including hotel or
rental costs.
Loss of Use will also pay Fair Rental Value for any damaged structures under
Coverage A and Coverage B the insured rents to tenants for the duration the
rental property remains uninhabitable.
Loss of Use also applies to homes deemed uninhabitable due to civil emergency,
of particular interest to farmers due to the rural nature of their business. (e.g.
forest and prairie fires, flood threats)
Loss of use indemnification is limited to 10% of Coverage A.
Scheduled Farm Personal Property Vs. Unscheduled Farm Personal

Property
Before we look at the next two types of Coverage Forms in a farm insurance
policy, let’s take a moment to differentiate between scheduled farm personal
property and unscheduled farm personal property.
With the Scheduled Farm Personal Property Form, an insured party is presented
with an exhaustive farm inventory list, and the insured party selects only the
items from the list for which he wants to purchase insurance. A specific value for
each insured item is established, and a cause of loss form is selected for each item
(basic, broad or special form coverage).
With an Unscheduled Farm Personal Property Form, the insured is presented

with a similar farm inventory list, but in this case, the insured party provides a
detailed inventory of all farm property located on the insured premises. Based on
the value of the established farm inventory, a specific level of insurance covering
all items is determined, and blanket coverage to all listed items will apply once a
cause of loss form (basic, broad or special form) is attached.
Coverage E- Scheduled Farm Personal Property
Scheduled Farm Personal Property provides insurance protection for select items
specifically chosen by the insured party, and covers these selected items whether
on or off the insured property (though not while being transported.) The
Declarations page will establish the limits of insurance protection for each item.
Scheduled Farm Personal Property may include, but is not limited to:
· Farm machinery, owned or borrowed, whether on or off the insured

premises
· Grain, hay, straw or fodder stored in buildings or structures, or stored in

the open in bales, stacks or trucks
· Livestock on or away from the premises
· Farm packing materials and supplies
· Farm implements
· Specialized machinery and/ or tools used in farming
· Computers and software used in farm management
· Portable, temporary buildings and / or structures.
Coverage F- Unscheduled Farm Personal Property
Whereas Scheduled Farm Personal Property establishes itemized insurance

protection for the insured party, Unscheduled Farm Personal Property is
intended to provide blanket coverage for a large variety of farm machines,
livestock, and feed/ farm products and supplies.
The insured party first provides a very detailed inventory of all items located on
the insured premises using an Unscheduled Farm Personal Property Form
provided by the insurer. A total value of the listed inventory is then calculated to
determine the level of insurance the insured party must carry. A Causes of Loss
form is then attached, which applies blanket coverage to all listed physical
property on the farm.
The insured party must carry a level of insurance equal to 80% of the total value
of farm inventory, and actual cash valuation applies in the event of a claim.
Coverage G- Barns, Outbuildings, and Other Farm Structures
The Barns, Outbuildings and Other Farm Structures Form provides insurance
protection for a wide variety of structures primarily used in the business of
farming.
“Farm structures” can include:
· Barns
· Silos
· Granaries
· Pens
· Fencing (excluding field and pasture fencing), corrals, and livestock

chutes
· Feeding structures
· Outdoor masts, towers and antennae
· Permanent and temporary storage structures primarily used for
farming purposes
Coverage also applies to any materials and supplies kept on or adjacent to the
insured properties for the purpose of building, altering or repairing these
structures.
Exclusions to Barns, Outbuildings and Other Farm Structures coverage include:
· Land
· Field or pasture fencing
· Foundations of buildings or structures
· Pilings or piers
· Cost of excavations, grading or filling required for replacement or

repair
· Any structure also used as a dwelling
Actual Cash Valuations apply in the event of a claim, unless otherwise noted in
the Declarations page.
Coverage extensions:
$250 for loss or damage to private light and power poles per occurrence.
Inland Marine Forms Applicable and Common with Farm Policies
By definition, inland marine insurance is used to indemnify an insured party for

losses to various types of moving or movable properties, and primarily focuses on
physical property that is either used in transportation, or physical property that is
frequently transported.
Two forms of inland marine insurance forms are frequently used by farmers to
provide protection for specified items commonly found on farms, and may be
included with a farm policy or purchased separately. These include the Mobile
Agricultural Machinery and Equipment Form, and the Livestock Floater.
Mobile Agricultural Machinery and Equipment Form
The Mobile Agricultural Equipment Form provides stand-alone insurance

protection for agricultural machines and their related tools and equipment. Due
to the high cost of many complex farming machines, this form generally provides
much higher limits of insurance than Other Farm Personal Property Forms.
Mobile agricultural equipment and machinery can be insured on a scheduled or

unscheduled (blanket) basis, and both forms require the insured to purchase a
level of insurance equal to 80% of the actual cash value of the item(s) insured.
Open peril coverage usually applies, and claims are paid on an actual cash value
basis unless a replacement cost endorsement is added.
The Mobile Agricultural Equipment Form does not apply to equipment on

consignment or held for sale, and cannot be used for machinery used in logging
or forestry operations. In addition, some forms of particularly expensive
machinery may require scheduled coverage, including combines, cotton picking
machinery and threshers.
Livestock Floater
Livestock floaters provide stand-alone insurance protection for six varieties of

domesticated animals including horses, mules, cattle, swine, sheep, and goats.
Livestock floaters can be purchased on a scheduled or unscheduled (blanket)

basis, and both forms require the insured to purchase a level of insurance equal
to 80% of the value of the animals insured.
Livestock floaters provide protection on a named peril basis, and also covers
animals injured and / or killed while in transport on trucks, trains or boats, or if
struck by vehicles not owned by the insured.
Poultry cannot be covered under a livestock policy, but famers can purchase a
nearly identical policy called a poultry floater.
Loss Settlement Valuations- Farm Insurance
Unless a replacement cost valuation is expressly noted on the Declarations page

of the insurance contract, all loss or damage to insured properties will be settled
by the insurance company on an actual cash value basis at the time of the loss.
If the replacement cost basis option is expressly indicated on the Declarations
page, loss determination will be calculated upon the following criteria:
If the limit of insurance on the damaged building or structure is at least 80% of

its full replacement cost at the time of the loss, an insurance company will settle
the loss based on the smallest of the following amounts:
1. The cost to replace the damaged portion of the building or structure

with equivalent construction for use on the same premises.
2. The amount actually and necessarily spent to repair or replace the

structure.
3. The applicable limit of insurance.
The cost of repairs or replacement does not include increased costs attributable
to enforcement of any ordinance or law regulating the construction, use or repair
of any property.
If the limit of insurance on the damaged building or structure is less than 80% of
its full replacement cost at the time of the loss, an insurance company will settle
the loss based on the larger of the following amounts:
1. The actual cash value, at the time of the loss, of the damaged part of the
structure.
2. A proportion of the cost to repair or replace the damaged part of the

building or structure, without deduction for depreciation. This proportion
will equal the ratio of the applicable limit of insurance to 80% of the cost
of repair or replacement.
The cost of repairs or replacement does not include increased costs attributable
to enforcement of any ordinance or law regulating the construction, use or repair
of any property.
If the loss qualifies for payment on a replacement cost basis, but the cost of repair
or replacement is more than either $1,000 or 5% of the applicable limit of
insurance, the only basis on which the insurer will settle pending completion of
repairs or replacement is actual cash value, at the time of the loss, of the damaged
part of the building or structure. In case of such a loss, the insured party can
make an initial claim for payment on the actual cash value basis, and later file a
supplementary claim for replacement cost payment. If this option is elected, the
insured party must notify the insurer of the intention to do so within 180 days of
the occurrence of the loss.
In other words, with replacement cost valuations, the insurance company will
only pay the insured party for the actual cash value of the loss at the time of the
loss. The insured party then must notify the insurance company within 180 days
that they intend to repair or replace the damaged property. Only when the repair
or replacement is completed and a supplementary claim is submitted to the
insurance company will the insurance company reimburse the insured party for
the additional costs over actual cash value associated with replacing the insured
property.
Farm Property- Causes of Loss Forms
Each coverage form in a farm insurance policy requires an attached Farm

Property- Causes of Loss Form, which stipulates exactly which perils the covered
properties are insured against.
We’ve seen these forms before in homeowners and commercial lines policies, and
the Farm Property- Causes of Loss forms are nearly identical with the exception
of a few additional protections for insured livestock.
As in other forms of insurance, there are three Causes of Loss Forms: Basic,
Broad and Special Form. Below, we’ll take a brief look at the perils covered by
each form:
Causes of Loss- Basic Form
Fire or Lightning Explosions Smoke Volcanic Activity

Wind Riot or Civil Commotion Theft Flood Loss to Livestock
Hail Aircraft or Vehicles Sinkhole Collapse Earthquake loss to Livestock
Vandalism
Causes of Loss- Broad Form
Includes all causes of loss listed in Basic Form, in addition to:
Falling Objects Accidental discharge or leakage of water or steam Attack of covered livestock by wild
animals (excluding sheep)
Weight of ice, sleet or snow Sudden and accidental discharges of electricity Drowning of covered livestock
Breakage of glass Collapse Accidental shooting of covered
livestock
Sudden and accidental tearing apart Electrocution of covered livestock Loading and unloading accidents
Causes of Loss- Special Form
Causes of Loss- Special Form provides open peril coverage for direct losses to
physical property subject only to listed exclusions. Exclusions to the Causes of
Loss- Special Form can include:
• Normal wear and tear, or purposeful neglect

• Rust, corrosion or decay
• Settling, cracking or shrinking of structures
• Infestation by rodents, vermin or birds
• Mechanical breakdown
• Disappearance of farm property, unless proof provided the property
was stolen
• Voluntary parting of farm property if induced by fraud
• Unauthorized instructions to transport property to another person
or place
• Vandalism or breakage of glass if insured premises was vacant for
30 days or more
• Dishonest or criminal acts by the insured or partners, employees or
trustees of the insured
• Acts of war or nuclear hazards
Farm Liability Insurance
Just as with any other form of business, farmers require liability insurance to
protect themselves and their farm financially in the event someone is injured on
their property, or their actions somehow cause physical damage or bodily injury
to another party. Farm liability insurance includes attorney fees and the costs to
defend the farmer and his/ her property in court.
In this section, we’ll discuss several types of farm liability insurance and how
each applies to farming activities.
Bodily Injury and Property Damage Liability
Bodily injury and property damage liability protects the farmer for physical
damage and / or bodily injury resulting from normal business operations on the
insured premises.
Personal injury and advertising
Personal and advertising injury coverage covers claims against the insured for a
variety of occurrences that specifically do not involve bodily injury or property
damage, including malicious prosecution, wrongful entry or eviction, and libel or
slander.
Medical payments
Medical payments protects the farmer in the event an individual suffers medical
injuries while on the farmer’s property, and also protects the farmer from injuries
caused to others as the result of the farmer’s activities on or off the insured
premises. Medical payments coverage covers medical, dental, hospital and
funeral costs arising out of bodily injury to individuals up to policy limits.
Farm Product liability
Farm product liability insurance protects the farmer against injury or illness to
persons resulting from the ingestion of the farmer’s products. Some wholesalers
may require the farmer to prove he / she has sufficient farm product liability
insurance to distribute their products.
Farm Pollution liability
Farm pollution liability coverage is an endorsement that provides protection

against a number of farm related pollution risks including animal waste overflow,
chemical spills, and other pollution incidents originating from an insured
property. A separate, similar endorsement covers chemical overspray from
aircraft.
Custom Farming liability coverage
Custom farming liability coverage protects a farmer from damages resulting from
farming operations performed for other individuals. This coverage is not
available to farmers who have receipts for custom farming activities totaling over
$5,000 in the previous 12 months.
Farm Employees Liability coverage
Employees are not covered under the general liability policy. Farm employees
liability coverage is an endorsement that protects the farmer financially from
medical payments due to injuries to employees that do not fall under coverage by
worker’s compensation insurance.
Chapter 3.4 - Crop
Insurance
Chapter Overview
“Agricultural producers” (e.g. farmers, agri-businesses, mega-farms, etc.) grow,
harvest and sell crops for a profit. For simplicity’s sake, through this chapter,
we’ll just refer to agricultural producers as “farmers”.
Crop insurance protects the producer (i.e. farmer) from a loss to the ability to
make a profit from his/her crop.
There are two types of crop insurance:
1. Crop-yield insurance is coverage for loss of the crop due to natural
disasters.
2. Crop-revenue is coverage for the loss of the value of the crop due to
decreased agricultural prices.
CROP-YIELD INSURANCE – COVERAGE FOR PHYSICAL LOSS TO THE CROP

There are two main types of crop-yield insurance:
1. Crop-hail insurance
2. Multi-peril crop insurance
a) Crop-Hail Insurance
Let’s look at this first, because it’s simpler. Some important facts to know:
1. It covers against more than hail
2. It’s generally available from private insurers. This is because hail is a
narrow peril that occurs in a limited place and accumulated losses tend not
to overwhelm the capital reserves of private insurers
3. It’s not reinsured or subsidized by the Federal Government (see above for
“why”)
4. Crop-hail insurance is rated on an acreage basis
5. Crops can be insured according to a percentage of the expected value of
the yield (e.g. 50% up to 100%)
6. Sometimes these policies will have a minimum loss percentage before the
policy will pay
For example, say a farmer has crop-hail coverage with $10,000 limit on 10,000
acres with a 5% minimum loss percentage. If he sustained a loss to 10% of his
crop - which exceeds the 5% minimum - the policy must therefore pay $1,000
(i.e. 10% of $10,000).
Commonly covered perils in a crop-hail policy in addition to hail:

1. fire
2. lightning
3. wind
4. frost
5. drought
6. insects
7. disease
8. excessive moisture
9. transit to storage after harvest
Typical exclusions in a crop-hail policy:

1. failure to harvest a mature crop
2. “Unit normal visible stand” (i.e. crop must be up to be covered)
3. “Before effective hour” (i.e. damage to the crop before the policy starts)
4. Any part the crop that can be recovered by harvesting
5. Crop not owned by the insured (e.g. share crops)
6. Damage to trees, bushes, fruit or nut crops
7. Loss due to damage to leaves, plants, etc. unless the actual crop is affected
b) Multi-Peril Crop Insurance is the next type of crop-yield insurance

Multi-Peril Crop Insurance (referred to as “ MPCI ”) basically covers losses
caused by or related in some way to weather (including hail!). Here a list of some
of the perils insured against:
1. volcano
2. earthquake
3. drought
4. wildfire
5. insect infestation (if reasonable attempts are made to avoid them)
6. excessive moisture
7. disease
8. fire
9. flood
10. lightning
11. hail
12. wind
13. tornado
14. hurricane
15. irrigation failure (if unavoidable)
16. low or poor quality yields
17. prevented planting (called “ prevent plant ”, meaning when weather
conditions prevent planting in a timely manner)
18. late planting and replanting
Because so many crops can be effected at the same time, the insurer can be
exposed to massive losses that could “break the bank” for smaller private sector
insurers.
Therefore, MPCI is subsidized by the Federal Crop Insurance Corporation (FCIC)
and regulated by the U.S. Dept. of Agriculture (USDA).
Coverage is for a percentage of the actual production history (APH) of the farm.
APH basically is just a history of the farmer’s crop yield over a period of years,
which is used to determine the “normal” production level for that farm. The
“yield guarantee” is then based on the APH yield per acre multiplied by the
percentage of coverage (i.e. if the farmer chooses 50% coverage, than that would
be APH/acre x .5).
A note about APH: it’s determined by a farmer’s records from a minimum of 4

years. If a farmer supplies less than 4 years of actual yields, “transitional yields”
(based on county averages) are used to fill in what’s missing. Failure to produce 4
years minimum of actual yields will limit coverage to 65% of the transitional yield
for the first year of a farmer’s coverage.
Being government subsidized and regulated, there are naturally rules to follow.
Insurance companies can’t dump insurers unjustly and arbitrarily, and farmers
can only request changes or increases before a defined “sales closing date” (i.e. no
random changes or increases, like right in the middle of a drought!) “ The
government says it this way: “[The] MPCI is a continuous policy and will remain
in effect for each crop year after the original application is accepted. Producers
may cancel the policy, a crop, a county, or a specific crop in a specific county,
after the first effective crop year, by providing written notice to the insurance
provider on or before the cancellation date shown in the applicable crop
provisions. Farmers must request policy changes from their insurance provider
on or before the sales closing date for a change of price election or coverage level.
In addition, requests to increase the maximum eligible prevented planting

acreage above the limitations contained in the crop policy must be made by the
sales closing date for the applicable crop. ”
Optional coverages of MPCI:
1. Catastrophic Risk Protection Endorsement (CAT Coverage) pays 55% of

the price of the commodity established by the Risk Management Agency
(RMA) on crop losses in excess of 50 percent. The premium on CAT
coverage is paid by the Federal Government; however, producers must pay
an administrative fee for each crop insured in each county.
2. Group Risk Plan (GRP) is designed as a risk management tool to insure
against widespread loss of production of the insured crop in a county. GRP
policies use a county yield index as the basis for determining a loss. When
the estimated county yield for the insured crop, as determined by National
Agricultural Statistics Service (NASS), falls below the trigger yield level
chosen by the producer, an indemnity is paid. Payments are not based on
an individual producer's crop yields. Coverage levels are available for up to
90 percent of the expected county yield.
MPCI Exclusions (losses not covered):

1. Losses due to farmer’s neglect or malfeasance
2. Losses due to a failure to reseed (including failure to plant the same thing
or loss due to the famer planting something unusual.)
3. Losses due to a failure to follow “good farming practices” (a “poor farming
practice” could include not spraying for weeds or insects, or harvesting
late)
Important differences between Crop-Hail and Multi-Peril Crop

Insurance.
a) Because MPCI is government subsidized, it must be purchased prior to

dates determined by the Federal Government, and can’t be added during
growing season. Coverage starts when the crop is planted, and planting
must be completed before government-established “planting dates”. Crop-
hail insurance, on the other hand can be purchased at agreed-upon times
(individual insurance companies may vary).
b) The government forces insurers to make MPCI available to any farmer, but
crop-hail insurers can be more selective about who they insure.
c) Crop-hail coverage levels are based on acreage, but MPCI
coverage is based on “units” (a unit is basically a farmer’s “field” - all
of the acreage owned by the farmer in a county at the time the coverage
begins). This affects how a loss is calculated.
• Under the MPCI, the loss amount (called the “reduced yield”) is
based on an average loss in all the fields of the “unit”.
• Under a crop-hail policy, the reduced yield is based on the acres
that have been affected.
Let’s take a look at how these policies might settle differently:
Crop-hail: Let’s say farmer john has a 1,000 acre field. It is completely
destroyed by hail in the North end, but there is no damage on the South
end of the field. A crop-hail policy will pay out on the north part of the
field, regardless of how good or poor the crop is on the south half.
MPCI: Now let’s say farmer john had a MPCI policy and a random
drought destroyed the North half of the field, but the South half is fine.
The MPCI will look at the production of the whole “unit” (i.e. entire
field). If the whole crop is average, he’s lost ½ of his field at average
production, and the policy will pay out for loss of ½ of the production.
However, if the crop is above average (e.g. South half is growing twice as
good as it normally does) – there might be no payout, because he’s
getting twice of what he expected out of the South half (i.e. there’s no net
loss, even though he lost the North half). So MPCI looks at the “final
result per unit” (i.e. when tallied up at the end of the year) to determine
losses and settlements.
2. CROP-REVENUE INSURANCE – COVERAGE FOR THE LOSS OF

CROP VALUE
Crop-revenue insurance is a combination of crop-yield insurance and price
insurance. It covers for a crop’s decline in price during the growing
season. It protects a farmer’s revenue for a crop whenever low prices, low yields,
or a combination of both causes revenue to fall below a guaranteed level selected
by the farmer.
Let’s take corn, for example. The RMA establishes crop-revenue insurance
guarantees on corn by multiplying a farmer's corn-yield guarantee (which is
based on the farmer's own production history) times the harvest-time futures
price determined at a commodity exchange, before the policy is sold and the corn
planted. There is a single guarantee for a certain number of dollars. The policy
pays an indemnity if the combination of the actual yield and the cash settlement
price in the futures market is less than the guarantee.
Different types of Crop-Revenue Insurance:
Income Protection (IP): IP protects against falling prices at harvest and/or
low yield. It provides a fixed revenue guarantee based on early board of trade
commodity prices for the crop type. IP is one of the lowest cost coverage forms
available.
Revenue Assurance (RA): RA is basically the same as IP, but prices are based
on average county prices which makes RA coverage more in line local pricing.
Crop Revenue Coverage (CRC): CRC bases its revenue guarantee on the
higher of two prices: harvest market price or early market price. This makes the
CRC more comprehensive than either IP or RA.
Adjusted Gross Revenue (AGR): policies insure revenue of the entire farm
rather than an individual crop by guaranteeing a percentage of average gross
farm revenue, including a small amount of livestock revenue. The policies use
information from a producer's Schedule F tax forms, and current year expected
farm revenue, to calculate policy revenue guarantee.
Group Risk Income Protection (GRIP): GRIP is a county or area revenue

plan that is based on county yields and Harvest Prices. An expected revenue is set
for the county on a per acre basis. Participants can purchase a larger amount of
protection with GRIP than any other coverage. However, unless the county
income falls below the prescribed trigger level based on the ending fall price, and
county yield (determined within 4-6 months after harvest), no indemnity is paid.
SOME FINAL NOTES ABOUT CROP INSURANCE

Crop insurance forms are “non-standard”, meaning every company issuing them
can write them to suit their own purposes (except where regulated by the
government).
The coverage period is typically limited to the growing season. Some crops
require certain landmarks for coverage to begin, such as visible leaves before
there is coverage, and coverage usually terminates at harvest time or on a specific
date. The most common form is the Annual Policy Form, but Three-Season, five-
Season and Continuous-Until-Cancelled Forms are also available.
Deductibles: Crop insurance doesn't really have deductibles. A farmer insures

his/her crop by a percentage; for example you are buying insurance to guarantee
60% of your revenue. Rather, there’s often a threshold (e.g. 5% damage to the
crop) below which there’s no payment at all, but above which the payout is for the
full 60%.
Some specific Crop insurance Forms:
Small Grains Policy and Course Grains Policies:

These policies cover crop yield losses but also reduction in quality of
crops. This is important to farmers, because they may be able to collect under
these policies even though they may have an average harvest, if the poor quality
of the crop brings a below-average sale price.
The small grains policy includes coverage for wheat, barley, and oats grown
for harvest on “insurable acreage”.
The course grain policy covers Corn, grain sorghum and soybeans grown
for harvest on “insurable acreage”.
“Uninsurable acreage” is acreage that the insurance company won’t insure due to
some factor. An example might be land planted with a type of crop that has no
history of being able to grow in the geographical region or an experimental crop.
Coverage under a small grains or course grains policy assumes, of course, that
damage was due to insurable causes. These include:
• Hail
• Drought
• Excessive moisture
• Fire
• Wildlife
• Failure of irrigation (if unavoidable)
• Insect damage (assuming good farming practices)
• Plant diseases (assuming good farming practices)
The insurance period for small grains and course grains is typically, coverage
begins when the crop is planted and ends when it’s harvested. It may also end
with:
• The end of the crop’s season
• Complete destruction of the crop
• Final adjustment of a claim
• Abandonment of the crop
Reporting of Acreage and Crop Damage
“Each crop year the producer is required to submit an acreage report by unit
for each insured crop. The acreage report must be signed and submitted by the
producer on or before the acreage reporting date contained in the Special
Provisions for the county for the insured crop. In the event of crop damage,
producers should immediately notify their insurance provider of the damage.” –
USDA
Policies always have duties to fulfill if there is going to be coverage. Crop

insurance often requires that the insured:
a) protect the crop from further damage
b) leave samples of the damaged crop intact in each field of a damaged unit
so the adjuster can inspect them
c) file a claim within 72 hours of the damage
Chapter 3.5 - Flood
Insurance
The National Flood Insurance Program (NFIP) is administered by the Federal

Emergency Management Agency, which works closely with over 90 private
commercial insurers to offer flood insurance to property owners and renters.
Since nearly all property policies specifically exclude flood coverage in their
contracts, flood insurance must be purchased separately or as an endorsement to
a property policy.
The NFIP offers flood insurance through private insurers in a program called
"Write Your Own" insurance. Insurance rates are set and do not differ from
company to company or agent to agent-- the premium is determined by the
location of the insured property and its exposure to flood damage.
NFIP Definition of Flood

The NFIP defines flood as:
• an overflow of inland or tidal waters.
• an unusual or rapid accumulation of runoff or surface waters from any
source.
• mud flows.
• collapse or subsidence of land along the shore of a lake or other body of
water, as a result of erosion or undermining caused by waves or currents of
water exceeding anticipated cyclical levels that result in a flood.
Flood Coverage Eligibility
Location Eligibility
In order to purchase flood coverage through the NFIP, a property must reside in
a community under the NFIP Emergency Program or the NFIP Regular Program.
Eligible Buildings
In order to be eligible for NFIP coverage, a building must:
• have two or more outside rigid walls.
• have a fully secured roof.
• be affixed to a permanent site.
• be able to resist flotation, collapse, and lateral movement
• have at least 51% of the ACV of the building, including machinery and
equipment within the structure, above ground level.
Eligible Contents
Eligible contents must be located inside a fully enclosed building and fastened
down to prevent flotation.
Residential Building Coverage Includes:

• the house or dwelling
• attached and detached garages
• permanently installed fixtures such as shelving, built-in appliances,
furnaces, radiators, plumbing and hot water heaters.
Residential Contents Coverage

Includes, but is not limited to:
• furniture, housewares and bedding
• lamps, lighting fixtures
• computers, home electronics
• washers and dryers
• air conditioners
• food freezers and the food in them
Basement Coverage
Includes, but is not entirely limited to:
• unfinished drywall
• electrical junction and circuit breaker boxes
• central air conditioning units
• furnaces, hot water heaters, fuel tanks, heat pumps
• lighting fixtures
• foundation elements
• clean up
Non-residential Building Coverage
Building coverage for non-residential buildings includes:
• the building and its foundation
• electrical and plumbing systems
• electrical junction and circuit breaker boxes
• central air conditioning units
• furnaces, hot water heaters, fuel tanks, heat pumps
• lighting fixtures
• foundation elements
Non-residential Contents Coverages

Includes, but not limited to:
• furniture and fixtures
• machinery and equipment
• stock
• raw materials
• finished and unfinished goods
• packing and shipping supplies
Dwelling Form and Policy Limits

Dwelling Form
Dwelling form coverage is available for :
• homeowners
• residential renters
• owners of 25.4 unit residential structures
• residential townhouse or row house
• owners of an individual unit in a condominium building
The dwelling form uses a replacement cost valuation, provided:

• the property is insured to 80% of its value.
• the insured lives in the dwelling for at least 80% of the year.
If either of these conditions are not met, valuation of damaged property falls to
ACV.
Policy Limits: Up to $250,000 building and $100,000 contents coverage.
General Property Form and Policy Limits

General Property Form
The general property form coverage applies to all other buildings that do not fall
under the dwelling policy form. Examples include:
• residential structures with five or more units
• hotels and motels
• apartment buildings
• assisted living facilities and dorms
• non-residential structures
The general property form offers ACV valuations only.
Policy Limits
• Residential Owners-Up to $250,000 of building coverage and $100,000
contents coverage.
• Business Owners-Up to $500,000 of building coverage and $500,000
contents coverage.
• Renters-Up to $100,000 contents coverage.
Residential Condominium Building Association Policy

Also known as a RCBAP policy, this coverage form applies to residential
condominium buildings provided that 75% or more of the building is reserved
strictly for residential use.
Coverage is written in the name of the association for the benefit of the
association and the condo unit owners.
Coverage is provided at replacement cost value as long as the co-insurance
requirement is met at 80%+ of the value of the property.
Policy Limits
Up to $250,000 per unit per building. So a 10 unit building can purchase up to
$2.5 million in NFIP coverage.
The National Flood Insurance Program:
In the United States, the leading cause of property damage from natural
disaster is Flood. It is not uncommon, as with Hurricane Katrina, that the
Federal Government steps in and assists victims of natural disasters with
disaster relief funds. The National Flood Insurance Program (NFIP) is a
federal program which is regulated by FEMA and was designed to provide
coverage for victims of floods. The NFIP is a federal program that provides
communities with the ability to purchase property insurance for both
personal and commercial structures in order to protect property owners.
These communities, however, must be willing to adopt flood control
measures that restrict or prohibit building in the areas that are the most at
risk of flood. Each community in the United States is provided a flood map
which shows all areas of high risk. The community has the option of
purchasing National Flood Insurance. Communities that do not participate
in the flood plan, will not be assisted by the government in the event of a
flood.
NFIP:
One-year and three-year flood policies are available through the NFIP. There is a
30-day waiting period from the day that the premium is received. Most coverages
have a standard deductible of $1000 for coverages under the emergency program
and $500 for coverages under the regular program. These deductibles are for
each separate building. To be eligible for these programs, property owners must
reside in a community that has flood insurance eligibility. This can be owners of
residential or commercial buildings or Associations that govern apartment or
condominiums. This program is available to renters for property loss and to
construction companies for coverage of buildings that are under
construction. The coverage itself covers property loss and land collapse.
The Emergency Program:

The Emergency Program deals with the first phase of the participation. This
provides limited amounts of coverage at rates that are below normal. This
emergency program is for communities which have not been identified in the
Flood Hazard Boundary Maps and / or have not become participants in the
Regular Flood Plan. These communities are given a more limited amount of
coverage than communities who implemented the guidelines of the Regular
Program. Less than 1% of the 20,000 communities that participate in the
Program remain in the Emergency Program. It is the goal of FEMA to have all
communities convert to the regular program.
Emergency Coverages:
a. Building:
• Single Family $35,000
• Other residential $100,000
• Non-residential $100,00
b. Contents (per unit):

• All residential $10,000
• All non-residential $100,000
The Regular Program:

A community participating in the Regular Program of the NFIP are provided with
a more comprehensive floodplain management system. Requirements are
imposed on the community in exchange for higher amounts of flood insurance
coverage. Communities are required to adopt and enforce a floodplain
management ordinance that meets minimum NFIP requirements. Communities
that do not enforce these ordinances can be placed on probation or suspended
from the program. This is done only after FEMA has provided assistance to the
community to help it become compliant.
Who may purchase a flood insurance policy?

NFIP coverage is available to all owners of insurable property (a building and/or
its contents) in a community participating in the NFIP. Owners and renters may
insure their personal property against flood loss. Builders of buildings in the
course of construction, condominium associations, and owners of residential
condominium units in participating communities all may purchase flood
insurance.
Building:
Single Family $250,000

Other residential $250,000
Small business $250,000
Other Non-residential $500,000
Contents (per unit):
All residential $100,000

Small business $500,000
Other non-residential $500,000
Chapter 3.6 - Umbrella and
Excess Liability
Umbrella and Excess Liability Coverage:
Umbrella and excess liability insurance policies are two types of policies that are
designed to provide additional liability protection over and above what a
standard liability policy offers. The reasoning is clear; in today's lawsuit saddled
legal system, a policyholder can easily find themselves buried under a mountain
of debt after an unfavorable ruling in a liability case.
Assuming one has $500,000 in liability coverage, a judgment against them for $1
million would deplete their liability coverage of $500,000, and they would be
held personally responsible for the remaining $500,000. And some court rulings
may award far more than $1 million; this is what umbrella and excess liability
coverages are designed to protect.
Umbrella and excess liability insurance protections are not designed as stand-
alone policies; they are designed to provide additional coverage over and above
liability policies that an individual or commercial enterprise already has in place.
Umbrella Policies:
Some Umbrella Insurance Policies are written to give additional coverages while
most are written to extend the dollar limit of an existing policy. If coverage is
written to cover a liability that isn’t covered in the underlying policy, it will have a
Retention Limit, sometimes called a "self-insured retention" or SIR (which is the
same as a deductible) for that incident.
Umbrella Coverages are commonly written for both Personal Insurance and
Commercial Insurance. They are referred to as Personal Umbrella Coverage and
Commercial Umbrella Coverage.
An umbrella liability policy acts as an "umbrella" to your base liability policies.

Umbrella liability provides extra protection against legal liability over and above
the policies you already have in place, and often provides additional coverages to
your base policies.
For example, let's say you have liability protection with your homeowners’ policy
and your auto policy. An umbrella policy would kick in after your benefits were
exhausted on either policy; it isn't limited to one policy. It can provide additional
coverage for any number of policies.
Because of the way an umbrella policy is structured, the deductibles will appear
astoundingly high. This is because the umbrella policy is designed to kick in only
when your other policies have paid out up to maximum policy limits. Therefore,
the deductible on an umbrella policy will always equal the maximum limits of
protection on your existing policies.
If your standard policy provides $100,000 in liability protection, your umbrella

excess liability coverage will have a deductible of $100,000. Your standard policy
will pay out the maximum amount of the policy ($100,000), and that amount will
pay the deductible on your umbrella liability policy. Then you are further
protected by the maximum limit on your umbrella liability policy.
Excess liability insurance coverage comes in one of two forms: follow-form and
stand-alone.
Follow Form Excess Liability

A follow form excess liability policy provides the exact same coverage as the
liability policy that underlies it. For example, your basic auto liability policy will
offer protection for certain named insureds, provide a certain number and type of
insurance coverages, and a list of exclusions.
A follow form policy "follows" your base insurance policy to the letter; it provides
additional liability coverage under the exact same provisions of the base policy.
The policy will cover the exact same named insureds only, the same coverages,
and the same exclusions.
If the base policy applies protection against a loss, then the follow form policy will
always apply protection against the loss as well.
Stand Alone Excess Liability

Like a follow form policy, a stand alone excess liability policy mimics the type of
coverages of the base policy, but includes its own set of limitations and
exclusions. So while a base policy may provide protection against a loss, the stand
alone excess liability policy may not.
For example, let's say you are a structural engineer that designs walkways. You
have a liability policy that protects you from being sued for the structural collapse
of walkways you design in hotels, convention centers and stadiums.
In a follow form excess liability policy, you would automatically have the same
protections afforded by your base liability policy: you have protection against the
structural collapse of walkways in hotels, convention centers and stadiums.
But in a stand alone excess liability policy, the insurer may provide you
protection for structural collapse, but it may exclude the walkways you design for
use in stadiums.
In short, a stand alone liability excess policy provides the same type of coverage,
but can limit or exclude certain instances of damage.
Chapter 3.7 - Personal Auto
Automobile Liability Insurance and The Personal Auto Policy
In this section, we’re going to analyze automobile liability insurance and a

personal auto insurance policy, commonly known as a “PAP.”
An automobile liability insurance policy is designed to provide an insured party

protection against their legal liability for bodily injuries and / or property losses
caused to other persons as a result of automobile accidents caused by the insured.
An auto liability policy, when combined with other forms of auto insurance
coverage, becomes a package policy known as a personal auto policy, or PAP. PAP
policies provide a broad range of insurance protections for private automobile
use. Businesses, corporations, and organizations are not eligible for PAP policies.
Eligibility requirements for a personal auto policy (PAP) include:
• PAP policies are for individuals, their families, or similarly related people
that reside together (i.e. adopted children and / or foster children)
• PAP policies cover four-wheel autos, vans and trucks weighing under
10,000 pounds.
• PAP policyholders must maintain a financial interest in the vehicles
covered by the policy (i.e. they must be auto owners, or individuals leasing
the covered automobiles.)
Some other important characteristics of a PAP policy:
PAP policies protect only those that meet the status of "insured" as listed in the
policy, which includes the lender when applicable. Generally speaking, the PAP
policy will cover the named insured, immediate family members of the named
insured, and anyone the insured party gives permission to drive the car.
PAP policies pay only for property damage and bodily injury, and the defense
thereof. A PAP policy does not pay for punitive damages. (?)
PAP policies provide indemnification only for the legal liability of the insured to
pay for bodily injury and property damages according to all applicable laws.
An insurance company is responsible to defend the insured against all liability
claims, and retains the right to settle claims out of court.
A typical PAP is divided into the following sections:

• Insuring Agreement and Definitions (Each section will have it’s own!)
• Part A Liability
• Part B Medical Payments
• Part C Uninsured Motorist
• Part D Coverage for Damage to Your Auto (incl. Comprehensive and
Collision)
• PIP Coverage (Optional or Mandatory; varies by state)
• Part E Duties After an Accident or Loss
• Part F General Provisions
• Endorsements
Now let’s start from the top and take a closer look at each section of the PAP
policy.
The Declarations Page
The declarations page of a personal auto policy will contain:

• the name and address of the insured party
• the effective date and expiration date of the policy period
• a list of applicable insurance coverages, the limits of each coverage, and
the policy deductible
• all parties to be indemnified as per the conditions of the contract (i.e.
establishes “loss payees”)
• the make, model and VIN of insured automobiles
• a list of any applicable endorsements added to the policy
If any party other than the named insured holds a financial interest in the
covered vehicle, this party will often be listed on the declarations page as a “loss
payee” on the vehicle.
For example, if an insured party purchases a vehicle using an auto loan, the
finance company issuing the loan may require the policyholder to add them as a
loss payee on the insurance contract covering that vehicle. This ensures the
finance company can recover their equity in the vehicle if the vehicle is damaged
or destroyed by the insured party.
Definitions
The “definitions” section of an automobile policy defines the terminology utilized

within the insurance contract. Let’s briefly go over some of the more commonly
used terms and how they apply to the PAP:
“You” and “Your” refer to the named insured on the declarations page, and the
spouse of the named insured if living in the same household. In the event of a
divorce, the spouse may retain coverage for up to 90 days on the original policy,
or until they purchase their own insurance policy, whichever comes first.
“We”, “Us” and “Our” will always refer to the insurance company providing the
policy.
“Family member” includes anyone who is currently a resident in the named

insured’s household and related by blood, marriage, or adoption. The term
“family member” may also include foster children, and a non-resident spouse for
up to 90 days after the dissolution of a marriage.
“Owned” refers to any owned auto, or any auto leased for six months or more
under a written contract.
"The use of" may refer to any activity involving the car, including repairing the
vehicle, getting into the trunk, or even washing the vehicle.
“Occupying” refers to someone in or upon a vehicle, getting in or out of a vehicle,

or getting on or off of a vehicle. "Occupying" can include sitting on a vehicle, and
leaning upon or against the vehicle.
“Bodily injury” refers to any bodily harm, sickness, or disease, including any
death related to these conditions. Bodily injury does not include mental distress
or psychological trauma.
“Property damage” refers to the destruction of, or any physical injury to, a piece
of tangible property.
Property damage also includes the loss of use of any damaged or destroyed
property.
“Business” includes any trade, profession or occupation.
“Trailer” refers to a vehicle designed to be towed by another vehicle.
“Your covered auto” - "Your covered auto" refers not only to the automobile
specified in the declarations page, but also
applies to:
• Any automobile the named insured borrows with permission.
• Any newly acquired auto.
• Any trailer owned by the insured.
• Any auto or trailer the insured does not own while in use as a substitute
for the automobile(s) specified in the declarations page due to:
i. Breakdown
ii. Repair
iii. Servicing
iv. Loss
v. Destruction
In regards to “Your covered auto”, think of it this way: While the insurance
company will always cover the auto listed in the declarations page, liability
insurance coverage follows the person, not the automobile. Any car the insured is
driving will be considered a “your covered auto.”
“Newly acquired auto”
“Newly acquired auto” refers to any new or used vehicles the insured party takes
ownership of during the current policy period, provided that:
the vehicle must weigh less than 10,000 lbs. the vehicle is not covered under
another insurance policy the vehicle isn’t used for the transport of goods and
materials, unless used in farming or incidental to a business involved in repairing
or servicing of furnishings or equipment.
Any “newly acquired auto” will automatically receive the broadest coverage
provided to any one car currently listed in the declarations at the time of
purchase / acquisition of the new vehicle.
If the “newly acquired auto” replaces the auto listed in the declarations, the
insured does not need to notify the insurer. (I can’t verify this: it sounds
ridiculous) If the “newly acquired auto” is kept in addition to the auto(s) listed in
the declarations, the insured must notify the insurer within 14 days of the
acquisition of the new vehicle. If the additional vehicle isn’t reported to the
insurer within 14 days, coverage for the new vehicle will automatically lapse.
For the extension of comprehensive and/ or collision coverage to a “newly

acquired auto”, the policyholder must report the “newly acquired auto” within 14
days for coverage to apply.
If the policyholder does not currently have comprehensive or collision coverage,

but would like to apply one of these coverages to the “newly acquired auto”, the
policyholder must notify the insurer within 4 days of acquiring the auto. The
insurer will automatically provide comprehensive and collision for 4 days with a
$500 deductible.
Part A Liability Coverage
Auto liability insurance protects the policyholder against the legal liability for
property damages and / or bodily injury caused to other parties as the result of
auto accidents caused by the insured. Liability insurance also provides for the
legal defense of claims or lawsuits arising from accidents caused by an insured
driver. A liability policy will not pay for any bodily injury or property damages
incurred by the named insured.
The Insuring Agreement
Generally speaking, a liability insuring agreement simply establishes that the

insurance company will agree to pay on behalf of any “covered persons” all
monetary damages for bodily injury and / or physical damage to other parties, up
to policy limits. The insurer also agrees to settle or defend any lawsuits arising
out of the legal liability of “covered persons”, and retains the right to settle legal
matters at it’s own discretion.
In addition, the insurer will recognize that legal defense costs and supplementary
payments are separate from and are not restricted by a policy's limit of liability.
However, once a policyholder has exhausted the policy’s limit of liability, the
insurer is no longer required to defend the insured.
For example, let’s say a policyholder with a liability limit of $100,000 causes an
accident that injures three people, and each of the three injured parties ends up
suing the policyholder for $50,000. If the insurer settles with the first two parties
for $50,000 each, the policyholder has now exhausted their $100,000 coverage,
and the insurer therefore is no longer required to defend the policyholder against
the third pending lawsuit for $50,000. The insurer is only liable for coverage up
to policy limits.
The insuring agreement of a liability policy generally defines “covered persons”

as:
1. The named insured on the declarations page and any direct family
members living in the same household for the ownership, maintenance or
use of any auto or trailer.
*Liability insurance travels with the person, so a liability policy will cover
the policyholder while in any covered vehicle, not just the auto listed in
the declarations.
2. Any other person using the policyholder’s covered auto listed on the
declarations page.
*Liability insurance covers damage or injuries caused by any person the

policyholder grants permission to use the vehicle listed on the
declarations page. If someone borrows your car and causes injuries to
another party, your liability insurance will provide primary coverage to
the injured party. If the person borrowing the car also had liability
insurance, that individual’s liability would be “in excess” of the primary
policy.
3. For your covered auto, any person or organization but only with respect to
legal responsibility for acts or omissions of a person for whom coverage is
afforded under this Part.
4. For any auto or trailer, other than your covered auto, any person or
organization but only with respect to legal responsibility for acts or
omissions of you or any family member for whom coverage is afforded
under this Part. This provision ( B.4.) applies only if the person or
organization does not own or hire the auto or trailer.
Liability Policy Limits
Most auto liability insurance policies describe the amount of liability coverage in
a series of three split numbers called split limits. Most states require drivers to
carry a minimum amount of insurance expressed in split limits.
For example, let’s say a policyholder elects to purchase liability coverage of 100 /
300 / 100.
The first number is the maximum amount the insurance company will pay for
bodily injury to each individual involved in an accident, in this case $100,000.
The second number is the maximum amount an insurance company will pay for
bodily injury in total, no matter how many individuals are injured in an accident,
which in this case is $300,000.
The third number indicates the maximum amount of money an insurance

company will pay for physical damage to property, in this case $100,000.
Let's study a quick example of how split limits work. Let's say an insured driver
with a state-required minimum 10/20/10 liability policy causes an accident that
results in $20,000 in bodily injury to the driver, $40,000 to his passenger, and
$40,000 in property damage. A 10/20/10 liability policy would pay the following:
1. Driver: $10,000 to cover bodily injury (policyholder personally responsible for

remaining $10,000).
2. Passenger: $10,000 to cover bodily injury (policyholder personally responsible
for remaining $30,000).
3. Property: $10,000 to cover property damage (policyholder responsible for
remaining $30,000).
As we can see, the driver in this case could held personally liable for $70,000 in
damages even though they had the minimum insurance coverage required by the
state. As such, many drivers find it worthwhile to purchase additional liability
coverage beyond the mandatory state minimums.
Liability policies can also offer single limit coverage, which sets an aggregate limit
for all injuries and property damage incurred per incident. A policyholder may
purchase a $300,000 liability policy, which protects the policyholder against his
/ her legal liability for all damages and injuries per incident for up to $300,000.
Nearly all states require a minimum amount of liability insurance coverage to

operate a motor vehicle. It is important to remember that liability insurance
policies only cover damages only up to policy limits, and policyholders can be
held personally financially responsible for any damages exceeding policy limits.
The Out of State Coverage provision allows drivers who carry the required
minimum coverage in one state to automatically receive the required minimum
coverage in a different state. So, if a policyholder buys the minimum 10/20/10 in
their home state, then travels to another state with 20/40/20 coverage
and gets in an accident, the policyholder will be assumed to carry the 20/40/20
coverage.
Supplementary Payments
The supplementary payments portion of a liability policy provides financial relief

for a variety of expenses incurred by the policyholder in the event of an accident.
Supplementary payments are separate from and not restricted by the policy’s
liability limits.
Supplementary payments can include:

• Up to $200 per day to the policyholder for lost wages incurred due to
court-related hearings
• Reimbursement for any reasonable expenses the policyholder may incur at
the request of the insurance company (i.e. retrieving accident reports or
records, copy fees)
• Up to $250 for bail bonds due to an accident involving a covered bodily
injury or physical damage
• Payment of accrued interest after a judgment is entered
• Premiums on appeal bonds and attachment bonds
Exclusions to Auto Liability Coverage - Intentional bodily injury or physical

damage (i.e. vehicular assault)
• Damage to any property owned by the insured, or being transported by the
insured. (i.e. the insured party is returning a laptop to a friend when he is
involved in an accident. The laptop is destroyed in the accident. Auto
liability will not cover the laptop, even though not owned by the insured.)
• Damages incurred under the scope of employment (covered by workers
comp or employer's liability), unless damages are incurred by a domestic
employee ineligible for workers comp.
• Damage to properties rented to or used by the insured, with the exception
of rented dwellings or private garages used by the insured.
• Vehicles being used for hire to transport people or goods (i.e. taxis)
• Company-owned business vehicles
• While employed in the business of, or engaged in repairing, servicing,
parking or storing vehicles. (i.e. mechanics, valets, vehicles released to
storage facility)
• Vehicles taken without permission
Part B Medical Payments
Earlier we learned that auto liability insurance will only cover medical expenses
for other individuals injured in an accident caused by the insured party. But what
happens if the insured party suffers injuries in the same accident?
Medical payments coverage is a "no-fault" insurance coverage, meaning it will

pay for the medical expenses of the insured party and other “covered persons”
regardless of who was at fault in an accident.
Medical payments coverage will also pay medical expenses if a “covered person”
is struck by a vehicle as a pedestrian.
Insuring Agreement / Definitions
The insuring agreement for Medical Payments states that the insurer will pay for
bodily injuries sustained by any “covered person” as the result of an auto
accident. The insurer will cover these expenses for up to three years from the date
of the accident.
The Medical Payments insuring agreement defines “covered persons” as:

• You or any family member
• Any other person occupying “your covered auto” (i.e. passengers in any car
the insured is driving with permission)
Coverage applies while any “covered person” is occupying or struck by a motor

vehicle or trailer designed for use on public roads. Medical payment coverage also
applies when the insured is struck as a pedestrian or as a bicyclist.
Medical payments coverage pays medical and funeral costs up to policy limits.
Medical payments coverage is valid for three years from the date of the accident,
and applies a single limit to each person per accident. Common limits are $1,000,
$2,000 $5,000, $10,000 and up per incident.
Exclusions to Medical Payments

• Accidents involving vehicles with less than four wheels (i.e. motorcycles,
golf carts)
• Autos rented or leased for hire
• Autos used without permission
• Commercial vehicles
Vehicles used as a residence (including motor homes when used as a residence)
Injuries incurred under the scope of employment (covered by worker’s comp)
Medical payments coverage is paid in excess of Personal Injury Protection (PIP)

coverage, which we'll study later. This means medical payments coverage will
kick in only after PIP coverage has been fully exhausted.
Part C Uninsured / Underinsured Motorists
Uninsured and underinsured motorist coverage is designed to provide an insured

party protection against bodily injury and / or physical damage caused by
uninsured or underinsured motorists. In effect, UM/UIM allows the policyholder
to purchase liability insurance for any uninsured drivers that may hit them.
Some policies may include physical damage by default, while others may require
the policyholder to purchase an endorsement to cover physical damage by an
uninsured or underinsured motorist.
An uninsured motorist is a motorist who carries no liability insurance, and also

includes motorists with liability insurance, yet their insurer refuses to pay or is
unable to pay the sums due for an accident. “Hit-and-run” drivers are also
considered uninsured motorists.
An underinsured motorist is a motorist who does carry insurance, but does not
carry enough insurance to pay for your damages. In such a case, the insured can
turn to their own UM/UIM policy to recover any damages over and above the
driver-at-fault’s policy limit.
Insuring Agreement and definitions
The UM / UIM insuring agreement states that the insurer will pay for bodily
injuries (and / or physical damage) to “covered persons” when these damages are
caused by the owner or operator of an uninsured vehicle.
“Covered persons” under UM/ UIM include:

• The insured and family members of the insured
• Any other person in “your covered auto.”
“Uninsured motor vehicle” refers to:

• Any auto without a liability bond or policy attached at the time of the
accident
• Any hit-and-run driver
• Any auto covered by liability at the time of the accident, but the insurer
cannot pay, will not pay, or has experienced insolvency and is unable to
pay
• An underinsured auto, meaning an auto whose policy applies, but the
extent of the damages are such that the covered person cannot recover the
full amount necessary to cover expenses
Uninsured motorist coverage also covers the insured and family members if
injured as pedestrians or bicyclists.
Exclusions to UM / UIM coverage include:
• Bodily injury caused by vehicles owned or used by the insured, but not
covered by their policy
• (i.e. you can’t strike your insured vehicle with your uninsured vehicle and
make a claim)
• Any vehicle owned by a government entity
• Injuries caused by off-road or racing vehicles
• Intentional acts
• Vehicles used as a premises
• Accidents involving a covered auto when leased or rented to another
person, or used for hire
• A covered auto when taken without permission (does not include family
members)
Part D Coverage for Damage to Your Auto
Coverage for Damage to Your Auto, sometimes known as “Physical Damage”,

allows the policyholder to purchase insurance to protect their financial interest in
their own automobiles. There are two types of Physical Damage coverage:
Collision
Collision coverage is an insurance protection that provides indemnification for

damages to your own vehicle as a result of a rollover or a collision with another
car or object. Even if you cause an accident that results in damage to your own
vehicle, your collision coverage will step in to pay for the damages minus the
deductible. Collision coverage is an optional insurance coverage, and often an
expensive one.
When a car is financed or leased, the finance company will often require collision
coverage to protect their insurable interest in the vehicle. When a motor vehicle is
totaled, collision coverage will pay for the actual cash value of the car at the time
of the accident. (Actual Cash Value = current depreciated market value of the
car.) Partial losses will be replaced / repaired with materials of like kind and
quality.
Collision coverage applies to "your covered auto" and any "non-owned" auto the
insured is driving.
Collision coverage also allows the insured to collect from their own insurance
company in the event of an accident whether at-fault or not.
Collision coverage will also pay up to $20 a day for transportation expenses while
the covered auto is being recovered and/ or repaired, but these expenses are
subject to a policy limit of $600.
Transportation expenses can be utilized 48 hours after the accident until the car
is repaired or returned.
Other than Collision
Also known as comprehensive coverage, other-than-collision is an insurance

protection that provides indemnification for damages to your own vehicle as a
result of any event other than a collision or overturn.
Comprehensive coverage can indemnify the policyholder for damages resulting

from a multitude of perils, and essentially provides "all-risks" coverage for an
automobile, with the exception of causes of loss explicitly listed in the exclusions
sections of the insurance contract.
Other-than-collision protects the policyholder for damages caused by:

• Theft
• Hail
• Rain / Flood
• Wind
• Vandalism
• Explosion
• Earthquake
• Riot/Civil
• Unrest
• Falling objects
• Fire
• Bird or Animal
• strikes
When a car is financed or leased, the finance company will often also require
comprehensive coverage to protect their insurable interest in the vehicle. When a
motor vehicle is totaled, comprehensive coverage pays for the actual cash value of
the car at the time of the total. (Actual Cash Value = current depreciated market
value of the car.) Partial losses will be replaced / repaired with materials of like
kind and quality.
Comprehensive coverage applies to "your covered auto" and any "non-owned"

auto the insured is driving, and is limited to the extent of the terms set forth in
the policy.
Comprehensive coverage will also pay up to $20 a day for transportation

expenses while the covered auto is being repaired, but these expenses are subject
to a policy limit of $600. Transportation expenses can be utilized from 48 hours
after the accident until the car is repaired or returned.
Exclusions for Damage to Your Own Auto include:

• normal wear and tear
• freezing
• mechanical and / or electrical breakdown
• tire damage
• war and nuclear events
• stereo equipment and electronics, unless permanently installed in the
automobile (subject to
• policy limits, usually $1,000)
• government or civil confiscation of owned or non-owned autos
• losses to non-owned autos taken without permission
• losses involving any racing or speed event, or losses incurred in a facility
designed for such events
No Fault Coverage-Personal Injury Protection (PIP)
No- fault coverage, or Personal Injury Protection (PIP) coverage, is an insurance

protection wherein the policyholder is indemnified for bodily injuries only by his
or her own insurance company regardless of who was at fault in an auto accident.
In turn, a PIP policy restricts the rights of the insured to seek recovery in the civil
court system for losses.
PIP protection as a whole offers several advantages:

• it reduces the number of insurance-related lawsuits clogging the civil court
system.
• PIP attempts to contain rising automobile insurance costs.
• as a first-party claim, the policyholder deals with their own insurance
company rather than an alien insurer.
• PIP coverage expedites payment of medical bills and lost wages.
Many states, like Florida, require a minimum amount of PIP coverage. Other
states, like Washington state, require insurers to notify policyholders about PIP,
and their customers must “opt-out” of PIP coverage.
PIP coverage provides:

• Medical expenses and medical transportation expenses (PIP may only pay
a specified
• percentage of medical expenses; Florida PIP pays 80% of reasonable
medical costs)
• Coverage for income loss, usually set at a percentage of income before the
accident
• Replacement services including caregivers and maids
• Death benefits
When applicable, PIP coverage is a primary coverage, and medical payments

coverage pays in excess of PIP.
PIP Covers:
You, family members who reside with you, and passengers in any car a “your
covered auto”.
PIP insurance coverage also provides for bodily injuries if you are struck as a
pedestrian by a vehicle, or if you strike a pedestrian with your vehicle.
PIP coverage restricts the policyholder's right to sue up to coverage limits; if

bodily injury exceeds the amount of PIP coverage, then the policyholder may try
to recover additional damages from at at-fault driver.
Part E: Duties After an Accident or Loss
Part E of the PAP policy defines the duties of the policyholder after an accident or
a loss. As part of the policy agreement, the policyholder must meet an established
set of responsibilities in the event of an accident or loss. If the policyholder does
not meet these requirements, the insurer can elect to nullify
the contract and refuse to pay on the policy.
Duties of the insured include:

• The insured must promptly report all accidents to the insurer, including
the how, when and where.
• The insured must also notify the police in the event of a vehicle theft or a
hit-and-run.
• The insured must fully cooperate with the insurer during any
investigation or court proceeding.
• The insured must promptly forward all pertinent legal papers regarding
a claim to the insurer, including accident reports, medical bills and
repair costs.
• The insured must protect all covered vehicles from further loss after an
incident / accident.
• The insured must allow the insurer access to damaged vehicles for
inspection and appraisal before disposal or repair.
• When a claim is filed, the insured must submit to a physical/ medical
examination and provide proof of loss if requested by the insurer.
• If the insured files any lawsuit regarding an accident submitted as a
claim to the insurer, the insured must also forward any legal documents
regarding the lawsuit to the insurer.
Part F General Provisions
Part F- General Provisions outline a set of conditions that apply to the entire
contract.
Policy Period and Territory
A PAP contract will only apply to accidents and losses that occur within the policy
period stated on the declarations page.
In addition, a PAP contract only applies to accidents and losses that occur within
the policy territory.
The policy territory includes:

• The United States
• Canada
• Puerto Rico
The PAP will also apply while being shipped between ports within the policy
territory.
Mexico is NOT part of the policy territory!
Changes to Policy
The changes in policy provision will state:
A written insurance policy cannot be changed or waived without an endorsement

written by the insurer and signed by the policyholder.
Changes in premium will take effect in accordance with state laws regarding
premium increases. The insurer will maintain the right to increase premiums
immediately in the following situations:
• The number, type, or use of automobiles
• Changes in coverage, deductibles or limits
• Changes in address
• Changes in covered persons
Also, any increased amounts of coverage offered without an increase in premium

will be applied automatically on the effective date of the change in policy.
For policies written for more than year, insurers will reserve the right to review
the premium rate for the following year on each anniversary of the policy.
Legal Action Against an Insurer
No legal action can be taken against an insurer unless the policyholder has
complied with all of the terms within the policy.
In addition, under Part A- Liability, no legal action can be taken against an

insurer until both parties agree in writing that the policyholder has an obligation
to pay, OR an obligation has already been determined by a judgment after trial.
Finally, you can NOT file a lawsuit against the insurer for the purpose of
establishing whether or not an insured is liable for a loss. In other words, if your
insurance company decides you are liable, but you don’t agree, you can not sue
your insurer over the issue of liability.
Insurer’s Rights to Recover Payment
An insurer’s right to recover payment essentially emphasizes the insurers rights

to subrogation.
If someone causes you bodily injury, and your own insurer pays you for those
injuries, you then subrogate your rights to collect money from the liable person to
the insurer. Simply put, a policyholder cannot collect twice for the same injury:
You cannot collect from the insurer AND the person liable for damages. Once you
collect from the insurer, you automatically transfer the rights to collect from the
liable party to the insurer, but only up to the maximum amount the insurer paid.
In addition, the policyholder must do whatever is necessary to allow the insurer

to exercise their rights to subrogation, and may not seek to prejudice the liable
party.
If a policyholder does receive payment from both parties, the policyholder must
hold the excess funds in htrust, and reimburse the insurer for the full extent of
their payment.
Subrogation rights DO NOT apply to Part-D Physical Damage.
Termination of a Policy
The termination provision establishes under what conditions the insurer and the
insured may elect to cancel the insurance policy.
The insured may cancel a policy at any time, provided the insured returns the
policy to the insurer (i.e simply telling the insurer you’d like to cancel), or the
insured may provide the insurer advance written notice of an exact date to
terminate policy.
The insurer may cancel a policy under the following conditions:
1. If the policyholder fails to make a premium payment, the insurer must provide
10 days written notice of cancellation to the insured.
2. If the insurer elects to cancel the policy within the first 60 days of the contract,
the insurer must provide 10 days written notice of cancellation to the insured.
3. After 60 days, the insurer may only cancel a policy for the following reasons:
• non-payment of premium
• misrepresentations on behalf of the insured
• a fraudulent claim filed by the insured
• the insured or a covered person under the insured has their driver’s license
suspended or revoked
In the above cases, the insurer must provide 20 days written notice of intent to
cancel the policy.
Other Insurance
If a policyholder has multiple liability policies covering the same loss, an insurer
will establish that their proportion of the loss equals that insurer’s percentage
proportion of the policyholders total liability coverage by all insurers. Each
insurer will only pay their proportion of the loss in regards to the total liability.
“Other Insurance” also states that any liability offered to a “covered person”
driving a non-owned vehicle will be in excess of the liability offered by the car
owner’s liability policy.
Popular Endorsements:
Suspension of Insurance
Allows the policyholder to suspend coverage on a vehicle for an extended amount

of time. While suspended, there is no coverage nor is the policyholder charged a
premium.
Towing and Labor
A towing and labor endorsement pays a specified limit for towing and labor
charges for disabled vehicles or vehicles that have been in an accident. “Labor”
covers only expenses realized at the location of disablement.
Extended Non-Owned Coverage
Provides extended coverage for non-owned vehicles such as a car supplied by a
company. Also provides coverage for non-owned vehicles used for carrying
people or property for a fee. In extended non-owner coverage, liability applies to
the named insured only.
Customized Equipment
Provides an extra layer of insurance for vehicles furnished with valuable

equipment not covered with a standard policy. Especially popular with vans,
trucks, vehicles used for both show and transportation.
Miscellaneous Vehicle Coverage
Allows a policyholder to add a wide variety of specialized vehicles to an auto

policy, including motorcycles, off-road vehicles, motor homes, mopeds
Non-Owner Coverage
Non-owner coverage provides liability protection for individuals who do not own
automobiles, but frequently drive the vehicles of others. Liability applies to the
named insured only.
Chapter 4.1 - Commercial
Property
Commercial Property Insurance
Commercial property insurance is a form of insurance that covers direct and

indirect losses related to business properties other than farms and one-to-four
family dwellings.
Commercial property insurance can offer businesses protection against economic

loss arising from damages, repairs and replacement of buildings and related
structures, the contents of those buildings, loss of business income, and even the
removal of debris from damaged structures or employee property
protection.
Like homeowners policies, commercial property insurance is often sold as a

package policy with an assortment of property and liability coverages rolled into
one insurance policy.
In this section, we’ll take a closer look at the structure of a commercial property
policy, the forms of coverage available, and the various additions and extensions
of coverage provided with each form, and later on we will review the causes of
loss forms.
Please note that while basic commercial property policies offer actual cash value
(ACV) valuations, businesses may request replacement cost coverage as an
endorsement, but also must meet the 80% coinsurance requirement.
Commercial property policies utilize named-peril or open-peril protections,

which are specified in the causes of loss forms. The causes of loss forms for
commercial insurance closely mimic the causes of loss forms we studied with
homeowners’ policies, but we’ll review them once again later on in this chapter.
Structure of a Commercial Property Policy
A standard commercial property policy form will contain:
1. Declarations Page
2. Common Policy and Commercial Property Conditions
3. Coverage Forms
4. Causes of Loss Forms
1. The Declarations Page
The declarations page for a commercial policy, as in any insurance policy, will
list:
• the name and address of the insured party

• the property covered in the policy
• limits of the insurance policy
• deductible on the policy
• the term and expiration date of the policy
• identifies all coverage forms and endorsements that apply to the policy.
2. Common Policy and Commercial Property

Conditions Page
The conditions pages contain provisions inserted into the policy that qualify or
place limitations on an insurer's promise to pay or perform. If certain policy
conditions or obligations are not met by the policyholder, the insurer establishes
its right to deny a claim in the conditions page.
The conditions page will highlight the rights and duties of the both the insurer
and the insured party in relation to the contract, and qualify the rights of the
parties regarding cancellation, policy changes, lawsuits etc.
In the next few sections, we will briefly discuss several pertinent issues resolved
in these conditions pages of commercial property insurance contracts. It is
important for adjusters to understand and remember these coverage conditions.
Policy Period / Coverage Territory
An insurance policy will provide coverage only within the stated policy period
listed on the declarations page, and only within the policy territory of the United
States, Canada, and Puerto Rico.
Deductible
The standard deductible on a commercial property policy is $500.
Cancellation/ Non Renewal
The cancellation / non-renewal section of the conditions page outlines the rights
and duties of each party in regards to the cancellation of an active insurance
contract.
As with most insurance contracts, the policyholder can choose to cancel an

insurance policy at any time by providing the insurer with advance written notice
of cancellation, or by returning the contract to the insurer with an effective date
of cancellation.
Insurers may also cancel contracts, but cancellation conditions are subject to a
variety of state insurance laws. Generally speaking, insurers are required to
provide at least 15 days written notice of cancellation to the policyholder
regardless of why they are cancelling the contract.
Insurers may reserve the right to cancel a commercial property insurance

contract for the following reasons:
• New policies- Insurers may reserve the right to cancel a policy without
reason in the first 60 days, but must provide appropriate written
notice of their intent to cancel to the policyholder.
• Non-payment of premiums.
• Conviction of a crime that the insurer feels might increase their risk of
insuring the policyholder. (e.g. if a policyholder is convicted of arson)
• Fraud or material misrepresentations on behalf of the policyholder.
• Acts of omission, or violation of policy conditions on behalf of the
policyholder.
• Material physical changes to an insured property.
• If the insurer has sufficient probable cause to believe that the
policyholder may or will intentionally destroy or allow for the
destruction of an insured piece of property.
• In regards to liability, if the insured loses their license to operate or
practice in their chosen profession with which they maintain liability
coverage.
Upon cancellation, insurers are required to return all premiums on a pro-rata

basis.
Commercial Vacancy
Commercial buildings are subject to certain coverage suspensions if left vacant

for 60 consecutive days.
Coverage for vandalism, sprinkler leakage, broken glass, water damage and theft
is automatically suspended when a commercial property has been left vacant for
60 consecutive days.
In addition, the insurer may reserve the right to severely restrict coverage on
buildings qualified as “vacant” under the terms specified in the policy. Most
policies will automatically decrease coverage by 15% when a building is deemed
vacant.
ACV vs. Replacement Cost
Commercial policies utilize actual cash value valuations, unless the insured
party adds an endorsement specifying replacement cost valuations. Like
homeowners policies, replacement cost valuations require the commercial
venture to maintain at least 80% coinsurance in their properties. We’ll review
coinsurance later on in this section.
Changes in Policy
All policy changes must be added by endorsement, and agreed to by both the
insurer and the first named insured on the policy.
Concealment, Misrepresentation and Fraud
The concealment, misrepresentation and fraud condition allows the insurance

provider to void any and all insurance coverage if the policyholder misrepresents,
distorts, or conceals any materially relevant facts to an insurance policy.
Control of Property
Control of property states that any act of neglect of a person other than the
policyholder beyond the direction and control of the policyholder will not affect
insurance coverage.
For example, if an employee of an insured commits a negligent act that causes a

fire on an insured property, insurance coverage will not be impaired.
Control of property also specifies that if a policyholder maintains an insurance

policy covering multiple properties, any breach of policy conditions will only
affect coverage at the property where the actual breach occurred.
Other Insurance
"Other Insurance" dictates the provisioning of claim payments amongst insurers

if an insured loss can be covered by two or more applicable insurance policies
written on the same basis.
Some policies will provide no coverage when another policy is in place, while
others will pay in excess to the primary policy. Most commonly, each insurer will
agree to pay their share of the loss in proportion to their share of all policy limits
applicable to the loss.
The other insurance clause is applied to satisfy enforcement of the “principle of

indemnity”, which states that no insured party can profit from an insured loss.
Insureds cannot collect twice or “double recover” for damages to insured
property.
Legal Action Against Us or Legal Action Against an Insurer
This condition stipulates that a policyholder must meet all the obligations of, and
complied with all terms of, an insurance policy before bringing any lawsuit
against an insurer.
In addition, a policyholder has two years from the date of a loss to commence a
lawsuit against the insurer, provided the above terms are met.
Subrogation
Any person or organization who receives a claim payment under an insurance

contract policy automatically transfers to the insurance company any rights
against others, to the extent of payment of the original payee by the insurance
company.
In other words, once a policyholder has collected an insurance payment for

covered damages, the policyholder automatically transfers his/her legal right to
collect from the liable party to the insurance company that paid the claim.
However, subrogation only applies up to the amount the insurer paid out on the
claim. If an injured party realizes $150,000 in damages from a loss and the
insurer indemnifies the injured party for $100,000, the policyholder only
subrogates his right to collect $100,000 from the liable party to the insurer. But
the injured party may still pursue the liable party for the additional $50,000 in
realized damages.
Subrogation prevents any attempts at double recovery (recovery from a liable

party AND an insurer) by an injured party.
Liberalization
Liberalization allows, within a 45-day window, an insured party to automatically
adopt any broadened insurance coverage provided by an insurer assuming there
is no increase in the cost of the premium.
No Benefit to Bailee
The No Benefit to Bailee condition essentially states that the insurance policy
does not apply to insured property in the custody and/ or control of another
person by permission. (Property in the possession of a bailee would be covered by
the insurance of the bailee.)
3. Commercial Coverage Forms
The Building and Personal Property Coverage Form
The most basic commercial property form is referred to as a "Building and

Personal Property Coverage Form." This form is the basis of all commercial
property policies, and contains three parts:
• Coverage A- Buildings and Structures

• Coverage B- Business Personal Property
• Coverage C- Personal Property of Others
Coverage A Buildings and Structures
Coverage A- Buildings and Structures applies to the buildings and structures

described on the declarations page, any additions to those buildings or additions
under construction, and also includes any construction equipment and/ or
building materials within 100 feet of the insured premises. The declarations page
will specify a limit of insurance for each type of property covered.
Coverage A provides insurance protection for:

• buildings and structures.
• permanently installed fixtures in structures, such as lighting and
security systems.
• permanently installed equipment and machinery.
• property used to maintain the business (ladders, fire extinguishers).
• flooring and floor coverings, heating, ventilating, refrigerating,
cooking, and dish-washing equipment.
Coverage B -Business Personal Property
Coverage B applies to business personal property. We can distinguish business

personal property from business buildings and structures in the same way we
distinguish our personal possessions from our dwellings in a homeowners' policy.
Business personal property is simply property of the business that is not affixed
to the building and is used to service the business, and, more likely than not, is
used on an every day basis.
Business personal property can include:
• furniture, loose fixtures, loose machinery, loose office equipment and

other stock used in the course of business.
• all other business owned personal property used primarily for
business purposes
• the value of labor, services and/ or materials furnished or arranged on
the personal property of others (Example: the insured receives a
couch from a client for refurbishing, during which a fire burns down
the repair shop. BPP will pay for the labor and materials used to
refurbish the couch, even though it is now destroyed.)
• improvements and betterments made by commercial tenants,
including signs, storefronts and other alterations and/or installations
acquired at the tenants expense
• leased business personal property for which the insured is
contractually obligated to provide insurance such as copiers, large
printers or phone systems
• all such business personal property that is in the open or in a vehicle
within 100 feet of the business premises.
Coverage C Personal Property of Others
Personal property of others refers to property owned by other people, but in the
care, custody and control of the insured business. Coverage C provides $2,500 in
coverage to the policyholder.
For example, if a client had his laptop stolen from your place of business, it
would be covered by Coverage C for up to $2,500.
Personal property of others coverage applies only to the locations listed on the
declarations page.
Building and Personal Property Exclusions
The Building and Personal Property Form specifically excludes several types of
property from coverage, including:
• Currency, bills, accounts, evidences of debt, securities, food stamps,

and bullion
• Animals, unless owned by others and boarded by the policyholder
• Automobiles held for sale
• Bridges, roads, patios, walkways or other paved surfaces
• Contraband or property being illegally transported or traded
• The costs associated with excavations, filling, or grading
• Foundations of buildings or structures, machinery or boilers if such
foundations are below ground or lower than the lowest basement
floor.
• Outdoor radio and TV antennas or masts and associated wiring
• Underground pipes or drains
• Fences, wiring and masts
• Outdoor signs not attached to buildings
• Trees, shrubs, plants
This is only a partial list, and once again adjusters need to analyze each policy
carefully to determine the applicable exclusions to each policy.
Additional Coverages Provided by Building and Personal Property

Coverage Forms
Commercial Property Forms provide a multitude of extended coverages to the

base policy. Some of the more common additional coverages include:
Debris Removal
Like a homeowners policy, a commercial policy will add extended coverage for
the removal of debris from the insured property if the debris resulted from a
covered loss.
Commercial property policies provide up to $10,000 in debris removal costs, and

the costs associated with debris removal are not subject to coverage limits.
Preservation of Property
Preservation of property coverage is designed to cover the expenses of

protecting property from further damage from a covered peril. It covers property
while in transport, and while stored at another location, and is not subject to
coverage limits.
For example, if a fire burns down part of a factory and leaves valuable machinery
exposed to the elements, preservation of property coverage would pay for the
policyholder to move the machinery to a safe facility, and would also continue to
provide insurance protection for that property from covered perils while stored
away from its original location.
Preservation of property coverage will also indemnify the policyholder for up to

30 days of storage fees associated with storing insured property at another
location due to damaged buildings.
Fire Department Service Charge
Extended coverage can pay up to $1,000 for fire department service charges
when the policyholder utilizes emergency services in an effort to protect covered
property. There is no deductible for Fire Department Service Charges.
Pollution Clean-up and Removal
Provides coverage up to $10,000 for pollution damages as a result of pollution

damages caused by a covered peril.
For example, if a lightning bolt strikes a waste container full of pollutants on the
side of an insured building, causing the container to explode, pollution clean-up
and removal coverage would provide indemnification for costs related to
cleaning up the spilled pollutants.
Pollution clean up and removal only applies if the policyholder provides written
notice of the loss within 180 days of the covered loss.
Increased Construction Costs
Increased construction costs activate when a covered loss must be replaced

under the application of new building ordinances, and only applies to
policyholders whose buildings are insured on a replacement cost basis.
For example, let's say a roof peeled off of an older, insured building due to a
strong wind gust. In repairing the roof, a contractor realizes local building codes
have been updated to reflect more stringent, and expensive, guidelines for
anchoring the roof to the building structure.
Increased construction costs coverage would indemnify the policyholder for the
increased costs associated with meeting the new roofing guidelines.
Increased construction cost coverage provides up to $10,000 indemnification, or

5% of the limit of insurance for the damaged building, whichever is LESS. (If a
building is insured for $100,000, increased coverage costs would only indemnify
the policyholder for up to $5,000.)
Electronic Data
Electronic data coverage indemnifies the policyholder for costs associated with
replacing or restoring electronic data lost or damaged due to a covered cause of
loss.
The covered causes of loss for electronic data includes viruses or harmful
computer codes introduced to computers used by the insured, but NOT when the
viruses are introduced to the computers by employees of the insured.
So, for example, if an employee is perusing Facebook at work and inadvertently

downloads a harmful virus, electronic data coverage would not apply. However, if
an outside hacker breaks in to a company computer system and plants a virus
or key logger, then electronic data would apply.
Electronic data coverage provides up to $2,500 in indemnification to the

policyholder per year, with no limit to the number of occurrences.
Coverage Extensions Provided by Building and Personal Property

Forms
Commercial property policies offer a number of coverage extensions to

policyholders who maintain the minimum co-insurance requirement of 80% to
value. These coverage extensions are not subject to coverage limits, and include:
Newly Acquired Properties Coverage
Newly acquired properties coverage provides 30 days of insurance coverage for

new buildings under construction at the insured premises, or for any newly
acquired business properties located off the insured premises.
Newly acquired properties coverage provides up to $250,000 in coverage for

buildings and structures, and $100,000 business personal property coverage.
Property Off-Premises
Property off-premises coverage provides up to $10,000 for covered business

personal property temporarily not on location of a property owned, leased or
rented by the policyholder.
For example, if ABC Design sent a convoy of employees out of town to do a series
of business presentations to potential clients over the course of several days, they
may set up and store their presentation equipment in a hotel conference room.
With property off-premises coverage, this property maintains insurance coverage
until it safely returns to the insured premises.
Property off-premises coverage excludes items off the insured premises for the
purpose of selling the property, or in the hands of salesman who intend to sell the
property. For example, if a company salesman leaves the insured location with a
carload of mink coats he intends to sell out on the road, property off premises
coverage would not apply in the event the coats were damaged by a covered peril.
Personal Effects and Property of Others
As an extension of business personal property coverage, the personal effects and

property of others extension provides a maximum of $2,500 for damage or
destruction to personal effects of the insured, employees of the insured, or
personal items in the care, custody and control of the insured. The damage must
occur on the insured premises for the extension to apply.
This extension does NOT apply to the theft of personal effects.
Valuable Papers and Records
Coverage B includes up to $2,500 of insurance coverage for costs associated with

replacing or recovering valuable paperwork or computer records destroyed by a
covered peril.
Outdoor Property
The outdoor property extension provides up to $1,000 of coverage for damages to

TV and radio antennae, detached signs, and trees, plants or shrubs. Trees, plants,
and shrubs, however, are subject to a maximum of $250 per unit.
Outdoor property is covered from the perils of fire, lightning, explosions, riot and
civil commotion, and damage by aircraft.
Non-Owned Detached Trailers
The non-owned detached trailer extension provides insurance protection for any
non-owned trailers while in use for business purposes on the insured premises,
provided the trailer is not attached to a vehicle. The limit to this extension is
$5,000, and the policyholder must have a contractual responsibility to pay for
any damages to a trailer for the coverage to apply.
Business and Personal Property Form Conditions
While every commercial policy establishes a set of common policy conditions that
apply to the policy as a whole, each coverage form will also establish a set of
conditions which apply to that particular coverage form. The Business and
Personal Property Form establishes the following conditions as a basis of
insurance coverage:
Abandonment
The abandonment condition clarifies that the insurance company holds no

financial responsibility for properties abandoned by the insured.
Insurers use this condition to reiterate that their only role in the insurance
relationship is to provide financial indemnification for damages to property. They
are not financially responsible for cleaning up after, disposing of, or demolishing
damaged properties.
Appraisal
The appraisal condition establishes the rules the insurer and the policyholder
must follow if they disagree on the value of a loss that both parties agree is
covered by the insurance contract.
Either party is permitted to demand an appraisal of damages. Once a party

demands an appraisal, both parties must hire an impartial appraiser, and in turn
those appraisers must select an umpire. If the appraisers of both parties can
agree on the amount of loss, the case is settled for that amount. If the appraisers
disagree, the umpire will ultimately decide the value of the loss.
Each party must pay for their own appraiser, and the two parties must split the
costs of the appraisal process and the umpire.
Duties In the Event of a Loss
The Building and Personal Property Form conditions will also outline the duties
of the policyholder in the event of a loss. If the insured fails to comply with these
conditions, the insurer may refuse to pay out on the insurance contract.
In the event of a loss, the policyholder MUST:
• Notify the police if the loss involved a crime or possibly involved a
crime.
• Provide prompt notice to the insurance company about what property
was involved, and the circumstances surrounding the loss.
• Provide the insurer with an accurate description of how, where and
when the loss occurred.
• Take reasonable steps to prevent further damages to covered
properties, and keep an accurate record of the expenses incurred to
further protect property.
• Provide a complete list of damaged and undamaged inventory,
including quantity, costs, values, and the total loss for the event.
• Allow the insurer to inspect the property, as well as any records or
books kept by the company.
• Allow the insurer to inspect and appraise damages to covered
properties.
• Sign a sworn proof of loss and remit the proof to the insurer within 60
days of the insurer’s request.
• Cooperate in any and all investigations and settlement procedures.
Loss Payment
The loss payment condition clarifies to whom, how, and when a claim will be
paid.
Essentially loss claims are paid to the named insured, but only up to the amount
of insurable interest held by the policyholder. If damaged properties share
ownership, appropriate compensation will be paid to listed loss payees on the
declarations page.
The insurer will either pay:
• The value of lost or damaged property

• The cost of repairing or replacing damaged property
• The agreed or appraised value of damaged property
• To repair, rebuild or replace damaged property with other property of
like kind and quality.
The insurer will agree to pay within 30 days of receiving the sworn proof of loss
from the policyholder.
Recovered Property
The recovered property condition simply states that if either party to the
insurance contract recovers property involved in a claim, each party must notify
the other of the recovery. If the insured wishes to keep the recovered property,
the insured may do so by returning all monies paid for the property by the
insurance company. Otherwise, the insured may keep the monies paid and forfeit
the right to the property to the insurer.
Vacancy
Just as we discussed earlier in the common policy conditions, insurers place

certain conditions on properties they determine are “vacant.” By policy
definition, “vacant” means any building owned by the policyholder that currently
utilizes less than 31% of the total available square footage of the entire building.
If less than 31% of an insured building is occupied for 60 consecutive days, the
building will be considered vacant and the following conditions will apply:
• All coverage for vandalism, sprinkler leakage, glass breakage, water

damage and theft shall be suspended.
• All other insurance coverage will be reduced by 15%.
Valuation
The valuation condition establishes that losses or damage to covered properties

are paid on an actual cash value basis. If the policyholder maintains the 80% level
of coinsurance on a property, all losses to buildings and structures totaling less
than $2,500 will be repaired or restored on a replacement cost basis.
The valuation condition also clarifies that stock sold but not yet delivered will be
indemnified at its net selling price, and where required by law, glass with safety
glazing will be repaired at it’s replacement cost.
Tenants improvements and betterments will also be paid using ACV, but only if
the tenant repairs the damaged betterments promptly. If the tenant does not
make prompt repairs, the tenant will be indemnified according to a proportion of
when the betterments were purchased compared to the end of the tenant’s
current lease.
Co-Insurance
We’ve covered co-insurance before in our studies, but lets briefly review co-
insurance here as it applies to commercial insurance.
Essentially, co-insurance is a means to encourage policyholders to maintain a

level of insurance coverage somewhat equivalent to the full value of the property
they are insuring. If a policyholder insures a property to 80%+ of its current
actual cash value, the policyholder has met the coinsurance requirement and is
considered “fully insured”, and, as a benefit, all partial losses to the covered
property will now be paid for in full by the insurer, minus the deductible.
If the policyholder insures a property for less than 80% of its actual cash value,
the policyholder becomes a co-insurer on partial damages to the property, and
now must pay for a percentage of partial losses in direct proportion to the
percentage amount they are underinsured. Let’s look at some examples:
Example 1:
Let’s say a building has an actual cash value of $200,000. In this case, the
policyholder must purchase at least $160,000 ($200,000 x .80= $160,000) in
insurance coverage to meet the coinsurance requirement established by the
insurer. If the policyholder purchases $160,000 or more in insurance on the
building, all partial losses will be covered by the insurer minus the deductible.
Actual Cash Value of Building: $200,000
Co-insurance Requirement: $160,000
Insurance carried by the policyholder: $160,000
Damages realized: $50,000
Deductible: $500
Insurer pays: $49,500
Policyholder pays: $500 deductible
Example 2:
Now let’s say the same policyholder decides to only purchase $100,000 in
insurance coverage on the $200,000 building. Because the 80% coinsurance
requirement threshold has not been met, the policyholder will now become a co-
insurer on any partial losses to the building. Let’s figure out how much the
policyholder would have to pay by being underinsured:
Actual cash value of the building: $200,000
Co-insurance requirement: $160,000
Insurance carried by policyholder: $100,000
In this case, we see the policyholder needed to purchase $160,000 worth of

insurance to be considered “fully insured.” However, having only purchased
$100,000 in insurance, the policyholder is now considered “underinsured” on the
property.
To determine exactly how much the policyholder is underinsured, first we’ll

divide the amount of insurance actually purchased by the coinsurance
requirement on the property:
$100,000 / $160,000 = 62.5%
We see the policyholder has only purchased 62.5% of the necessary insurance
needed to meet the coinsurance requirement, so the policyholder is now
considered to be underinsured by 37.5% on the property (100- 62.5%= 37.5%).
In this scenario, the policyholder must now pay a 37.5% share (or penalty) on
partial losses to covered property, which is the exact proportion to which the
policyholder is underinsured on the property.
Actual cash value of the building: $200,000
Coinsurance requirement: $160,000
Insurance carried by policyholder: $100,000
Damages Realized: $50,000
Insurer Pays: (62.5% x $50,000= $31,250) - $500 deductible, or $30,750.
Policyholder pays: (37.5% x $50,000 = $18,750) + $500= $19,250
Insurance companies encourage policyholders to purchase insurance coverage

equivalent to at least 80% of the value of the insured property for two reasons:
Maintaining co-insurance not only helps protect the policyholder from facing
enormous financial distress in the event of a total loss, but it also allows the
insurer to establish an equitable means to establish premiums for its
policyholders.
Please note that policy limits still apply in the above scenario. If the policyholder
maintained the minimum 80% co-insurance requirement on a $200,000
building but suffered a total loss of property, the policyholder would still find
themselves out-of pocket for the remaining 20%, or $40,000.
Mortgage Clause
The mortgage (or “mortgageholders”) condition simply clarifies a mortgagor’s

rights in relation to the insurance contract, including their rights to proportions
of claims for damages, and their rights to receive notice if the policyholder fails to
adhere to, or pay premiums on, an insurance contract.
If the event the policyholder commits an act that voids the insurance contract, or
indeed fails to pay the premium, the mortgage clause allows the mortgage holder
to continue the policy without the consent of the insured in order to protect their
financial interest in a property.
Optional Coverages and Endorsements Available on the Buildings and

Personal Property Form
As we’ve stated previously, Buildings and Personal Property Forms provide

indemnification for damages on an actual cash value basis. However,
policyholders may also select the following optional coverages for part or all of
their insurance package.
Agreed Value Coverage
With agreed value coverage, both the policyholder and the insurance company
must come to an agreement on a specified value for an insured piece of property
before the policy is written. Once a specific value has been agreed upon, that
value then becomes the limit of insurance on the insured item, and the
coinsurance requirement is waived. If the insured piece of property is destroyed
during the policy period, the policyholder will collect the full amount of the
agreed value as indemnification.
Agreed value coverage is often applied to rare property or high-value collector

items on a scheduled basis. For example, a novelty store may place an antique car
near the entrance of their business to attract customers into the store. While the
actual cash value of such a car is highly speculative, the novelty store may decide
to insure the car on an agreed value basis to protect their financial interest in the
car. If the car is destroyed, the novelty store will collect the agreed valued listed in
the policy.
Agreed value may also be used to protect property with wildly fluctuating prices.
Since a standard commercial policy applies ACV at the time of the loss, the
policyholder may have to pay a coinsurance penalty if the property was
underinsured at the time of the loss. Since agreed value coverage effectively
waives the coinsurance requirement, policyholders can rest assured they will
receive a pre-determined level of indemnification regardless of when the loss
occurs.
Inflation Guard
Inflation guard allows the policyholder to increase their limit of insurance on an

insured property by a specified percentage on a scheduled basis throughout the
policy term. For example, the policyholder may choose to implement an inflation
guard that instructs the insurer to increase the policy limits by 2% at the
beginning of each quarter.
Inflation guard allows the policyholder to maintain an appropriate level of

insurance relative to property value as the property value increases over time.
Replacement Cost
The replacement cost endorsement changes the loss settlement terms from actual
cash value to a replacement cost valuation. The replacement cost is the cost to
replace damaged or destroyed property with property similar in kind and quality
without regard for the depreciated value of the damaged property it is replacing.
For example, if a 15 year-old printing press is destroyed in a fire, the replacement

cost endorsement would require the insurance company to replace the printing
press with a new printing press capable of functioning with the same speed and
accuracy of the old printing press.
Replacement cost valuations can be extremely beneficial in such a situation. The

old printing press may have depreciated considerably in value at the time of the
loss, and their recovery on the destroyed item may have been negligible had they
recovered on an actual cash value basis. With replacement cost, the policyholder
is restored to their original position without regard for depreciation.
The replacement cost endorsement will always require the policyholder to meet
at least the 80% minimum level of coinsurance, and does not apply to property of
others on the insured premises.
With replacement cost, the policyholder must replace or repair damaged

properties to receive indemnification for their claim. They also have the option of
receiving the actual cash value of the loss, and then filing an additional claim for
the difference between the replacement cost and the actual cash value.
Value Reporting
If a business has property values that fluctuate throughout the year, or has a
tendency to acquire and divest multiple properties throughout the year, they can
utilize the Value Reporting Form to ensure they carry an adequate amount of
insurance at all times.
With the Value Reporting Form, the insured first purchases a limit of insurance
sufficient to cover the highest amount of property value they may realize over the
course of the policy period. Then, over the course of the policy period, the insured
must report the actual value of property covered on a specified day each month.
The insurer then adjusts the premium earned according to the actual values
reported by the insured.
With the Value Reporting Form, the policyholder is required to submit timely
and accurate value reports within 30 days of the end of each reporting period. If
an insured misses a deadline, the insurer will use the values submitted in the last
report. If the insurer determines that values were underreported by the insured,
the insurer will levy a penalty against the insured equal to the percentage the
insured underreported the value of covered property.
Other Common Coverage Forms In Commercial Property Policies
We looked the building and personal property coverage form and it's extensions
of coverage in the last section. In this section, we're going to look at a variety of
other commercial coverage forms available for commercial property insurance. It
is extremely important for adjusters to recognize and understand the different
types of coverage forms.
In the next few sections, we'll look at the following coverages:
• Business Income (or Business Interruption) Coverage Form

• Extra Expense Coverage Form
• Contingent Business Interruption Form
• Builders Risk Coverage Form
• Condominium Coverage Form
• Leasehold Interest Coverage Form
• Legal Liability Coverage Form
• Differences in Conditions Coverage Form
The Business Income Coverage Form (with Optional Extra Expense

Coverage)
The Business Income Coverage Form (or Business Interruption Coverage

Form) is designed to provide insurance protection for the loss of normal business
income due to damages caused by a covered loss. Business Income coverage has
two optional forms:
• Business Income with Extra Expense

• Business Income without Extra Expense
If you own a factory that is wiped out by a tornado, your factory obviously won't
be able to produce any goods, and your business will likely face a substantial loss
of income while the factory is being repaired or replaced. Business income
coverage is designed to indemnify the policyholder for this loss of normal
business income, and is crucial to the survival of most small and medium-sized
businesses when faced with an unexpected disaster.
Business income coverage begins exactly 72 hours after the occurrence of

damage, and continues until:
• the date the damaged property is restored or repaired, OR

• the date business resumes at a new location
The time transpiring between the 72-hour window after initial damage and the
time a repaired or replacement factory is up and running is known as the Period
of Restoration. Business income coverage indemnifies the policyholder for
normal business income the policyholder would have expected under normal
circumstances only during this Period of Restoration.
Determining an adequate indemnification figure for business interruption
coverage can prove difficult while settling claims. Generally speaking, business
income coverage will pay for the loss of what is called net income on a profit
and loss statement, plus any continuing operating expenses incurred during the
period of restoration. It is designed to pay for things like rent, salaries, payments
to the bank, utilities, taxes, administrative and other costs necessary to keep the
business running, in addition to the loss of expected profits.
A brief review of terms used in a Profit and Loss statement:
Total Revenues (sales and services provided), minus Cost of Goods Sold
(materials and labor associated directly with sales and services) equals Gross
Income. Gross Income less Operating Expenses (general and administrative)
equals Net Income from Operations.
Net Income from Operations less Interest and less taxes is sometimes
called Net Income.
Business Income coverage will not provide indemnification for cost of goods sold,
including inventory, labor, material or supervision and other expenses required
to actually make or sell products. Business income coverage will often have a
periodic reporting requirement that will determine the limits of coverage, as well
as the premium the business must pay for that coverage. Sometimes the reports
will be filed quarterly or monthly to account for seasonal variations in business
activity.
Policyholders have the option to purchase business income coverage with or

without extra expense coverage, so let’s take a look at the Extra Expense
Coverage Form here as well.
Extra Expense Coverage Form
The Extra Expense Coverage Form is designed to provide insurance

protection for any costs associated with expediting the continuance of business
operations after a covered loss.
In an effort to curb disruption of normal business operations as much as possible

after a disaster, policyholders may wish to undertake efforts to continue
operations elsewhere by “making do” at a damaged factory, contracting work to
other businesses, or leasing space elsewhere to continue operations. Extra
expense coverage seeks to indemnify the policyholder for expenses incurred in an
attempt to minimize the disruption of their normal business operations after
experiencing damages.
Extra Expense coverage can cover expenses such as:
• subcontracting work
• relocation expenses
• generators to run power at a damaged property
• leasing and rentals involved with continuing a disrupted business
Extra expense coverage can apply at the damaged property, or to cover extra
expenses associated with operating at a new property until necessary repairs are
done to the damaged property. For example, a factory may be damaged, but still
somewhat operational. The policyholder may need to go out and rent several
pieces of machinery to keep the factory going, and extra expense coverage would
pay for these rental costs.
But let's say the factory was too damaged to continue operating. The policyholder
may have to lease and move into a new building, which also would require the
policyholder to install or lease new computers. Extra expense coverage would
also apply in this situation.
While the Period of Restoration under business income coverage requires a 72

hour window before insurance coverage applies, extra expense coverage applies
immediately after damage occurs and continues until the damaged property is
repaired or replaced, or a new property is up and running.
Regarding both extra expense and business income coverage, the Period of
Restoration is not subject to the policy period as long as the initial cause of loss
occurs during the active policy period. For example, if a business is subject to a
covered loss that occurs three days before the policy term expires, the policy
continues to cover the loss of business income up until the Period of Restoration
is complete.
Business Income with or without Extra Expense
Now that we understand Business Income Coverage and Extra Expense Coverage,
let’s go back and see how the two work in tandem.
Business Income Coverage With Extra Expense simply provides both forms of
coverage simultaneously. The policy will account for the loss of business income
sustained during the Period of Restoration, and also provide coverage for all
additional costs associated with getting the business back up and running with
or without regard as to whether the additional costs actually cause a
reduction in loss.
Conversely, Business Income Coverage Without Extra Expense will also pay for
additional costs associated with getting a business back up and running, but will
indemnify only to the extent the extra expenses reduced the original
loss.
Let’s look at an example to clear that up:
Joe’s Shoe Factory burns down in a fire. Joe’s business is relatively new and he
doesn’t want to let his first customers down, so he decides to set up shop
elsewhere while his factory is refurbished. He leases a new building and rents
some machinery and resumes production of shoes, at a total cost of $80,000.
Even with all the extra expenditures, Joe is only able to reduce his $200,000 loss
by $50,000.
Business Income with Extra Expense Coverage would indemnify Joe for
$230,000, and we can determine this with the following formula:
Net Loss of business income ($150,000) + Extra Expenses (80,000) = $230,000.
Business Income without Extra Expense Coverage would indemnify Joe for
$200,000.
Net loss of business income ($150,000) + the extent to which the extra expenses
lowered the amount of loss from the original loss ($50,000).
Once again, Business Income with Extra Expense will pay the total costs of the
extra expenses regardless if the extra expenses resulted in a reduction in loss.
Business Income without Extra Expense will only indemnify to the extent the
extra expenses reduced the original loss.
Let’s use the same example, but with a different reduction in loss:
In the same situation, lets say that after the $80,000 in extra expenses, Joe was
able to reduce the loss in business income to $40,000. In this case:
Business Income with Extra Expense Coverage:
Net Loss of Business Income ($40,000) + Extra Expenses ($80,000) = $120,000
Business Income without Extra Expense Coverage:
Net loss of Business Income (40,000) + Extra Expenses ($80,000) = $120,000.
In this case, both policies would indemnify Joe for the exact same amount, even
though Business Income without Extra Expense Coverage costs much less
because the insurer is taking on less risk.
Conversely, let’s say the $80,000 in Extra Expenses led to NO reduction in Joe’s
loss:
Business Income with Extra Expense would pay Joe the loss of business income
($200,000), plus the $80,000 in extra expenses incurred, resulting in the insurer
indemnifying Joe for $280,000.
Business Income without Extra Expense would pay the loss of business income
($200,000) only, and Joe would have to eat the $80,000 in extra expenses he
laid out because they did not cause any reduction in the loss of business income.
Extra Expense Only
Some companies elect to forgo insurance coverage for the loss of business
income, and instead choose to purchase Extra Expense Coverage only.
Most frequently, we find this in the type of companies that must continue
operating regardless of the loss of business income. Banks, hospitals,
newspapers, and utilities are a few examples of businesses that might only seek
extra expense coverage, and most of these companies already have contingent
plans written up in the event one of their main production or service facilities
becomes inoperable.
The Period of Restoration in extra expense coverage is the same as with business
income coverage, but does not utilize the 72 hour window. Extra expense
coverage applies from the moment the insured experiences damages at a covered
property, and expires once the facility is repaired, replaced, or a new facility is
ready to operate.
Extra Expense coverage applies a “Limit of Loss Payment” condition to the Period
of Restoration. This condition limits the total amount of recovery available to the
insured based on 30 day increments relative to the Period of Restoration. The
limits of loss payment are expressed in percentages, and the applicable
percentages for the policy will be listed on the declarations page.
For example, the Declarations Page may state the limits of loss payment for extra
expense coverage at 40%/ 80%/ 100%. In this case, the insured is allowed to
recover 40% of coverage limits in the first 30 days of the Period of Restoration,
80% in the second 30 days, and may recover up to 100% of the limit if the Period
of Restoration is longer than 60 days.
If a company elects to buy Extra Expense coverage with a limit of $500,000 and
limits of loss payment established at 40%/80%/ 100%, the insured would be able
to recover the following amounts during the Period of Restoration:
Day 1-30: $200,000 maximum recovery

Day 31-60: $400,000 maximum recovery
Day 60+ : $500,000 maximum recovery.
Additional Coverages for Business Income and Extra Expense Forms
Order of Civil Authority
Commercial businesses occasionally find themselves unable to access their

insured premises due to an order of civil authority caused by damage or
destruction to neighboring or adjacent properties. An order of civil authority
means access to an area has been restricted by one of any number of
governmental agencies, including but not limited to police officials and
firefighters. When an order of civil authority is demanded by a covered cause of
loss to another property, the policyholder may receive indemnification for the
loss of business income incurred due to the order of civil authority.
For example, access to an insured factory may be restricted by civil authorities if

the factory is endangered by a fast-moving fire in a developed area. Even worse,
perhaps the fire has already burned through the area without damaging the
insured premises, but persistent smoldering fires in the wake of a fire have left
the entire area too dangerous to access and civil authorities determine it will not
be safe for two weeks.
Because the insured cannot access the insured premises, “order of civil authority”
coverage will kick in and provide both business income and extra expense
coverage for up to three weeks. The 72-hour window for business income
coverage still applies.
Extended Business Income
If a policyholder is still experiencing a loss of business income after the Period of

Restoration expires, “Extended Business Income” coverage will apply for up to a
maximum of additional 30 days.
Newly Acquired Properties
Provides $100,000 of coverage for newly acquired properties or properties under

construction, including alterations and additions to new buildings, and damages
to machinery and/or supplies.
Optional Coverages for Business Income
Coinsurance Method
While assessing a proper level of coinsurance for tangible property is pretty

straightforward, assessing a proper level of coinsurance for business income is
extremely complex. Where property insurance establishes a minimum level of
coinsurance at 80%, business income coverage offers the policyholder an option
of establishing the level of coinsurance at 50%, 60%, 70%, 80%, 90%, 100% or
125%.
Maximum Period of Indemnity
This option removes the coinsurance requirement and replaces it by restricting

the Period of Restoration to a maximum of 120 days after the 72-hour window
has expired.
With the Maximum Period of Indemnity, the policyholder receives coverage for
the actual business income loss sustained and extra expenses incurred within 120
days of a covered loss, or until the policyholder has exhausted policy limits,
whichever comes first.
For example, let’s say a policyholder maintains $100,000 in Business Income

coverage. A fire ravages the insured’s factory, and the policyholder experiences
the following losses in business income:
Month 1 (30 days): $20,000

Month 2 (30 days): $17,000
Month 3 (30 days): $15,000
Month 4 (30 days): $10,000
Month 5 (30 days): $5,000
Since the Period of Restoration ends at exactly 120 days, the policyholder would
receive indemnification for $62,000 under the Maximum Period of Indemnity.
Alternately, let’s look at this loss chart:
Month 1 (30 days): $50,000

Month 2 (30 days): $37,000
Month 3 (30 days): $25,000
Month 4 (30 days): $20,000
Month 5 (30 days): $15,000
In this case, the policyholder would reach their policy limits of $100,000 between
Month 2 and Month 3, and coverage would cease at the $100,000 mark.
Monthly Limit of Indemnity
The monthly limit of indemnity also removes the coinsurance requirement, but
requires the policyholder to parcel their stated limit of coverage into a fractional
maximum of coverage available per month. The policyholder may choose to
divide their stated limit of coverage by 1/3, 1/4 or 1/6, and the selected fraction is
placed on the Declarations Page.
If a policyholder maintains a limit of $120,000 in coverage, they may elect to

parcel this limit of coverage into a maximum allowable recovery of either
$40,000, $30,000 or $20,000 per month.
Let’s put this in an example:
Policyholder A chooses the monthly limit of indemnity option for his Business
Income Coverage form. He has a policy limit of $200,000, and chooses to
maximize his monthly available recovery at ¼ his policy limit. Policyholder A
experiences a fire in his factory, and realizes the following loss of business income
in the 4 months following the fire:
Month 1: $70,000
Month 2: $48,000
Month 3: $63,000
Month 4: $40,000
Policyholder A has selected to maximize his monthly available recovery at

$50,000 ($200,000 x ¼), so he would recover the following amounts per month:
Month 1: $50,000
Month 2: $48,000
Month 3: $50,000
Month 4: $40,000
Policyholder A would recover $188,000 over the Period of Restoration.
Agreed Value
The agreed value option also waives the coinsurance requirement, and requires a
company to submit to the insurer a report detailing all of their financial data from
the previous 12 months, and another report detailing their expected financial
data over the next 12 months.
The company and the insurer then establish an agreed value of coverage going
forward, based on the financial documents submitted by the company. The
company then must purchase a limit of insurance equal to the agreed value, all
losses are paid in full.
Contingent Business Interruption Coverage Form
Where business income coverage indemnifies the insured for a loss of business
income due to damages or destruction to the insured’s own property, contingent
business interruption coverage is designed to step in when the insured realizes a
loss of income because of covered property damages to key suppliers to the
insured’s business, or to key customers of the insured’s.
For example, a specialty computer manufacturer may design a new computer

system based on a specialized set of microchips. If the only supplier of these
patented microchips experiences a disastrous fire at their only manufacturing
plant, the specialty computer manufacturer may find themselves unable to
operate until their key (and only) supplier recovers.
Conversely, imagine if the microchip manufacturer only sold their specialized

chips to the same computer manufacturer. But, in this case, the computer
manufacturer experiences a fire at their assembly plant, and can no longer
purchase a steady supply of microchips from the insured.
In both of these cases, contingent business interruption coverage could step in

and indemnify the policyholder for the loss of business income due to covered
damages at a dependent business.
Take note, with contingent business interruption, the causes of loss form for the
insured party applies to damages at a dependent property. The dependent’s
property causes of loss form or insurance coverage has no relevance to the
insured’s contingent interruption policy.
Builders Risk Coverage Form
The Builders Risk Coverage Form is designed to provide insurance

protection for buildings under construction or renovation.
Builder's risk coverage includes insurance protection for building materials,

foundations, fixtures and supplies, as well as the equipment, machinery and any
temporary structures used in the construction of permanent or temporary
buildings and structures.
The policy period of a builders risk coverage form is unique in that the coverage
applies to a building under construction. Therefore, the policy period generally
begins when construction starts, and ends when one of the following events
occur:
• the policy expires.

• the building is accepted by the purchaser.
• the policyholder no longer has an insurable interest in the property.
• 90 days after construction is completed.
• 60 days after the building becomes occupied
• the property is abandoned with no intention to complete
• the building is put into its intended use
Builders risk coverage is sold on the basis of the completed value of the building,
and insured must carry 100% coinsurance on the policy to receive full value for
partial losses.
Building materials, supplies and equipment in the insured’s care or belonging to

others are covered within 100 feet of the insured premises, but the limit of
insurance on these items is $5,000.
Coverage Extensions for the Builders Risk Coverage Form include:
· Debris Removal
· Fire Department Service Charges
· Pollutant Cleanup and Removal
· Preservation of Property
· Scaffolding, Construction Forms, and Temporary Structures- protected only
while on the insured premises.
· Property at other locations- provides a $10,000 limit of insurance
protection for materials stored at other locations that are intended to
become a part of the insured premises.
· Property in Transit- provides a $25,000 limit of insurance protection for
property while in transport to the construction site.
· Sewage Backup- provides a $5,000 limit of insurance protection for
damages caused by the backup of sewer systems or drainage.
Condominium Coverage Form
The condominium coverage form is designed to provide insurance protection for

condominium buildings and complexes.
The condominium coverage form provides insurance protection for the common
areas of a condominium building, as well as the infrastructure of the
condominium building including piping, ductwork, electrical and wiring units,
and other systems important to the function of the condominium as a whole.
The condo coverage form also applies to business personal property used by the
condominium including furniture, computers, and maintenance equipment and
supplies.
The condominium coverage form does NOT cover include the business personal
property of individual commercial unit owners residing in a condominium. This
coverage would be provided by a Condominium Commercial Unit Owners Form,
which is essentially a Business and Personal Property Form for businesses
located in a condominium building.
Leasehold Interest Coverage Form
The leasehold interest coverage form provides insurance protection for indirect
financial losses to an insured business due to the inability to occupy a favorably
leased property due to covered, direct losses to that property.
A favorable lease is defined as a lease acquired below market value.
For example, let’s say a business has signed a 5-year contract to lease office space
in a new complex. At the time the lease was signed, not only were market
conditions favorable for renters, but the renter received an additional discount
for signing a five-year lease.
However, two years into the favorable lease, the new complex is consumed by a
fire sparked by lightning. At the time of the fire, the commercial real estate
market had turned in the landlord’s favor, and now the renter faces substantially
higher rents if they elect to go out and lease a new property.
For the insured, leasehold interest coverage would indemnify the policyholder for
the difference in what the insured had paid prior to the fire, and the market cost
of a signing a new lease for the balance of time owed on the old lease.
Let’s say the insured signed a five-year lease for 30,000 square feet at $10 a foot.
In this situation, annual lease costs would equal $300,000, or $25,000 a month.
After the fire, renting an equivalent amount of space in the same market would
cost the insured $15 a square foot, and they still need 30,000 square feet of
space. At the new rates, their annual lease costs will jump to $450,000, or
$37,500 a month. Leasehold interest coverage would indemnify the insured for
the increase in lease costs for the term of the initial lease, or $150,000 (net
annual increase in lease costs) x 3 (years left on the lease) = $450,000.
Leasehold interest coverage indemnifies the insured for:
• Tenant’s Lease Interest- as discussed above.

• Bonus Payments- any monies advanced to the landlord as part of the
original lease in order to acquire a favorable lease rate. (e.g. an initial
down payment in lieu of lower monthly payments for the term of the
lease)
• Improvements and betterments- indemnifies for the loss of the
remaining value of improvements and betterments attached to the
previously leased property.
• Pre-paid rents.
Legal Liability Coverage Form
The legal liability coverage form provides insurance protection against negligent
damage to the personal property of others while in the insured's care or on the
insured's premises. Legal liability coverage also provides for the legal defense of
claims brought against the insured by other parties for which the coverage
applies.
Legal liability coverage most frequently applies to bailees or warehouse operators

who are entrusted to provide an element of safety for a large quantity of other
people’s possessions. “Bailees” are business operators who hold the property of
others for the purpose of storage, repair or servicing, such as dry cleaners,
computer repair shops or businesses that refurbish furniture. Warehouse
operators can include public storage facilities, private warehouses for retailers or
distributors, and specialized warehouses such as cold storage or manufacturers
storage.
Legal liability coverage has no deductible and requires no coinsurance, and

covers theft but not the “unexplained disappearance” of the property of others.
Legal liability coverage may also apply to negligent damage to buildings occupied
by the insured.
As with all other forms, a cause of loss form must be attached.
Differences in Conditions Coverage Form (or Endorsement)
The differences in conditions coverage form is designed to bridge certain
coverage gaps left open by the exclusions in a standard commercial policy.
Though often described as an “all-risks” coverage form, the differences in
conditions form most frequently provides coverage for earthquakes, landslides,
flooding, and collapse due to water damage. While the form may cover all these
risks at once, the insured may also select the differences in coverage form to
acquire protection against specified perils only, such as “flood and earthquake”,
or perhaps just “earthquake.”
Because differences in conditions forms are specifically geared to cover the

excluded risks from standard commercial policies, the form itself will exclude the
risks found in the standard commercial forms, including fire, lightning,
vandalism, wind and hail.
Differences in conditions forms tend to only cover perils that could potentially
lead to catastrophic losses to large-scale industrial or commercial risks. The form
usually does not require coinsurance as the coverage does not apply to perils
likely to inflict partial losses, and, in addition, the associated premiums would
likely cost too much for the policyholder to bear. Instead, differences in
conditions forms tend to carry very large deductibles.
Differences in conditions coverage can be purchased as a separate policy or added

as an endorsement to an existing policy.
Other Coverage Forms and Popular Endorsements
Earthquake and Volcanic Eruption
The earthquake and volcanic eruption form, quite obviously, provides protection
against earth movements and volcanic eruption.
Deductibles are generally priced at a percentage of the limit of liability, and the
form counts any and all eruptions and/or earthquakes within a single 168-hour
period as a “single occurrence”. Damages resulting from tidal waves or tsunamis
caused by earthquakes are specifically excluded from coverage.
This form may also be used solely to purchase insurance for Earthquake-
Sprinkler Leakage Only, which provides insurance protection against damages
caused by sprinkler leakage resulting from an earth movement.
Flood Endorsement
The flood endorsement provides insurance protection against damages to

property caused by the flooding of water over normally dry land.
For insurance purposes, “flood” is technically defined as:
the overflow of inland or tidal waters

• an unusual or rapid accumulation of runoff or surface waters from
any source.
• mud flows or mudslides caused by the flow of water
• collapse or subsidence of land along the shore of a lake or other body
of water, as a result of erosion or undermining caused by waves or
currents of water exceeding anticipated cyclical levels that result in a
flood.
Flood coverage may be primary or on an excess basis over a National Flood

Insurance Policy, also known as a NFIP.
The Ordinance or Law Endorsement
The Ordinance or Law Endorsement is designed to provide insurance protection

for additional costs associated with repairing or rebuilding a facility damaged by
a covered peril in order to comply to current building codes.
Many older factories or commercial properties damaged by covered perils may

require upgraded repairs to meet the requirements of new or more stringent
building codes.
Many of these costs to upgrade facilities aren't covered by a replacement cost

commercial policy, and severe damage can therefore add thousands if not
millions of dollars in additional expenses for the policyholder beyond what their
insurance policy supplies for indemnification.
An ordinance or law coverage form will protect a policyholder from realizing

these additional costs up to policy limits.
Peak Season Endorsement
The peak season endorsement allows the insured party to temporarily increase
coverage limits at specified intervals over the course of the year in order to
account for increased inventories. The endorsement will indicate both a.) the
amount by which the insured wants coverage increased, and b.) the exact dates
the increased level of coverage will apply.
Merchants may pursue peak season endorsements due to an increased level of

stored merchandise during the winter holidays, or a fireworks manufacturer may
seek a peak season endorsement to cover large inventories prior to the Fourth of
July.
Protective Safeguard Endorsement
The protective safeguard endorsement adds a condition of coverage to a policy

requiring that any one or a multitude of protective devices must be operational in
order for the coverage to apply. In return, the insured receives a premium
discount. These devices can include:
• Automatic sprinkler systems

• Fire alarms
• Security services or watch guards
• Burglar alarms
• Video surveillance
• Protective storage of valuable papers and records
• Service contracts for the above safeguards
Policies generally dictate that if an insured party fails to notify an insurer

regarding known impairments or problems with these systems, coverage will be
suspended and possibly denied at the applicable insured location.
For example, a jewelry store may seek a discount on their annual premium by
adding a protective safeguard endorsement. As part of the endorsement, the
jeweler agrees to install a burglar alarm and have a guard on the insured
premises 24 hours a day.
However, during the slow business season, the jeweler may decide he can no
longer afford a guard and lays off the guard without informing the insurance
company. Consequently, when the store is robbed in the middle of the night, the
insurer may now deny coverage because the insured did not adhere to the terms
of the protective safeguard endorsement.
Insureds using a protective safeguard endorsement for automatic sprinkler
systems may shut off their systems for repair of leaks or the removal of frozen
water for up to 48 hours without notifying the insurer. If repairs take longer than
48 hours, the insurer must be notified immediately.
Spoilage Endorsement
The spoilage endorsement adds perishable stock to covered property, and

provides insurance protection against spoilage of such stock due to mechanical
breakdown of refrigeration equipment, contamination by refrigerants, or the loss
of electrical power.
Indemnification for losses due to spoilage are calculated using the market selling
price of the perishable stock at the time of loss less any discounts the insured
would normally expect.
Causes of Loss Forms
Each coverage form we've studied in a commercial property policy will require an
attachment called a cause of loss form.
A cause of loss form dictates exactly what perils are insured against in the
attached coverage, and which perils are specifically excluded from coverage.
Remember, a policy will list a set of general exclusions that apply to the entire
policy, AND each coverage form will have it's own set of exclusions.
Commercial property causes of loss forms fall into one of three categories:
• Basic Form
• Broad Form
• Special Form
We'll take a brief look at the general policy exclusions applicable to all coverages
in this section, followed by an analysis the three causes of loss forms.
The following exclusions apply to every commercial policy coverage. Remember,

it is still important that you check each policy carefully for applicable exclusions.
Commercial Policy Universal Exclusions
• a loss resulting from enforcement of building ordinances which regulate

construction, use or repair of property.
• earthquakes or land movement.
• seizure or destruction by governmental action or authority
• nuclear reaction, radiation and associated radioactive contamination
hazards.
• loss resulting from utility service failures.
• war.
• Flood, or the rising of water and/ or mudslides, and the backup of water
through sewage pipes or drains
• damages to wiring or devices caused by artificially generated electrical
current
• explosion of boilers, steamers, pipes and engines (available but requires
endorsements)
The Basic Form cause of loss form is a named peril form, meaning losses are
covered only by the specific perils named in the insurance coverage. A basic
policy form covers the following perils:
• Fire
• Lightning
• Explosions, not including ruptures caused by high pressure devices or
boilers
• Windstorm and hail damage.
• Smoke damage.
• Aircraft or vehicles not owned by the insured.
• Riot and civil commotion, including damage caused by striking employees.
• Vandalism and malicious mischief (excluding theft and glass breakage).
• Sprinkler leakage.
• Volcanic events and shock waves.
• Sinkhole collapse
The Broad Form cause of loss form is a named peril policy covering all the
perils listed under the Basic Policy Form, and adds the following perils to
coverage:
• breakage of glass
• falling objects.
• weight of ice, snow and sleet.
• water damage from sources other than sprinkler leakage, such as damage
resulting from a water or steam system or appliance
• additional coverage for collapse, if caused by:
-any covered perils listed in the policy
-hidden decay, hidden insect or vermin damage
-weight of people, personal property, or rain collecting on a rooftop
-use of defective materials or construction methods, but only if occurring during
a period of construction or remodeling
The Special Form cause of loss form is an open peril policy which covers all
known perils except for those specifically listed in the exclusions section of the
insurance coverage.
Some common exclusions to the Special Form include:
• wear and tear, rust and decay

• smog damage or damage caused by the release of pollutants
• damage, other than collapse, caused by vermin infestation
• settling or cracking buildings
• explosion of steam boilers
• damages caused by utility services
• dishonesty on the part of the insured or employees.
• losses to property left in the open rain, snow or ice conditions.
• governmental intervention.
• errors or faults in planning, zoning, design, workmanship or materials
• voluntary surrender of property
• missing property
General Liability
Commercial general liability insurance is a form of liability insurance used by
businesses to protect themselves against damages and lawsuits arising from its
premises, its general operations, and the products they manufacture and sell. We
frequently hear stories such as:
• someone suing a grocery store after they slipped and fell on a wet floor.
• someone suing a toy manufacturer after a piece of one of their toys
detached and caused a child to choke.
• a bouncer injures a patron while breaking up a fight in a bar.
• a flooring installer cuts through a water pipe in your home, resulting in
damage to your furniture.
All these occurrences may result in a lawsuit against a business, and, as such, the
comprehensive general liability (CGL) insurance policy is specifically designed to
protect businesses from a wide assortment of financial hazards arising out of
normal business operations.
In this section of our test, we’ll take a closer look at the commercial general
liability policy, who it covers, and how it protects a business against their liability
for damages to other parties. We’ll look at the structure of a CGL, the applicable
coverage forms, and the conditions, exclusions and definitions found within a
CGL.
Commercial General Liability: The Claims-Made Form vs. Occurrence

Form
Before we advance to the structure and coverages of a CGL policy, let’s take a
brief look at the two different types of CGL coverage available to businesses.
The CGL insuring agreement explicitly states that an insurer “will pay those sums
that the insured becomes legally obligated to pay as damages because of bodily
injury (BI) or property damage (PD) to which the insurance applies."
When an insured business inflicts some type of bodily injury or property damage
onto another person or entity, the CGL refers to this infliction of damages as an
occurrence.
An occurrence can be defined as an accident (a sudden, unexpected event), OR a

continuous and repeated exposure to a generally harmful situation introduced by
the insured business. For example, a consumer utilizing a piece of exercise
equipment made by the insured may not always injure the consumer at the exact
moment they are using it, but rather, repeated use of the equipment over time
may lead to painful back problems for the consumer.
The distinction is important: In one case, the consumer may file a claim for
bodily injury against an insured business right after they suffer an injury, while
in the other case, the consumer may choose to file a claim for bodily injury two
years after using the exercise equipment. If the insured business that produced
the exercise equipment had changed insurance carriers over this two-year period,
who would have to pay the claim for damages? The original insurer or the new
insurer?
Insurance companies resolved this dilemma by introducing two different types of

coverage forms for the CGL policy, called the occurrence form and the
claims-made form. The difference in the forms involves what “triggers” each
form to respond to a claim.
Trigger
A trigger is defined as an event that enacts the provisions of a CGL policy. It is

also called a “coverage trigger”.
The Occurrence Form: An Occurrence Form CGL policy is triggered by bodily

injury or physical damage that occurs during the policy period. If an occurrence
trigger CGL has a policy period from January 1st, 2008 to January 1st, 2009,
then the CGL policy will respond to any accident that occurred between those
two dates. Even if a claim is made on May 30, 2013 for an accident that occurred
on July 1st, 2008, an occurrence triggered CGL will still protect the insured
because the accident occurred during the policy period the CGL was in effect.
The Claims-Made Form: The claims-made form CGL is triggered when a

claim is filed against the insured business during the current policy period,
regardless of the date when the bodily injury or property damage occurred. If a
claims-made trigger CGL has a policy period from January 1st, 2008 to January
1st, 2009, then the CGL policy will respond to any claim filed between those two
dates. So if an accident occurred on January 1st, 2007, and the injured party files
a claim on July 1st, 2008, the claims made CGL would be triggered because the
claim was filed during the policy period.
Summary
With an occurrence trigger, the CGL will cover any accident that
occurred during the policy period, regardless of when the claim is
filed.
With a claims-made trigger, the CGL is activated when a claim is filed

during the policy period, regardless of when the accident occurred.
Logically, a claims-made CGL policy can’t cover all claims against an insured
business from “the beginning of time” so to speak. Because of this, the claims-
made form establishes a retroactive date on the declarations page. The
retroactive date clarifies the earliest date an “occurrence” may have transpired in
order to qualify for coverage under the claims-made form. The retroactive date
essentially says “We will pay on all claims filed during the policy period, as long
as the damages related to the claim occurred after this specified date.” For
example, let’s say a business purchases a claims-made CGL policy with a policy
period of March 2010- March 2011, and the insurer establishes a retroactive date
of July 1, 2005 on the declarations page. This policy will respond to any claims
filed against the policyholder between March of 2010 and March of 2011, as long
as the damages occurred after July 1, 1995. If a consumer files a lawsuit against
the policyholder for injuries suffered on May 23, 1995, the policy would not
respond, because the occurrence took place before the established retroactive
date. Now, let’s go back to our example earlier involving the exercise
machine. Sally purchases her exercise machine from GoFit on December 27,
2005. On March 15, 2006, Sally is working out when a cable breaks on the
exercise machine, causing a deep bruise to her knee. Sally braves the injury and it
appears to heal, but two years later on March 3, 2008 her knee collapses while
running. A doctor determines the deep bruise from years earlier failed to heal
properly, and caused her knee to ultimately collapse. The same day, Sally files a
lawsuit against GoFit for the damages to her knee. On the day the claim was
filed, let’s assume GoFit had a claims-made CGL policy with a policy period of
January 1, 2008 to January 1, 2009, and a retroactive date of January 1, 2005.
Would coverage apply? Yes, coverage would apply. The CGL would respond to
the claim because the claim was filed during the current policy period, and the
“occurrence” transpired after the established retroactive date of January 1, 2005.
Now, let’s assume GoFit had an occurrence form CGL with a policy period of
January 1, 2008 to January 1, 2009. Would this policy respond to Sally’s
lawsuit? No, it wouldn’t. The “occurrence” of Sally’s injury on March 16, 2005
falls out of the range of GoFit’s policy period, and therefore the occurrence form
CGL would not respond to Sally’s lawsuit. In field work, you will find that nearly
all businesses employ the occurrence form CGL policy. Occurrence form CGL
policies are considered safer as their coverage extends into perpetuity, and
businesses can feel rest-assured they have liability insurance coverage for all their
past business activities. Because an occurrence form CGL carries more risk for
the insurer however, businesses pay higher premiums for occurrence form CGL
policies. The claims-made form is somewhat riskier for businesses because once
the policy expires (or, even worse, is canceled), the business effectively has no
insurance coverage for any of their past business activities that may come back to
haunt them. Imagine if GoFit canceled their claims-made policy and switched
over to an occurrence form CGL policy, only to discover that cables were
snapping on almost all of their old exercise machines and injuring consumers?
They would have no coverage once the claims started piling in, because the
occurrence form CGL would only cover bodily injuries occurring during their
current policy period. GoFit would be in a heap of trouble! To ease this burden,
the claims-made CGL policy also offers policy extensions often referred to as
“tails” or “tail coverage.” Although “tails” appear to transform the claims-made
form into an occurrence form CGL, there is one key difference: Where the
occurrence-form CGL lasts in perpetuity even after the payment of premiums
stops, the claims-made form with a “tail” continues to charge premiums to the
business as long as the policy is extended. Let’s look at the two types of “tails”
offered with the claims-made CGL policy.
Basic Extended Reporting Period: The basic extended reporting period

automatically applies to every canceled or expiring claims-made CGL policy when
the insured does not plan to renew. This tail coverage responds to any occurrence
that transpires within 60 days of the expiration of the claims-made policy,
provided the third party files a lawsuit within 5 years of the occurrence. For
example, if a third party suffers an injury for which the insured is liable 45 days
after a claims-made CGL policy expires, the basic extended reporting period will
respond provided the third party files a claim within five years of the injury. The
basic extended reporting period is often referred to as a “mini-tail” or “basic
tail”. Supplemental Extended Reporting Period: The supplemental
extended reporting period is an optional coverage that, when purchased by the
insured, takes effect after the basic extended reporting period has expired. The
insured must provide at least 60 days written notice after the claims-made policy
expires of their intention to purchase this coverage, and they must pay the
premium prior to launching the coverage. The supplemental extended reporting
period essentially waives the 5 year limit of the basic extended reporting period,
and allows coverage for incidents occurring in the 60 days after the initial claims-
made policy expires to continue into perpetuity. In this case, if a third party
suffers an injury for which the insured is liable 45 days after a claims-made CGL
policy expires, a supplemental extended reporting period would respond no
matter when the third party decided to file a claim. So, in a nutshell, you can
describe the supplemental extended reporting period as a 60 day occurrence-
form CGL that is tacked on to the end of a claims-made CGL policy. Lastly, the
claims-made CGL policy will often contain what is called a “laser beam
endorsement.” Laser Beam Endorsement: The laser beam endorsement of a
claims-made CGL allows an insurer to exclude specific types of accidents,
products, work, or locations from CGL coverage. It was so named because it
allows an insurer to “laser in” on very specific types of risks for which the insurer
does want exposure. For example, some risks may be so great that the insurer
simply cannot apply an adequate premium in order to provide coverage. In other
cases, an insured business may switch from an occurrence-form CGL to a claims-
made form CGL, but the insurer knows that the business has had severe
problems with certain products in the past. With the laser-beam endorsement,
the insurer can specifically exclude those troubled products from any type of
insurance coverage. Now that we’ve discussed the two different types of coverage
forms for the CGL, let’s get on with discussing the CGL itself.
The Commercial General Liability Policy: As we discussed earlier, the

comprehensive general liability (CGL) insurance policy is specifically designed to
protect businesses from a wide assortment of financial hazards arising out of
normal business operations. A CGL policy can protect businesses from:
• Direct liability for bodily injury/ property damage resulting from a

business premises and its operations.
• Damage to a premises used or rented by the insured.
• Liability for manufactured or sold products and completed operations.
• Indirect liability as the result of actions taken by employees, agents,
contractors, or representatives of a business while performing business-
related activities.
• Contractual liabilities, where an insured party contractually agrees to
indemnify others against certain risks.
• Personal and advertising injury, where a third party suffers personal injury
(not bodily injury!) due to the actions of the insured.
Who is insured under a CGL?
The insuring agreement will dictate who is covered under the CGL policy.
Coverage can vary slightly between sole proprietorships, joint ventures, LLC's
and corporations.
Generally speaking, we can assume CGL policies will cover the executives,
partners, employees, managers, volunteers, agents, stockholders and
representatives of an insured business, but only when such individuals are
performing under the scope of the insured’s business activities.
CGL policies covering individuals or sole proprietorships will also cover the
spouse of the first named insured.
Elements of a CGL
The CGL insurance contract contains four sections:

• Conditions Page
• Coverage Forms - either "Claims-Made" forms or "Occurrence" forms
• Damage to Premises Rented By You (or Tenants Legal Liability)
We’ll cover the conditions of a CGL policy after we discuss some definitions and
the coverage forms.
CGL Important Definitions
As we’ll learn in a minute, the CGL excludes from coverage property damage and
bodily injury caused by automobiles owned and/or rented by the insured. While a
CGL is designed to cover a multitude of business hazards, automobiles will
always require their own liability policies.
The CGL policy does, however, respond to bodily injury caused by mobile
equipment, so it's important we analyze the distinction between the two.
“Autos” are defined as any self-propelled motor vehicle (and/ or attached

trailers) designed for use on public roads. Autos may also include certain vehicles
with permanently attached machinery such as snow removal vehicles, street
cleaners, cherry picker vehicles (e.g. the kind that utility workers often use to fix
power poles) and road maintenance vehicles.
What is the key to defining “autos”?
“Autos”, by and large, are built and designed to use on public roads, and are
primarily used to transport people or cargo.
“Mobile equipment”, on the other hand, covers a multitude of vehicles

designed primarily for use off public roads. Mobile equipment can include
bulldozers, farm machinery, forklifts, cranes, and other vehicles whose primary
purpose is the machinery attached to the vehicle. If the vehicle is not designed to
transport people or cargo, then you have “mobile equipment.”
Once again, the CGL policy will respond to bodily injury and property damage
claims caused by “mobile equipment”, but will not respond to claims involving
“autos”.
There is one exception: Some CGL’s will allow an “auto” to be classified as

“mobile equipment” if the auto is used solely on the business premises. For
example, a huge warehouse may employ a small truck to transport goods back
and forth within the warehouse- in this case, the CGL may allow the auto to
qualify as mobile equipment.
“Your Product” means any goods or products manufactured, sold, handled or

distributed by the insured, including any containers, materials or parts included
with the product. It also includes goods or products sold under the name of the
insured.
“Your Work” means any operations performed by the insured, including all
parts, materials and equipment furnished in connection with such operations. It
also includes any warranties and / or instructions accompanying the operations,
or the lack thereof.
An “advertisement” is any notice transmitted to members of the general public,

through any means, for the purpose of attracting customers.
An “occurrence”, as described earlier, is an accident (a sudden, unexpected

event), OR a continuous and repeated exposure to a generally harmful situation
“Impaired property” describes tangible property other than the insured’s

product or work that cannot be used or is less useful because it incorporates the
insured’s defective or inadequate product or work. Impaired property also
includes unfinished contracts or agreements.
The definitions page also defines a number of work-related roles with respect to
the CGL, including:
A “leased worker” is a worker assigned to perform work-related activities for

the insured through a labor leasing firm.
A “temporary worker” performs work-related activities in place of a

permanent employee who is on leave. Individuals who perform seasonal or short
term work-related activities are also considered temporary workers.
A “volunteer worker” donates time on behalf of work-related activities for the

insured without compensation from the insured.
An “employee” performs work-related activities for the insured under a contract

for compensation. “Leased workers” are considered employees, and “temporary
workers” are not considered employees.
An “insured contract”, under Coverage A, is limited to:

• A lease of premises
• Sidetrack agreements
• Easement or license agreements
• An obligation to indemnify a municipality
• Elevator maintenance contracts
• Any contract where the policyholder assumes the tort liability of another
party for bodily injury or property damage.
Declarations page
The declarations page of a CGL will list:

• the named insured
• the address of every premises the insured owns, rents or occupies
• the policy period
• the policy premium
• the limits of insurance
• if a claims-made form, the restoration date applicable to the policy
CGL Coverage Forms Coverage A – Bodily Injury and Property
Damage
• Premises and Operations Liability

• Products and Completed Operations Liability
• Contractual Liability for Insured Contracts
Coverage B- Personal and Advertising Injury Liability
Coverage C- Medical Payments to Others
Damage to Premises Rented By You
Coverage A- Bodily Injury and Property Damage Liability
Coverage A provides financial indemnification to the insured party for bodily

injuries and property damage caused to others for which the insured party is
legally liable. In addition, the insurer establishes their responsibility to defend
the insured party against any lawsuit seeking damages from the insured, and also
assumes the cost of defending the insured in court.
Coverage A claims are organized into three groups of hazards:
1. Premises and Operations Hazards
Premises liability coverage responds to bodily injury and/ or property damage

claims arising from an “occurrence” on a premises owned, leased or rented by the
insured. This can include the premises itself, or “ways immediately adjoining the
insured premises.”
For example, premises coverage will respond not only to slip-and-fall injuries
inside an insured premises, but also injuries suffered on sidewalks in front of a
business, or parking lots adjoining a business. In general, the “ways” (e.g.
walkways, pathways) must possess a direct physical connection with the insured
business for coverage to apply. If a beauty shop is located on the second floor of a
mall and someone slips on the stairwell, coverage would not apply as the stairwell
is not directly connected to the business.
Premises coverage also applies to newly acquired properties assuming the insurer
has notified the insurer within 30 days of acquiring the property.
Alternately, operations liability coverage responds to bodily injury and/ or

property damage claims arising from an “occurrence” away from the insured
premises.
Many businesses perform functions primarily outside of the insured premises,

including appliance repair businesses, construction companies, and delivery and
cleaning businesses. Operations liability protects a business for their activities
while in progress at another location.
2. Products and Completed Operations Hazards
Products liability coverage responds to bodily injury and property damage claims
arising out of the ownership or use of manufactured goods or other tangible items
offered by the insured. Product liability comes into play only when a.) the product
has left the insured premises and b.) is in the hands of a third party.
Product liability claims usually fall under one of the following three categories:
1. Strict liability - Most product liability cases deal with issues of strict
liability. Under strict liability, manufacturers are held wholly
responsible for the inherent safety of their products. If a finished
product contains a defect that leads to injuries, the manufacturer can
be held liable for damages without the plaintiff having to prove
negligence.
2. Negligence - Negligence usually asserts that the manufacturer failed to
exercise due care in the design, testing, or manufacturing of a product,
and that this failure to exercise due care resulted in a dangerous
product.
3. Breach of Warranty - Breach of warranty most often applies when a
manufacturer realizes they are producing defective or dangerous
products, but fail to warn the public about an acknowledged safety
hazard.
Another form of breach of warranty involves deceptive advertising, where a

product cannot meet the standards of quality or purpose set forth in an
advertisement.
Where operations liability covers work in progress away from the insured
premises, completed operations liability responds to claims involving completed
work away from the insured premises.
Let’s say an insured business constructs and completes a staircase for a client,
then packs up and returns home. Three days later, the staircase collapses as the
client is walking up the stairs, and the client files a lawsuit. In this case,
completed operations liability would respond.
As you may note, operations liability segues fairly easily into completed
operations liability. While work is in progress, operations liability applies. Once
work is completed, completed operations liability takes over where operations
liability left off.
“Work” is deemed complete at the earlier of the following:

• the moment the business has fulfilled the terms of an agreement or contract.
• the moment any portion of the work is used for its intended purpose.
Looking back at our staircase example, let’s say our insured hasn’t quite finished
the staircase, but the client decided to start using it anyway because it “looked
finished enough to use.” Because the client used it for its intended purpose,
completed operations liability would now respond.
3. Contractual Liability for Insured Contracts
On occasion, some businesses may assume certain types of liability from another
party through a written contract. The CGL may respond to these liability claims,
as long as they meet the insurer’s definition of an “insured contract”.
“Insured contracts” can include:

• Lease of premises
• Sidetrack agreements
• Easement or license agreements
• An obligation to indemnify a municipality
• Elevator maintenance contracts
• Any contract where the policyholder assumes the tort liability of another
party for bodily injury or property damage.
For example, let’s say Mae’s Café would like to install a large sign over the city
sidewalk to attract customers into their restaurant. Mae’s Café owns the sign, but
the sign is perched over the sidewalk, which is property of the city.
Mae’s Café must get a city permit to install the sign, and the as a condition of
receiving the permit, Mae’s Café must sign an agreement with the city to hold the
city harmless if the sign falls and injures someone on the sidewalk. In this case,
Mae’s Café has assumed the liability of the city through a written contract, so the
CGL would respond even though an “occurrence”, or an injury to a pedestrian,
took place on a city sidewalk.
As you’ll see below in the exclusions to Coverage A, “contractual liability” is

actually excluded. But the wording in a CGL actually provides broad coverage for
contractual liability, as long as it falls under the definitions of “insured contracts”
as listed above.
This coverage does not apply to certain types of professional service contracts,
including architects, engineers or surveyors.
Coverage A Exclusions
• Expected or intentional injury by the insured, unless in acts or self-defense
or protection of property
• Injuries to employees (covered by worker’s compensation)
• Automobiles, aircraft or watercraft (unless damage is to autos parked on
the insured premises)
• Contractual Liability (except those listed in (3.) above)
• Liquor Liability (for businesses selling or serving alcohol; covered under
Liquor Liability)
• Transportation of mobile equipment
• Pollutants
• War and terrorist attacks
• Property of the insured, property in the care, custody and control of the
insured, and property loaned to the insured
• Property damage to insured’s work or products
• Electronic data
• Recall of products or work
Coverage B Personal and Advertising Injury
Personal and advertising injury coverage responds to claims against the insured
for a variety of occurrences that do not involve bodily injury or property damage.
Rather, personal and advertising injury is designed to protect the insured against
damages to a third party’s character, reputation, or “standing in the community.”
Personal injury can respond to claims involving:
Libel and slander
Libel and slander involve unjustly or untruthfully defaming another person or

entity through written (libel) or spoken (slander) words. In addition, the
defamatory statements must be made to persons or entities other than the one
being defamed.
For example, directly accusing Person A of stealing would not qualify as slander.
But communicating to others that “Person A is a thief!” would qualify as slander,
as the false information is being disseminated to a third party in the community
who may subsequently pass judgment upon Person A based on false information
provided by the insured.
False arrest, detention or imprisonment
False detention, arrest and imprisonment involves the unlawful, unwarranted

detention of an individual by an insured. Most frequently associated with false
accusations of shoplifting or theft, where the insured may be found to have
violated an individual’s civil rights by wrongfully detaining them.
Malicious Prosecution
Malicious prosecution involves an insured bringing a lawsuit against another

party without probable cause or basis, but rather out of vindictiveness or malice
between two individuals or organizations. Malicious prosecution requires the
insured party to lose an initial case against a defendant, at which time the
defendant can then sue the insured for malicious prosecution.
Wrongful Entry or Eviction
Wrongful entry involves an owner or landlord attempting to repossess real estate

or rented space by unfair, unjust or reckless means. May also involve invasion of
privacy, or accessing another’s private space for unjust or unfounded means.
Wrongful eviction involves the physical eviction of an individual from a public

premises or space without cause. For example, a mall owner may elect to have a
patron removed from the premises because the mall owner “doesn’t like the look
of the patron’s pants.” The patron may then turn around and sue for the violation
of his/ her civil rights under wrongful eviction.
An advertising injury means a third party suffered damages as the result of the
insured party promoting or advertising their goods and/ or services in a public
arena.
Advertising injury can respond to:
Libel and slander
As discussed above, libel and slander involves untruthful, damaging written or

oral public statements made about a third party. Imagine if a detergent company
ran an ad featuring a competitors product, but in the ad they made false claims
about their competitors product provided by an overzealous consulting firm. The
detergent company then runs the ad on local television without checking the false
claims.
Such statements could damage a third party’s business and reputation, resulting
in a lawsuit.
Infringement of copyright
Infringement of copyright involves the misappropriation of another party’s ideas,

titles, slogans or style of doing business.
Coverage B Exclusions
• Knowingly publishing, disseminating or spreading false information to the
public
• Knowingly violating the copyrights of another
• Failure of an insured to adhere to price, quality and performance claims
• Infringement of copyright, patent, trademark or intellectual property
rights outside of advertisements
• Damages arising out of acts committed prior to the current policy period
• Advertising liability by contract, or assumed liability
• Criminal copyright and trademark infringement
• All claims if the insured is in an advertising, broadcasting, or publishing
business, or involved in the design of websites or operation of internet
search services
• Electronic chatrooms or bulletin boards
Coverage C - MedicalPayments
Medical payments is a no-fault coverage that responds to medical, dental,

hospital, nursing and funeral costs arising out of bodily injury to individuals
while on or next to an insured's owned or rented properties, or bodily injury
resulting from ongoing business operations. Coverage C provides indemnification
for injuries for up to one year from the date of the occurrence.
Coverage C Exclusions:
• Any “insured”
• Employees of the insured (covered by worker’s compensation)
• Tenants of the insured
• Athletic contests, games, physical challenges or sporting events
• Injuries resulting from completed operations
The insurer reserves the right to require the injured party or claimant to see a
physician chosen by the insurer, and at the insurer’s expense,
CGL Conditions Page
As we’ve discussed before, the conditions page contains provisions inserted into
the policy that qualify or place limitations on an insurer's promise to pay or
perform. If certain policy conditions or obligations are not met by the
policyholder, the insurer establishes its right to deny a claim in the conditions
page.
The conditions page will highlight the rights and duties of the both the insurer
and the insured party in relation to the CGL contract, and qualify the rights of the
parties regarding cancellation, policy changes, lawsuits etc.
In this section, we’ll highlight a few relevant conditions we haven’t covered yet, or
are unique to the CGL contract.
Policy Territory
Like most policies we’ve covered so far, CGL policies will respond to
“occurrences” taking place in the United States, Canada, and Puerto Rico.
CGL takes it a little further however, and includes any international waters or
airspace of the aforementioned countries.
In addition, coverage territory for damages arising out of the “products” hazard is
world wide, as long as the product was made or sold in the United States, Canada,
or Puerto Rico.
Bankruptcy
Bankruptcy or insolvency of the insured party does not relieve the insurer from
any obligation to pay claims on behalf of the insured.
Duties in the Event of an Occurrence, Claim or Suit
The CGL contract outlines a number of responsibilities of the insured in the event
of an occurrence. These include:
• Providing prompt notice to the insurer of an occurrence, including the
how, when and where, and the names and addresses of the injured parties
and relevant witnesses.
• If a suit is brought upon the insured, the insured must promptly notify the
insurer.
• The insured must cooperate with the insurer in any matter involving a
claim, including forwarding legal papers and authorizing the insurer to
obtain all relevant materials related to a claim
• Assist the insurer in enforcing subrogation rights
• The insured cannot make voluntary payments upon a claim on behalf of
the insurer without the insurer’s authorization.
Legal Action Against Us or Legal Action Against an Insurer
This condition stipulates that a policyholder must meet all the obligations of, and
against an insurer.
In addition, a policyholder has one year from the date of a loss to commence a
lawsuit against the insurer, provided the above terms are met.
Other Insurance
"Other Insurance" dictates the provisioning of claim payments amongst insurers
if an insured loss can be covered by two or more applicable insurance policies
written on the same basis. Most commonly, each insurer will agree to pay their
share of the loss in proportion to their share of all policy limits applicable to the
loss.
The claims-made form will always pay in excess of any form that is not claims-
made. The claims-made form also pays in excess regarding claims filed in the
retroactive period, or claims filed in the extended reporting period.
The other insurance clause is applied to satisfy enforcement of the “principle of

indemnity”, which states that no insured party can profit from an insured loss.
Insureds can not collect twice or “double recover” for damages to insured
property.
Premium Audit
Initial premiums paid towards a CGL policy are actually considered a deposit
premium.
A deposit premium is essentially a sum of money paid to an insurer to put the

CGL policy into effect. The insurer establishes the deposit premium based on an
analysis of their estimated risk exposure over the policy period taken at the
beginning of the policy period.
At the end of the policy period, the insurer will conduct a premium audit to
determine their actual exposure over the course of the past policy period, and
calculate the actual premium earned, which is often based on payroll or annual
sales of the insured.
The actual premium earned is then compared to the deposit premium paid at
the beginning of the policy period, and the insured must either pay the balance
due, or is refunded the difference.
Representations
The representations condition simply demands that the information provided by

the named insured on the declarations page is complete and accurate, and
clarifies that the insurer has based the provisions of the policy on the information
provided by the insured.
In a nutshell, the representations condition is simply a reminder for the insured
that any material misinformation provided to the insurer can and/or will nullify
the policy.
Separation of Insureds
Also known as a “severability of interests” condition, separation of insureds

stipulates that coverage applies to each “insured” separately, as if no other
“insured” existed.
We generally think of liability insurance as protecting those on the “inside” of a

business against those on the “outside” of the business. But what if an insured
party under a CGL experiences property damages caused by another “insured”
who is also covered under the same CGL policy? On the surface, we’d probably
think the CGL would not respond, because a CGL does not respond to damages to
property of “the insured.” But in truth, this is where separation of insureds comes
into play.
Separation of insureds means each individual insured is protected as a separate

entity, even against other insureds.
The limits of the policy, however, still apply to all insureds collectively.
Transfer of Rights of Recovery Against Others to Us
This condition deals with subrogation, a term we are very familiar with by now.
Essentially, the insured must agree to subrogate their rights to collect from
another party to the insurer, and the insured must not impair the ability of the
insurer to act upon those rights.
Non-renewal
If the insurer elects to not renew a policy, the insurer will notify the named
insured within 30 days of the expiration of the current policy.
CGL Limits of Insurance
The declarations page identifies the limits of insurance for a CGL policy. The
stated limits of insurance establish the maximum amount the insurer will pay in
total over the policy period to satisfy liability claims, regardless of the number of
insureds, the number of claims or lawsuits filed, or the number of persons or
organizations filing claims against the insured.
CGL limits of insurance are a bit more complex than some of the other policies
we’ve studied, but we’ll sort it out right here.
The standard CGL establishes six sets of limits, but the limits are all somewhat
inter-related. First up, we have aggregate limits. An aggregate limit, as we recall,
is the maximum amount a policy will pay to satisfy claims over the course of the
policy period. The CGL, however, applies two aggregate limits to each policy:
1. The Products-Completed Operations Aggregate Limit
Earlier in this chapter, we learned that Coverage A splits coverage according to

hazard exposures for the insurer. The CGL policy sets a separate aggregate policy
limit for the Products-Completed Operations hazard. This limit establishes the
maximum amount the policy will pay to satisfy claims regarding Products and
Completed Operations only.
2. General Aggregate Limit
The general aggregate limit establishes the maximum amount the policy will pay
out over the policy period for Coverage A, B, and C except for Products and
Completed Operations.
In other words, the general aggregate limit applies to Coverage A-Premises and
Operations, Coverage B-Personal and Advertising Injury, Coverage C Medical
Payments, and Damages to Premises Rented by You. The General Aggregate limit
does not apply to claims under Products and Completed Operations, a category of
hazards which has its own aggregate limit as discussed above.
Under each aggregate limit, the insurer will establish further sub-limits of
insurance. Both the Products-Completed Operations Aggregate Limit and the
General Aggregate limit will establish a per occurrence limit.
Per Occurrence Limit
The per occurrence limit establishes the maximum amount the insurer will pay to
satisfy claims for bodily injury, property damage and medical payments per
occurrence.
For example, if we have a CGL with a General Aggregate limit of $1,000,000, the
insurer may establish the per occurrence limit at $250,000. If an individual files
a suit for damages against the insured for $350,000 arising out of a single
occurrence, the most the CGL will pay to satisfy that particular claim is
$250,000, or the per occurrence limit.
The per occurrence limits are subject to the aggregate limit that precedes it. The
CGL will pay any number of individual claims up to the per occurrence limit for
each claim, until the aggregate limit is exhausted.
Personal and Advertising Injury Limit
The Personal and Advertising Injury limit establishes the maximum amount the
insurer will pay for personal and advertising injury to any one person or
organization. Since Coverage B- Personal and Advertising Injury claims apply to
the General Aggregate Limit, any claim paid reduces the General Aggregate Limit
by the amount of the claim.
Medical Payments Limit
The Medical Payments Limit establishes the maximum amount the insurer will
pay for bodily injury sustained by any one person. The Medical Payments limit is
also subject to the General Aggregate limit, and any claim payments reduce the
General Aggregate limit by the amount of the claim.
Let’s look at an example:
Sample CGL Policy for Ron’s Furniture
General Aggregate Limit: $1,000,000

Per occurrence limit: $250,000
Products –Completed Operations Aggregate Limit: $1,000,000

Per occurrence limit: $250,000
Let’s say Sarah is perusing the showroom of Ron’s Furniture when a shelf
containing several heavy lamps collapses onto Sarah, causing her severe neck and
back injuries which require many complicated surgeries to repair.
Sarah sues Ron‘s Furniture for $500,000 to cover the cost of her medical
procedures. The “occurrence” took place on the premises of Ron’s Furniture, so
his Coverage A- Premises and Operations coverage would respond to Sarah’s
lawsuit. The insurer pays all legal costs to defend Ron’s Furniture in court, but
the court sides with Sarah and awards her $450,000 in damages.
Since Ron’s Furniture has a per occurrence limit of $250,000 on their CGL, the
insurer would indemnify Ron for $250,000, and Ron’s Furniture would be
responsible for paying the remainder of the claim. In addition, since the claim fell
under Ron’s Premises and Operations coverage, the General Aggregate Limit
would be reduced to $750,000 for the remainder of the policy period.
Now, suppose Sarah purchased a wooden bar stool manufactured by Ron’s

Furniture. Sarah takes the bar stool home, and a week later the bar stool
collapses under her weight, also causing injuries to her back.
We’d go through the exact same process in this scenario, but this time Ron’s
Products and Completed Operations coverage would respond because the
“occurrence” transpired off the business premises, and the product was in the
hands of a third party. Ron’s insurer defends Ron in court again, but since it all
boils down to an issue of strict liability, Ron’s Furniture loses the case and his
Products and Completed Operations coverage kicks into action. This time,
however, his Products and Completed Operations Aggregate is reduced by the
amount of the claim.
Miscellaneous CGL Coverage Forms: The Owners and Contractors

Protective Liability Form: When a business or property owner hires an
independent contractor to perform work-related operations, the hiring business
automatically assumes an element of liability for the work performed by the
independent contractor. For example, let’s say Builders Inc. hires Contractor X
to build a deck. While Contractor X is building the deck, an employee of
Contractor X accidently knocks a full can of paint off the partially constructed
deck, and the can falls and severely injures a pedestrian. In a case like this, the
pedestrian has every right to sue Builder’s Inc., even though technically Builder’s
Inc. didn’t cause the injuries, Contractor X did. Why is this? This is a case of
vicarious liability, where one party can be held liable for the actions of another,
even though the original party did not cause the injuries. In the same way
business owners can be responsible for the actions of their employees and
parents can be held responsible for the actions of their children, business owners
can be held responsible for bodily injury and property damage caused by a third
party performing work for the hiring business. While the CGL can respond to
damages caused by an independent contractor, many business owners instead
choose to require their independent contractors to purchase an Owners and
Contractors Protective Liability policy as an extra level of protection. The
Owners and Contractors Protective Liability policy responds to all liability claims
filed against the hiring business arising out of work performed by the
independent contractor. Owners and Contractors Protective Liability policies are
specific to a single project and location, and the contract expires when the
independent contractor has completed the assigned work. Because of this, the
Owners and Contractors Protective Liability policy only uses the “occurrence
form” policy. The independent contractor purchases the policy and pays the
required premiums, but the hiring business is listed as the named insured and
retains ultimate control over the policy. The Owners and Contractors Protective
Liability policy has several advantages for the hiring business in that:
• The independent contractor cannot cancel or alter coverage with the hiring
business’ knowledge.
• The limits of insurance only apply to a single location for a fixed project.
• The hiring business’ existing CGL policy limits will not be affected by any
claims arising out of the negligence of the independent contractor.
• Owners and Contractors Protective Liability policies provide primary
coverage for all claims arising out of the work of the independent
contractor.
• Can be used on projects considered inherently dangerous and more likely
to produce claims.
• Protects the named insured from the negligent acts of incompetent or
unqualified contractors.
• Protects the named insured from acts or omissions in supervising the
operations of the independent contractor.
Exclusions to the Owners and Contractors Protective Liability policy include:

• Auto/ watercraft
• Contractual liability
• War and terrorist acts
• Liquor Liability
• Workers Compensation
• Property in the care, custody and control of the insured
• Products
• Completed operations (the policy is project specific; once the project is
complete, the policy expires)
Liquor Liability Coverage Form
As we learned earlier, the standard CGL policy specifically excludes liability for
damages arising out of the manufacturing, selling, storing, furnishing or serving
of alcoholic beverages.
The Liquor Liability Coverage Form (or endorsement) picks up where the CGL
excludes coverage, and responds to any claims of bodily injury and property
damage arising out of the service, manufacturing or sales of alcohol, including
cases involving over-service and illegal service to minors.
While we might think only bars and/ or nightclubs would require the Liquor
Liability Coverage Form or endorsement, the form is actually quite important to
any business that maintains even a remote connection to the service of alcohol.
For example, imagine if a paper products manufacturer decided to throw a
Christmas party for their employees. The company purchases several bottles of
wine for the party, and afterwards an employee leaving the party causes an
accident and is discovered to be under the influence. The company could be held
liable for such damages, and those damages would not be covered under the
standard CGL, in which most insurers won’t even touch a claim where any
alcohol is involved.
Some establishments you wouldn’t ordinarily think of that may require Liquor
Liability include:
Grocery stores
Hotels
Casinos
Golf courses
Department stores
Inns and motels
Comedy clubs
Businesses that do purchase Liquor Liability coverage are often required to

provide alcohol training classes to their employees on a scheduled basis, and
coverage is excluded if a liquor license lapses during the policy period.
Pollution Liability Coverage Broad Form and Pollution Liability
Limited Coverage Form
Sold only on a claims-made basis, the pollution liability forms provide coverage
for the pollution liability exposures specifically excluded in the standard CGL.
The Pollution Liability and Pollution Liability Limited Coverage Forms respond
to “pollution incidents”, where pollution causes bodily injury or property damage
after being released into the air or water, or dispersed into or top of land.
Pollution liability coverage can respond to “pollution incidents” related to:

• Pollution releases and damages at the insured site
• Pollution damages occurring off-site due to pollutants emanating from the
insured site
• Pollution damages transpiring during owned or third party transportation
• Pollution damages at non-owned disposal sites
The broad form covers clean up costs, and the limited form only covers property
damage and bodily injury. Pollution liability may also be purchased as an
endorsement.
Chapter 4.3 - Professional
Liability Coverage
Professional Liability Insurance
Professional liability insurance was created to protect professional practitioners

in a wide variety of specialized employment fields including doctors, lawyers,
engineers, architects, financial planners and accountants.
While a general liability policy only responds to claims involving bodily injury,
property damage, personal injury or advertising injury, a professional liability
policy is designed to respond to claims arising out of negligence,
misrepresentation, breach of contract, violation of good faith and inaccurate
advice.
The sole purpose of the professional liability insurance policy is to cover the costs
of defending a lawsuit, in addition to paying any monetary damages arising
from a lawsuit alleging a “wrongful act”- negligence and / or inappropriate
actions on behalf of the professional.
There are two types of professional liability insurance coverages: Malpractice

insurance, and errors and omissions insurance.
Malpractice Insurance
Malpractice liability insurance, sometimes referred to as “Medical Professional

Liability”, protects medical and legal professionals against claims of professional
negligence by act or omission, in which the professional services provided
deviated from accepted standards of practice in their respective fields.
Malpractice insurance is popular in the following fields:
• Doctors, dentists and other health care professionals
• lawyers
• hospitals and medical care facilities
• veterinarians
Errors and Omissions (E & O) Insurance
Errors and Omissions liability insurance protects an individual or company from

being held responsible for errors, or the failure of the work to perform as
promised in a contract. In general, E&O insurance does excludes coverage for:
a) dishonest, fraudulent or criminal acts of the insured or the insured’s

employees
b) bodily injury or damage to physical property
E&O insurance is popular in the following fields:
• law (note - Lawyers Professional Liability does not cover the insured’s
activities under the Employees Retirement Income Security Act of 1974)
• engineering
• architecture
• accountants and financial planners, including stockbrokers
• real estate brokers
• insurance agents and brokers (note - does not include coverage for
punitive damages, libel or slander)
Other available E&O insurance:
a) Employment Practices Liability protects employers against losses

arising from wrongful termination, discrimination, sexual
harassment and other employment related issues.
b) Environmental Liability protects against allegations that the insured

failed to identify contaminants and issues related to
contamination of the environment.
Professional liability insurance is issued on an "occurrence" basis, or a "claims

made" basis.
Occurrence Policy
An occurrence policy covers claims arising from events occurring while the
policy is in force, no matter when the claim is made.
Claims Made Policy
A claims made policy covers claims made during the policy period. Sometimes a
retroactive date may be applied to the insurance policy to cover acts committed
before the insurance policy was purchased.
For example, lets say a doctor purchases an occurrence policy in January 2006,
which provides coverage from January 1, 2006 until July 31, 2007. In July of
2006, he operates on a patient. In 2009, that patient alleges medical negligence
and files a lawsuit. Even though the lawsuit was filed in 2009, the "event"
occurred in July 2006 when the occurrence policy was in effect, so the doctor is
covered by his policy.
Now let's say the same doctor purchased a claims-made policy in January 2006
which provided coverage from January 1, 2006 until July 31, 2007. In July of
2006, he operates on a patient. In 2009, that patient alleges medical negligence
and files a lawsuit. In this case, the doctor would not be covered because the
lawsuit was filed after the claims made policy had expired.
“Consent to Settle” Clause
A unique provision in Professional Liability Insurance is the “consent to Settle”

clause. It requires an insurer to seek an insured's approval prior to settling a
claim. However, the insurer’s expenses to defend the insured are included in the
policy’s limit of liability (unlike other liability policies where defense costs are in
addition to the limit of liability).
Note also that if the insured does not approve the recommended settlement
amount, the consent to settlement clause states that the insurer will not be liable
for any additional monies required to settle the claim or for the defense costs that
accrue from the point after the settlement recommendation is made by the
insurer.
Package Policies
Commercial Package Policies
A commercial package policy (CPP) combines two or more lines of commercial

insurance into a single insurance contract.
A jewelry manufacturer, for example, might seek property insurance to protect

their premises and manufacturing facilities, and also seek some sort of crime
coverage to protect their inventory of valuable metals and finished pieces from
employee theft. An inland marine policy might provide insurance protection for
jewelry shipped to consumers, and a boiler and machinery insurance policy could
offer protection for specialized pieces of equipment used in the manufacturing
process. And, of course, they’d need liability insurance to protect themselves
against liability for damages related to their premises and products.
To cover all these risks, a business could choose to purchase a series of monoline
policies, which each offer a single line of insurance coverage, or they can choose
to purchase a commercial package policy, which integrates multiple lines of
insurance into one complete insurance package.
The commercial package policy allows businesses to pay one premium to one
insurer for all of their insurance needs, usually at a significant discount to the
cost of several equivalent monoline policies. The commercial package policy
provides one Common Declarations page, and a Common Policy Conditions page
applicable to the entire policy.
Commercial policy packages offer several other advantages for both the insured
party and the insurer. Commercial package policies are advantageous in that they
offer:
• the ability to eliminate gaps in coverage or overlapping coverages for
the insured.
• reduced premiums for the insured.
• reduced expenses and less susceptibility to adverse selection for the
insurer.
• increased customer loyalty.
Commercial package policies can include any number of the following lines of
insurance, based on the varying needs of each individual business:
• commercial property insurance
• commercial general liability insurance (CGL)
• employment-related liability insurance
• professional liability
• commercial crime and employee dishonesty
• commercial inland marine insurance
• business auto insurance
• boiler and machinery coverage
• equipment breakdown
Commercial package policies are elective based, meaning businesses can choose
to package whichever insurance lines apply to their insurance needs.
Some coverages, however, are not offered as part of a CPP, including:

• workers compensation insurance
• health insurance
• life and disability insurance
These types of coverages must be written separately from a CPP.
The Businessowner's Policy

Small- to- medium sized businesses frequently purchase a specific type of
commercial package policy called a Businessowners Policy (BOP). Where the
commercial package policy offers multiple elective coverages, a BOP policy
incorporates several lines of insurance coverage required by most small-to-
medium sized businesses into one easy to understand, comprehensive insurance
package.
Developed in the early 1980’s to provide a broad range of insurance coverage at

an affordable price for small businesses facing a similar risk structure, the BOP is
often referred to as a “homeowner’s policy” for businesses. It provides essential
property and liability insurance coverage for businesses on an open-peril basis,
and offers replacement cost valuation for property losses if the business insures
80% to value. For businesses that insure less than 80% to value, actual cash value
valuations apply. There is no coinsurance clause with the BOP.
Extremely popular, BOP package policies almost universally offer:
• 12 months of business income coverage
• 12 months of extra expense coverage
• built-in inflation guard for buildings and structures
• liability protection to cover lawsuits from accidents or products, and also
protection from slander or copyright lawsuits.
• $500 deductible on all claims (except fire dept. service charges, extra
expense and business income)
• an actual cash value endorsement option
• a named-peril endorsement option.
The BOP does not offer the following coverages, which can be added by
endorsement:
• insurance for company owned vehicles
• professional liability
• malpractice
In this section, we’ll take a closer look at the Businessowners Policy, including it’s
applicable coverages, conditions, exclusions and endorsements. We’ll also briefly
study which businesses qualify for a BOP.
Please note, since BOP policies incorporate several lines of insurance we’ve
already studied in our course, a lot of the information presented in this chapter
has been covered before. It’s important we familiarize ourselves with these
concepts, however, so we’ll go over them again.
Who Qualifies for the BOP Policy?

While most BOP policies tend to follow somewhat similar guidelines for eligibility
regarding business type, space, and sales requirements, in the field you will find
that many independent insurers author their own eligibility requirements for the
BOP.
For example, many insurers require buildings to be under a certain age or height,
or they may require a business to be in operation for a certain number of years
before they will issue a BOP policy. Loss history, applicant history, and even
management experience may be analyzed and varying requirements set.
Niche BOP insurance providers have proliferated in recent years as well, catering
to specific types of small businesses by tailoring BOP policies around the needs of
their clients.
At a minimum, we need to understand the following guidelines for BOP

eligibility:
Wholesalers
Wholesalers and distributors are eligible for the BOP program if they meet two
requirements:
1. No more than 25% of gross annual sales may come from retail operations, and
2. No more than 25% of the floor area may be open to the general public.
Wholesalers can include gardening supply or farming wholesalers, wholesalers of

baked goods, paper products wholesalers, and florists. Examples of distributors
could include beauty supply distributors, auto parts distributors and appliance
distributors.
Processing and Service Businesses
Small to medium sized processing and service business qualify for the BOP if:
1. Total annual sales do not exceed $3 million.

2. No more than 25% of sales occur off-premises.
Examples of processing and service businesses include beauty shops, appliance

repair shops, printing services and dry cleaners.
“Limited Cooking” and Fast Food Restaurants
These types of restaurants can qualify for the BOP program if the following
conditions are met:
1. Restaurant must be 7,500 square feet or less.

2. Can seat a maximum of 75 customers, or 150 for “fast food” establishments.
3. Beer and wine can account for no more than 25% of total annual sales.
4. No liquor sales.
5. Must maintain proper fire extinguishing equipment.
“Limited cooking” facilities can’t use any cooking equipment that emits enough
smoke or grease-laden vapors that would require an exhaust system or dry-
chemical fire extinguishing mechanism. Generally limited to ovens, toasters,
microwaves and cold foods.
Convenience Stores With or Without Gasoline Sales
Convenience stores with gasoline sales qualify for the BOP if:
1. Gasoline sales account for less than 75% of total annual sales.
2. No auto repair operations permitted.
3. No car washes on the premises.
4. No propane or kerosene sales or filling stations permitted.
Self-Storage Facilities
Self storage facilities that qualify may have unlimited floor space, but:
1. can only offer a maximum of two floors

2. cannot offer storage for pollutants, waste, chemicals or industrial materials
Specialty Contractors
Certain contractors may qualify for the BOP if:
1. Annual payroll does not exceed $300,000

2. Annual sales do not exceed $3,000,000
3. Sub-contracted work cannot exceed 10% of sales.
4. Not involved in heavy construction.
5. Cannot work at heights over three stories.
Some examples of qualified contractors might include carpenters, electrical

specialists, plumbers, refrigeration systems contractors, and Heating/
Ventilation/ Air Conditioning (HVAC) contractors.
Motels
Motels are eligible for the BOP if:
1. The motel has a maximum of three floors.

2. Does not offer attached or unattached bars / cocktail lounges.
3. Is not a “seasonal” motel, or closed for a period of 30 or more days on an
annual basis
Apartment Houses and Residential Condominium Association

Buildings
Apartment buildings and residential condominiums are eligible for the BOP if:
1. Incidental occupancies are limited to the above eligible businesses, not

exceeding 25,000 square feet.
2. Incidental occupancy by contractors cannot exceed 7,500 square feet, or 15% of
the floor area.
“Incidental occupancies” represent businesses or offices located within an

apartment building or condo association, usually on the ground floor.
Office Buildings
Office buildings may qualify for the BOP if:

1.The building is less than 100,000 total square feet.
2. Must be no more than six stories high.
3. Office tenants cannot occupy more than 25,000 square feet, and occupancy by
contractors cannot exceed 7,500 square feet, or 15% of the floor area.
Now, that’s a lot to remember, so if we had to narrow down the most important
general criteria for the BOP, we would probably want to remember these points:
1. BOP’s tend to apply to businesses with predominantly “on-premises”

operations, and limit “off-premises operations.
2. BOP’s generally require apartments and businesses to occupy less than
25,000 feet.
3. BOP’s can apply to owned office buildings with less than 100,000 square
feet of space.
4. BOP’s apply only to buildings with no more than six stories.
5. BOP’s generally are limited to businesses with annual revenues not
exceeding $3 million.
Businesses Ineligible for the BOP
• Automobile repair shops or service stations

• Vehicle dealerships
• Parking lots or garages
• Places of amusement, including but not limited to arcades, amusement
parks, waterslide parks and movie theaters.
• Bars, nightclubs and pubs
• Banks, credit unions, savings and loan associations, and other similar
financial institutions
• Insureds whose business operations include one or more locations which
are used for manufacturing, processing or servicing, except for eligible
processing and servicing risks
• Household personal property
• Condominium associations other than office or residential condominiums
• Buildings occupied in whole or in part for manufacturing or processing,
unless the occupancy represents an eligible processing risk
The Businessowners Policy

• Section I- Property
• Section II- Liability
• Section III Common Policy Conditions
Section I- Property
Coverage A Buildings and Structures
Coverage A of the BOP applies to the buildings and structures described on the
declarations page, any additions to those buildings or additions under
construction, and also includes any construction equipment and/ or building
materials within 100 feet of the insured premises.
Coverage A provides protection against damages to:

• buildings and structures.
• permanently installed fixtures in those structures, such as lighting and
security systems.
• permanently installed equipment and machinery.
• property used to maintain the business (ladders, fire extinguishers)
• flooring and floor coverings, heating, ventilating, refrigerating, cooking,
and dish washing equipment.
• outdoor fixtures.
• for apartment buildings, Coverage A applies to furniture owned by the
insured in furnished apartments or other types of rental units.
Coverage B Business Personal Property
Coverage B applies to business personal property. Business personal property is

property of the business that is not affixed to the building and is used in service
of, or to service the business, and, more likely than not, is used on an every day
basis.
Business personal property can include:

• furniture, loose fixtures, loose machinery, loose office equipment, stock
(inventory), and other stock used in the course of business.
• all other business owned personal property used primarily for business
purposes
• the value of labor, services and/ or materials furnished or arranged on the
personal property of others (Example: the insured receives a couch from a
client for refurbishing, during which a fire burns down the repair shop.
BPP will pay for the labor and materials used to refurbish the couch, even
though it is now destroyed.)
• improvements and betterments made by tenants, including signs,
storefronts and other alterations and/or installations acquired at the
tenants expense
• leased business personal property for which the insured is contractually
obligated to provide insurance such as copiers, large printers or phone
systems
• all business personal property that is in the open, or in a vehicle within
100 feet of the business premises.
Building and Personal Property Exclusions

The BOP specifically excludes several types of property from coverage, including:
• Currency, bills, securities, and bullion
• Automobiles, trucks, aircraft and other vehicles that require registration
• Watercraft while afloat
• Contraband, or property being illegally transported or traded
• Land, water, lawns or crops
• Outdoor radio and TV antennas, or masts and associated wiring (unless
under extensions)
• Outdoor signs not attached to buildings (unless under extensions)
• Trees, shrubs, plants (unless under extensions)
Additional Coverages Offered by the BOP
Just as in our standard commercial policy discussed earlier in this course, most
BOP’s will offer coverage at no additional charge for:
Inflation Guard
Inflation guard automatically increases the amount of building coverage on an

annual basis. This allows the insured to maintain an appropriate level of
insurance relative to property value as the property value increases over time.
Debris Removal
The BOP offers additional coverage for the removal of debris from an insured
property if the debris resulted from a covered loss.
The BOP provides up to $10,000, or 25% of Coverage A in some cases, for debris
removal costs as long as the debris is reported in writing to the insurer within 180
days of a covered loss.
Preservation of Property
Preservation of property coverage indemnifies the insured for any expenses

incurred while protecting property from further damage resulting from a covered
peril. Preservation of property covers property while in transport, and while
stored at another location for up to 30 days from the date of the initial damage.
Fire Department Service Charge
Additional coverage can pay up to $2,500 for fire department service charges
when the policyholder utilizes emergency services in an effort to protect covered
property. There is no deductible for Fire Department Service Charges.
Business Income Coverage
As discussed previously in our section on commercial insurance, business income

coverage indemnifies the insured for a loss of business income caused by direct
physical damage to covered property. BOP business income coverage applies
during the “period of restoration”, which begins 72 hours after the initial damage
occurs, and continues until normal operations resume, up to a maximum of 12
months.
Business income coverage is not subject to policy limits.
Extra Expense Coverage
Extra expense coverage indemnifies the insured for costs incurred to maintain
business operations after direct physical damage to covered property. Extra
expense coverage begins immediately after a direct loss, and the BOP can provide
up to 12 months of coverage, or until business resumes normal operations.
Extra expense coverage is not subject to policy limits.
Pollution Clean-up and Removal
Provides coverage up to $10,000 for pollution damages resulting from direct

physical damage caused by a covered peril. This additional coverage provides
indemnification for the costs of extracting spilled or disseminated pollutants
from land or water, and only applies if the policyholder provides written notice of
the loss within 180 days of the covered loss.
Interruption / Actions by Civil Authority
Provides coverage for a loss of business income caused by direct physical damage
to other properties by a covered peril, which results in restricted access to the
insured property by civil authorities. Coverage begins 72 hours after the initial
loss, and provides up to three weeks of coverage.
For example, a tornado could cause severe damage to a bridge linking the
insured’s property to the highway. If the authorities close the bridge for repairs,
employees and customers may not be able to access the business, and the
insured’s income may be impaired.
Seasonal Increase (Peak Season)
Provides a 25% increase in the limits of coverage for business personal property
to accommodate seasonal variations in inventory.
For example, retailers may store excess levels of inventory prior to Christmas, or
a ski manufacturer may experience excess levels of inventory in September in
preparation for the winter sales push.
Electronic Data
Provides up to $10,000 in coverage for replacing, restoring or repairing

electronic data that has been destroyed or corrupted by a covered peril.
The covered causes of loss for electronic data includes viruses or harmful
computer codes introduced to computers used by the insured, but NOT when the
viruses are introduced to the computers by employees of the insured.
Computer Operations Interruption
Provides up to $10,000 on an annual basis for loss of income caused by an

interruption of computer operations by a covered peril.
The covered causes of loss for computer operation interruption includes viruses
or harmful computer codes introduced to computers used by the insured, but
NOT when the viruses are introduced to the computers by employees of the
insured.
Fire Extinguisher Systems Recharge Expense
Provides up to $5,000 for the cost of recharging fire extinguisher systems in the
event of accidental discharge. Accidental discharge during testing or installation
is excluded from coverage.
Fungi, Rot and Bacteria
Provides up to $15,000 for damage caused by fungus, rot or bacteria, but often
under limited conditions and specified perils. Covers the cost of tearing out and
replacing that portion of covered property that either contains the fungus, or
tearing out and replacing that portion of property that restricts access to the
fungus.
Business Income from Dependent Properties
Also known as contingent business interruption, this coverage is designed to step

in when the insured realizes a loss of income because of covered property
damages to key suppliers to the insured’s business, or to key customers of the
insured’s.
With contingent business interruption, the causes of loss form for the insured
party applies to damages at the dependent property. The dependent’s property
causes of loss form or insurance coverage has no relevance to the insured’s
contingent interruption coverage.
Increased Cost of Construction
Provides up to $10,000 in coverage for increased costs associated with bringing

damaged or repaired property up to current municipal codes.
Collapse
Provides coverage for collapse caused by a specified set of perils similar to the
basic causes of loss discussed earlier in our studies. Does not cover collapse
caused by wear and tear or deterioration.
Glass Expense
Covers certain expenses associated with boarding up broken glass, and removing
obstructions to access broken glass.
Money Orders and Counterfeit Currency
Provides up to $1,000 in protection for inadvertently accepting fake currency or

money orders in good faith.
Forgery or Alterations
Provides up to $2,500 for losses related to the forgery or alteration of checks,

drafts or promissory notes.
Coverage Extensions Offered by the BOP
Newly Acquired or Constructed Buildings
Newly acquired properties coverage provides 30 days of insurance coverage for

new buildings under construction at the insured premises, or for any newly
acquired business properties located off the insured premises.
Newly acquired properties coverage provides up to $250,000 in coverage for

buildings and structures, and $100,000 business personal property coverage.
Personal Property Off-Premises
Property off-premises coverage provides up to $10,000 for covered business

personal property temporarily not on location of a property owned, leased or
rented by the policyholder, or in transit under orders by the insured.
Personal Effects
The personal effects and property of others extension provides a maximum of

$2,500 for damage or destruction to personal effects of the insured, employees of
the insured, or personal items in the care, custody and control of the insured. The
damage must occur on the insured premises for the extension to apply.
This extension does NOT apply to the theft of personal effects.
Outdoor Property
Provides up to $2,500 for damages to fences, satellite dishes, radio and TV

antennae, and detached signs. Also covers damage and destruction to trees,
shrubs and plants, but only up to a maximum of $500 per tree.
Valuable Papers and Records
Provides up to $10,000 of insurance for costs associated with replacing or

recovering valuable paperwork or computer records destroyed by a covered peril.
Accounts Receivable Coverage
Provides up to $10,000 in coverage for accounts receivable that the insured
cannot collect because of damage or destruction to accounting records held on
the insured premises, but damaged or destroyed by a covered peril.
Also provides up to $5,000 of the same coverage if the damaged or destroyed

accounting records were held off-premises, and damaged by a covered peril.
Conditions – Property Loss
As we’ve discussed before, the conditions page contains provisions inserted into
the policy that qualify or place limitations on an insurer's promise to pay or
perform.
Aside from the Common Policy Conditions, the property section of a BOP offers
its own set of conditions for property coverage. We’ve seen them all before, but
we’ll go over them again:
Abandonment
The abandonment condition clarifies that the insurance company holds no

financial responsibility for properties abandoned by the insured.
Insurers use this condition to reiterate that their only role in the insurance
relationship is to provide financial indemnification for damages to property. They
are not financially responsible for cleaning up after, disposing of, or demolishing
damaged properties.
Appraisal
The appraisal condition establishes the rules the insurer and the policyholder
must follow if they disagree on the value of a loss that both parties agree is
covered by the insurance contract.
Section II – Liability
The BOP Liability section is virtually indistinguishable from the stand-alone CGL
policy we covered earlier in our studies. All coverage, however, is provided on an
“occurrence form” basis. The “claims-made” option is not available with the BOP.
Just as in the CGL, BOP liability offers liability coverage for bodily injury and
property damage arising out of the business owner’s premises and operations, as
well as liability coverage for products and completed operations. The BOP also
provides a series of separate aggregate limits identical to those we found in the
CGL.
The BOP offers per occurrence liability limits of $300,000, $500,000, $1 million
or $2 million. These limits apply per occurrence for bodily injury and physical
damage, and per person for personal advertising injury.
The General Aggregate Limit for the BOP is established at twice the selected per
occurrence limit. So, for example, if the insured selects a $500,000 per
occurrence limit, the General Aggregate Limit for the BOP will be $1,000,000. If
the insured selects a $2 million per occurrence limit, the General Aggregate Limit
will be $4 million. The Products-Completed Operation Limits Aggregate Limit
will also be set at twice the selected per occurrence limit.
Damages to Premises Rented by You generally starts at $50,000 per occurrence,

and the Medical Payments Limit usually starts at $5,000 per person. These limits
may be increased at the discretion of the insured.
A sample policy, therefore, might establish the following limits:
Selected Per Occurrence Liability Limit - $500,000

General Aggregate Limit (Liability, Medical Expenses, Personal Advertising
Injury) - $1,000,000
Products-Completed Operations Limits- $1,000,000
Per Occurrence Limit (Liability and Medical Expenses)- $500,000
Per Person Limit (Personal and Advertising Injury)- $500,000
Medical Payments Limit (per person)- $5,000
Damages To Premises Rented by You- $50,000 (per occurrence)
Just like the CGL, the BOP also offers supplementary payments in conjunction
with liability. Supplementary payments includes:
• All costs associated with defending and investigating a claim against the
insured
• Up to $250 for cost of bail bonds required because of accidents or traffic
violations arising out of any vehicle to which “bodily injury” applies
• The cost of bonds to release attachments
• Costs incurred by the insured (as requested by the insurer) in assisting any
investigation or defense of a claim, including up to $250 a day in lost
wages
• All costs taxed against the insured
• Prejudgment interest levied against the insured on the portion of the
judgment paid by the insurer
• Interest accrued after judgment but before the insurer has paid
Supplementary payments are NOT subject to policy limits.
Conditions- Liability
Bankruptcy
Bankruptcy or insolvency of the insured party does not relieve the insurer from
any obligation to pay claims on behalf of the insured.
Duties In the Event of a Claim, Occurrence or Lawsuit
The CGL contract outlines a number of responsibilities of the insured in the event
of an occurrence. These include:
• Providing prompt notice to the insurer of an occurrence, including the
how, when and where, and the names and addresses of the injured parties
and relevant witnesses.
• If a suit is brought upon the insured, the insured must promptly notify the
insurer.
• The insured must cooperate with the insurer in any matter involving a
claim, including forwarding legal papers and authorizing the insurer to
obtain all relevant materials related to a claim
• Assist the insurer in enforcing subrogation rights
• The insured cannot make voluntary payments upon a claim on behalf of
the insurer without the insurer’s authorization.
Legal Action Against Us
This condition stipulates that an insured must meet all the obligations of, and
against an insurer. In addition, the insurer cannot be held liable for damages not
covered by the BOP, nor can they be held liable for payment for damages over
and above the stated limits of insurance.
The BOP policyholder has one year from the date of a loss to commence a lawsuit
against the insurer, provided the above terms are met.
Separation of Insureds
As discussed in our section on CGL, separation of insureds stipulates that

coverage applies to each “insured” separately, as if no other “insured” existed.
Separation of insureds ensures that each individual insured is protected as a

separate entity, even against other insureds. The limits of the policy, however,
still apply to all insureds collectively.
BOP- Liability Exclusions

• In general, any injury caused by legal, medical or pharmacological
professional services. These services require professional liability and/ or
malpractice liability coverage.
• Expected or intentional injury by the insured, unless in acts or self-defense
or protection of property
• Injuries to employees (covered by worker’s compensation)
• Automobiles, aircraft or watercraft
• Contractual Liability
• Liquor Liability (for businesses selling or serving alcohol; covered under
Liquor Liability)
• Transportation of mobile equipment
• Pollutants
• War and terrorist attacks
• Property of the insured, property in the care, custody and control of the
insured, and property loaned to the insured
• Property damage to insured’s work or products
• Electronic data
• Recall of products or work
Section III Common Policy Conditions
Cancellation / Non-Renewal
The cancellation / non-renewal section of the conditions page outlines the rights
and duties of each party in regards to the cancellation of an active insurance
contract.
As with most insurance contracts, the policyholder can choose to cancel an
insurance policy at any time by providing the insurer with advance written notice
of cancellation, or by returning the contract to the insurer with an effective date
of cancellation.
Insurers may also cancel contracts, but cancellation conditions are subject to a
variety of state insurance laws. Generally speaking, insurers are usually required
to provide at least 20 days written notice of cancellation to the policyholder, or 10
days if the insured has failed to pay the required premiums.
The insurer reserves the right to cancel a policy if an insured property has been
vacant or unoccupied for 60 or more days. Under the BOP, properties with more
than 65% of rental units unoccupied, or with over 65% of the floor space vacant,
can be considered “vacant” properties.
Changes to Policy
All policy changes must be added by endorsement, and agreed to by both the
insurer and the first named insured on the policy.
Concealment, Misrepresentations or Fraud
The concealment, misrepresentation and fraud condition allows the insurance

provider to void any and all insurance coverage if the policyholder commits
fraud, or misrepresents, distorts, or conceals any materially relevant facts to an
insurance policy.
Examinations of Books And Records
The insurer has the right to inspect the books and records of the insured for up
until three years after the policy expires.
Inspections and Surveys
The insured must allow the insurer and any other organization that makes
insurance recommendations to inspect or survey the insured premises at any
time, and to provide reports and recommend changes based on their inspections.
The results of these inspections may be used to determine insurability and
premiums.
Insurance Under Two or More Coverages
Liberalization
Liberalization allows, within a 45-day window, an insured party to automatically
adopt any broadened insurance coverage provided by an insurer assuming there
is no increase in the cost of the premium.
Premium Notices
Insured is responsible for payment of all premiums to keep the policy in place.
Premium notices will be sent to the address listed for the first named insured on
the declarations page.
Premium Audit
A deposit premium is essentially a sum of money paid to an insurer to put the

CGL policy into effect. The insurer establishes the deposit premium based on an
analysis of their estimated risk exposure over the policy period taken at the
beginning of the policy period.
At the end of the policy period, the insurer will conduct a premium audit to
determine their actual exposure over the course of the past policy period, and
calculate the actual premium earned, which is often based on payroll or annual
sales of the insured.
Transfer of Rights of Recovery
The insured must agree to subrogate their rights to collect from another party to
the insurer, and the insured must not impair the ability of the insurer to act upon
those rights.
Transfer of Your Rights Under This Policy
Essentially, the insured cannot transfer the rights or protections offered by this
policy to another person. It can only be transferred if the insured dies, at which
point the rights are transferred to the legal representative of the insured.
BOP Exclusions
The BOP policy provides protection on an open-peril basis, similar to the Causes
of Loss- Special Form we’ve discussed previously in this text. Generally speaking,
all losses are covered unless specifically excluded from coverage.
Because the BOP offers open-peril coverage, the insurer will possess the burden
to prove damage was excluded from coverage when they deny a claim for an
insured. As such, the BOP exclusions are generally lengthy and thorough, and it is
EXTREMELY important that each adjuster examine the exclusions to each policy
carefully.
Some nearly universal BOP exclusions from coverage include:

• Dishonest, illegal or criminal acts by the insured
• Operations executed by the government or governmental authority
• Enforcement of ordinance or law
• War and military action
• Explosions of boilers and/ or steam equipment
• Wear and tear, including deterioration
• Power failure
• Earthquakes
• Water damage by continuous leakage or seeping over a period of 14 days
or more
• Nuclear hazards
• Settling, shrinking, expansion or cracking of foundations, floors or ceilings
• Interruption or surge of artificially generated electric power supply
• Earthquakes
• Pollution
• Neglect of property
• Unexplained disappearance of property
Popular Added Coverages and Endorsements
Named Peril Endorsement
For small businesses seeking a lower insurance premium, the BOP offers a
named-peril endorsement. The named-peril endorsement protects the
business owner from damages resulting from:
• Fire and lightning

• Windstorm and Hail
• Explosions
• Smoke
• Aircraft or Vehicles
• Riot or Civil Commotion
• Vandalism
• Sprinkler Leakage
• Sinkhole Collapse
• Volcanic Action
• Transportation, if by
o Collision, derailment or overturn
o Stranding or sinking of vessels
o Collapse of bridges, docks, or piers
Outdoor Signs
Allows the insured to purchase open-peril coverage for unattached outdoor signs.
Mechanical Breakdown
Coverage for mechanical breakdown can provide a vital safety net for small
businesses that rely on certain boilers, steamers, refrigeration systems, or any
other type of mechanical or electrical machinery. Some policies offer computer
hardware coverage as well.
Mechanical breakdown indemnifies the policyholder for repairs and/ or

replacement of machinery, and may also include business income coverage.
Spoilage Endorsement
The spoilage endorsement adds perishable stock to covered property, and

provides insurance protection against spoilage of such stock due to mechanical
breakdown of refrigeration equipment, contamination by refrigerants, or the loss
of electrical power.
Indemnification for losses due to spoilage are calculated using the market selling
price of the perishable stock at the time of loss less any discounts the insured
would normally expect.
Hired and Non-Owned Auto Liability
For businesses that do not carry any form of commercial auto insurance, the
hired and non-owned liability endorsement provides liability protection for
damages caused by hired or non-owned auto accidents that occur on company
business.
Hired auto liability covers autos rented, leased or borrowed by the insured. For
example, if XYZ Inc. rents a car for an employee to attend a conference and the
employee causes a car wreck, the victim may seek restitution from the XYZ Inc.
Non-owned auto liability provides liability coverage for vehicles not owned by the
insured, but used in the course of the insured’s business. A perfect example
would be pizza delivery employees who use their own cars to deliver pizzas. If an
employee causes a car accident while delivering pizzas, the victim may seek
restitution from the pizza company, as the employee was performing under the
direction of the company.
Hired and non-owned auto liability provides insurance protection for the
business ONLY! It does not provide liability protection for the owner nor the
driver of the vehicle involved in the accident.
Employee Dishonesty
Employee dishonesty protects the insured against losses due to theft by

employees, temporary workers, leased workers, and other authorized
representatives of the company. Since many schemes may be undetected for an
extended period of time, employee dishonesty coverage applies for up to one year
after the expiration of the coverage.
Protective Safeguards
The protective safeguard endorsement adds a condition of coverage to a policy

requiring that any one or a multitude of protective devices must be operational in
order for the coverage to apply. In return, the insured receives a premium
discount. These devices can include:
• Automatic sprinkler systems
• Fire alarms
• Security services or watch guards
• Burglar alarms
• Video surveillance
• Protective storage of valuable papers and records
• Service contracts for the above safeguards
Policies generally dictate that if an insured party fails to notify an insurer
regarding known impairments or problems with these systems after 48 hours,
coverage will be suspended and possibly denied at the applicable insured
location.
Burglary and Robbery
For businesses dealing in valuables such as furs, jewelry, watches, or metals,

burglary and robbery coverage offers indemnification for losses resulting from
burglaries and robberies.
Burglaries involve forcible entry and theft of valuables from a business, and
robbery involves the taking of valuables by force from an individual.
Provides $2,500 in coverage, but the insured may select to purchase higher
limits.
Ordinance or law coverage
Ordinance or law coverage indemnifies the insured for extra expenses related to
replacing or repairing damaged properties up to current building codes.
Utility Services- Direct Damage
Covers losses due to the interruption of water, communications, or power

services to the insured’s business because of damages to the utility provider. For
example, if a bolt of lightning causes a fire at the power station that supplies
power to the insured, and power is cut off for two days, a utility services
endorsement would indemnify the insured for any losses incurred due to the
interruption of power service on the insured’s property.
An additional, similar endorsement called Utility Services- Time Element offers

business income and extra expense coverage for the loss of utility services.
Both coverages are offered on a named-peril basis.
Crime & Bonding
Commercial Crime Insurance
A business can suffer a loss by theft in one of two ways:
1. theft by an employee (or by an employee acting in collusion)
2. theft by someone other than an employee
Commercial Crime Insurance protects businesses against losses due to theft.

There are two different Commercial Crime policies:
1. Loss Sustained Form
2. Discovery Form
The difference between the two is what “triggers” coverage:

Loss Sustained: covers only losses that both occurred and were discovered during
the policy period, (or within one year of its expiration).
One exception to that rule is that Loss Sustained forms will also cover losses that
occurred under previous (expired) crime policies and that were discovered during
the current policy year, as long as crime coverage had continued without
interruption from the time of the loss.
Thus, if a business owner purchases a Loss Sustained policy, and shortly

thereafter discovers an occurrence of theft that happened one year prior to the
inception date of the policy, the loss would not be covered (assuming the policy
was not a renewal of a previous policy).
Discovery: covers any loss discovered during the policy period or within 60 days
after its expiration regardless of when it occurred.
Thus, employee theft that occurred two years before the policy inception date is
covered if the theft is discovered during the policy period (or its 60-day discovery
extension).
Note: A retroactive date may be established to limit the amount of time prior to
the policy's inception a covered loss may occur (e.g. no coverage for losses that
occurred 10 or more years prior to the policy).
COMMERCIAL CRIME FORMS
Commercial Crime and Employee Dishonesty coverage may be written as part of
a package policy, sharing the Declarations page and the Common Policy
Conditions with the other lines of coverage in the package; or it may be written as
a stand-alone policy with its own Declarations page and Policy Conditions.
The coverage is written with a basic Commercial Crime Coverage Form, which
includes eight primary insuring agreements. Each insuring agreement carries its
own limit and deductible, and each may be left out by not showing a limit for it
on the Declarations page.
PRIMARY INSURING AGREEMENTS

There are eight primary insuring agreements found in the basic Commercial
Crime Coverage Form. An insured chooses the insuring agreement(s) that best
meets their business’ needs. The insuring agreements are as follows:
1. Employee Theft -- provides coverage for loss of or damage to money,
securities, and other property resulting from theft committed by an
employee.
2. Forgery Or Alteration -- coverage for loss by forgery or alteration of
negotiable instruments, such as checks, drafts, promissory notes or similar
instruments calling for payment of a sum of money. The negotiable
instruments must be:
a. Checks or drafts made or drawn in the insured’s name, payable to a
fictitious entity
b. Checks or drafts, including payroll checks, executed through forged
endorsements
c. Alteration of the amount of a check or draft
3. Inside The Premises--Theft Of Money And Securities -- coverage for loss of
money and securities resulting from theft, disappearance, or destruction.
Additionally, if damage to the premises occurs due to the actual or
attempted theft of money and securities, coverage is provided as long as
the insured is the owner or liable for the damage.
4. Inside The Premises-Robbery Or Safe Burglary Of Other Property --
provides for the loss of or damage to property other than money and
securities from inside the premises resulting from:
a. an actual or attempted robbery of a "custodian" (“custodian” means
the insured or a partner that has care or custody of insured
property)
b. Damage to the premises and to a locked safe or vault resulting from
an actual or attempted robbery or safe burglary is also provided.
5. Outside The Premises-- provides for:
a. loss of money and securities outside the premises in the care,
custody and control of a messenger or armored car service resulting
from theft, disappearance or destruction.
b. robbery of other property under the same circumstances.
6. Computer Fraud -- will pay for the loss of or damage to money, securities
and other property resulting from using a computer to fraudulently
transport property from inside the insured's premises (or its banking
premises) to a person or place outside the premises, which encompasses
anywhere in the world.
7. Money Orders And Counterfeit Paper Currency- - pays for loss resulting
from having accepted counterfeit currency or money orders in good faith
in exchange for merchandise, money, or securities.
8. Funds transfer fraud -- pays for the loss of funds resulting from fraudulent
instructions directing a financial institution to transfer, pay or deliver
funds.
ADDITIONAL INSURING AGREEMENTS (AVAILABLE BY ENDORSEMENT)

A number of additional insuring agreements may be added to the basic
Commercial Crime Coverage Form by endorsement. These include:
Extortion Endorsement -- covers for all types of property, when surrendered
away from the premises as a result of a threat to do bodily harm to the insured or
an employee, or to a relative or invitee of either, who is (or allegedly is) being
held captive. The coverage is also triggered by threats to damage the premises or
property within the premises.
Clients' Property Endorsement -- coverage for non-owned property for which the
insured is legally liable while the property is on the premises of the insured's
client. Examples of those businesses needing such coverage are janitorial services
or any other business providing a service on the premises of others.
Lessees of Safe Deposit Boxes Endorsement-- covers theft, disappearance, or

destruction of securities; and burglary or robbery of property other than money
or securities, all from within designated places of safe depository.
Securities Deposited With Others Endorsement -- covers theft, disappearance, or
destruction of securities, which have been deposited with a custodian, such as a
bank or stockbroker.
Safe Depository Endorsement -- covers the named insured's legal liability if it is
the safe depository for customers' property. The perils covered include burglary,
robbery, destruction or damage.
Guests' Property Endorsement -- covers the named insured's legal liability for
guest's property while in a safe deposit box or while the property is inside the
premises or in the named insured's possession.
NOTABLE CRIME COVERAGE PROVISIONS

Many of the provisions of a crime policy are similar to General Commercial
policies, however –there are certain provisions worth noting:
Other Insurance --The policy is excess over any other recoverable insurance (i.e.,
if there are two policies covering the same loss, the other policy pays first, than
this one after the other one is exhausted).
Property Covered -- The policy covers only property the named insured owns or
holds or for which the insured is legally liable, and only for the benefit of the
insured.
Valuation -- Money is valued at its face value; securities are set at their value on
the day the loss is discovered. Other types of property are valued at actual
replacement cost or, if less, the cost to repair the property.
Legal Action Against the Insurer - A lawsuit must be brought within two years
from the date the loss is discovered (after full compliance of the policy terms by
the insured).
Cancellation as to Any Employee -- Coverage for any employee is cancelled
immediately upon discovery of any theft or other dishonest act committed by the
employee, by the name insured, partners, officers, directors, members or
managers. This is true even when the dishonest act occurred before the employee
was hired by the named insured. The insured must be notified in writing at least
30 days before the effective date of cancellation.
Extended Period To Discover Loss – Even though a policy has an extended
discovery period, when another policy that replaces the Crime policy is
purchased, the extended period to discover a loss expires immediately.
Exclusions:
All Commercial Crime coverages exclude:

1. Theft or dishonest acts committed by the insured, partners or members,
whether acting alone or in collusion with others
2. Theft or dishonest acts committed by any of the insured’s employees or
representatives except as provided under the Employee Theft Coverage
3. Seizure or destruction of property by government authority
4. Legal expenses (except as provided under Forgery or Alteration coverage)
5. Nuclear hazard, War and similar actions
6. indirect loss, such as failure to realize income, payment of damages to a
third party (other than compensatory damages arising directly from a
covered loss), and costs incurred in establishing the existence or amount
of the loss
Employee Theft coverage specifically excludes:

1. Any loss caused by any employee or predecessor for whom similar prior
insurance has been cancelled and not reinstated
2. Inventory shortages are not considered a covered cause of loss unless it
can be proved that an employee or employees acting in collusion caused
the loss
Exclusions that only apply to:

• Inside the Premises Theft of Money and Securities
• Inside the Premises Robbery or Safe Burglary of Other Property
• Outside the Premises
1. Loss resulting from accounting, mathematical errors or omissions

2. Loss resulting from giving or surrendering property in an exchange or
purchase.
3. Loss resulting from fire, however caused, except:
a. Loss of or damage to money and securities
b. Loss from damages to a safe or vault
4. Loss of property contained in any money operated device unless the
amount of money deposited in it is recorded by a continuous recording
instrument in the device
5. Loss of or damage to motor vehicles, trailers or semi-trailers or equipment
and accessories attached to them
6. Loss to property that has been transferred or surrendered outside the
premises on the basis of unauthorized instructions or as a threat to cause
bodily harm or property damage. This does not apply to loss of money,
securities, or other property while outside the premises and in the custody
of a messenger if the insured was not aware of a threat at the time the
property left the premises.
7. Loss caused by vandalism or malicious mischief to the premises or its
exterior, or to any safe, vault or other property
8. Voluntary parting of title or possession of property
Auto Insurance
Business Auto Policy

A business auto policy is designed to provide a variety of motor vehicle insurance
protections to a business or commercial enterprise. Many businesses use a wide
array of motor vehicles in the course of their normal operations, and a business
auto policy can provide insurance coverage for cars, trucks and even specialized
vehicles such as buses, snowplows and maintenance vehicles.
We will analyze four different types of business auto policies:
• Business Auto Policy
• Garage Policy or Garage-keepers Policy
• Trucker's Policy
• Motor Carrier Policy
The Business Auto Policy

A basic business auto policy (BAP) can fulfill the motor vehicle insurance needs
of almost any business. The BAP covers all autos owned and used for business
purposes, and provides coverage to any employee or agent of the business that
has permission to use the vehicle.
A business auto policy is split into the following sections:
Section I Covered Autos
Section II Liability Coverage
Section III Physical Damage Coverage
Section IV Conditions
Section V Definitions
Section I: Covered Autos

The covered autos section of a business auto policy utilizes a series of numbers
(called symbols) to designate which particular insurance coverages apply to
which insured motor vehicles.
Each number represents a different definition of “ covered auto”:
Symbol #1 Any Auto
10. any auto literally covers any auto; it’s such broad coverage that it
typically only applies to liability coverage (i.e. harm to others and their
property, not loss to the insured’s property).
Symbol #2 Owned Autos Only
• owned autos refers to any/all motor vehicles owned by the insured during
the policy period.
Symbol #3 Owned Private Passenger Autos Only
• covers all passenger autos, but excludes trucks, buses, specialty vehicles
etc.
Symbol #4 Owned Autos Other Than Passenger Autos
• covers all owned autos except passenger automobiles (e.g. covers only
trucks, buses, specialty vehicles etc.)
Symbol #5 Owned Autos Subject to No-Fault insurance laws (some states have
“no fault” laws)
Symbol #7 Specifically Described Autos
• a “specifically described auto” is a specific motor vehicle. For example, the

declarations may list a particular bus that the business uses to ferry
potential clients to a trade show.
Symbol #8 Hired Autos Only
• Only for autos the insured has leased, hired, rented or borrowed (but not
rented or borrowed from employees)
Symbol #9 Non-Owned Autos Only
• non-owned auto refers to liability coverage provided on all motor vehicles

not owned by the insured party. For example, if an employee uses their own
car in the course of business and damages another party's auto, symbol #9
would provide coverage for the business’ liability (but not the employee
who owns and is driving the car).
Appearance of Symbols on an Auto Policy
So for example, lets take a look at how this might appear on a business auto
policy using "liability" coverage and "comprehensive coverage."
The coverages will be listed in a chart as follows:
Liability Coverage 1
Comprehensive Coverage 2,7
Collision Coverage 2,4,7
Next to liability coverage we see symbol #1. This means that liability coverage
applies to "any auto".
Next to comprehensive, we see symbol #2 and #7. This means the business has
elected to maintain comprehensive coverage on "owned autos only" and
"specifically described autos."
Next to collision coverage, we see symbols #2, #4 and #7, meaning the business
has selected to maintain collision coverage on "owned autos only", "owned autos
other than passenger autos", and "specifically described autos."
note on symbols: with symbol #1 “Any Auto” there is no need to report

acquisition of a new vehicle. However, with Symbol 7 “Specifically Described
Autos” (a common symbol) the insured must report acquisition of a newly
acquired vehicle within 30 days in order to have coverage.
Section II – Liability
Section II covers legal liability of the insured, but only up to the specified limit of
liability in the policy. However, this section also specifies that the insurer will
provide defense costs and “supplementary payments” for covered auto accidents.
The obligation to provide a defense for the insured is not limited by the policy
limits; it’s unlimited. Therefore, the insurer’s exposure is potentially unlimited,
even if the liability coverage amount is small.
An “insured”, as defined in the policy, includes:

a) named insureds while owning or operating a covered auto
b) anyone operating a covered auto with permission (including an employee)
c) others who become liable for the conduct of an insured
d) employees while moving property to/from a covered auto
Section III-V of a Business Auto Policy

Section III Physical Damage
Physical damage comprises comprehensive and collision coverages, which mimic
their counterparts in a personal auto policy.
Collision coverage provides insurance protection for damages to the insured
business auto when the auto overturns, strikes another auto or an object.
Comprehensive coverage provides insurance protection for specified damages to
the insured business auto for any other type of damage not covered by the
collision coverage, such as hail, lightning, fire, contact with an animal, etc.
Notes:
• If there is a total loss, settlement is at Actual Cash Value (ACV). If replacement
or repair results in better than like kind or quality, the Limit of Insurance
provision states that the amount of this “betterment” is not covered.
• Loss due to racing, wear-and-tear, etc. is not covered. Loss to CDs, radar-
detectors, and other aftermarket electronics is not covered. Loss to factory
installed or necessary electronics is covered.
Section IV Conditions
The conditions page of a business auto policy will detail the usual policy
provisions such as subrogation, the insured's duties in reporting a loss,
requirements for changes in policy, policy territory (note – Mexico is not within
the standard territory, but liability coverage is often worldwide), etc.
Section V Definitions
Just as in all other insurance policies, the definitions page simply clarifies the
terms used throughout the policy. Examples include “accident”, “loss”, “insured”,
“bodily injury”, etc.
Notes –
• “auto” does not include “mobile equipment” (e.g. vehicles with caterpillar
tracks, fork-lifts, etc. – basically, commercial vehicles that are not
designed for use on public roads). However, mobile equipment is covered
when the “mobile equipment” is being towed or carried by a “covered
auto” (e.g. the insured is transporting their backhoe on the truck listed on
their policy).
• Pollution: there’s no coverage for costs associated with pollution clean-up
having to do with transporting hazardous material, but there is coverage
for clean-up of normal fluids such as gas, anti-freeze and oil that come out
of the vehicle during a wreck (if the pollutant is normal to the vehicle’s
use).
• The definition of “accident” includes continuous or repeated exposure to
the same condition that results in “bodily injury” or “property damage”
BAP Endorsements
There are a number of endorsements available for the BAP:
• Uninsured/Underinsured Motorist – adds coverage which pays the
insured if they suffer a loss due to an uninsured/underinsured motorist, a
hit-and-run driver or if the other party’s insurance denies the claim.
• Named Individuals Broadened PIP - This endorsement provides that
persons named therein are treated as named insureds for PIP coverage. It
is appropriate for attachment when the named insured furnishes an
automobile to another person, such as an employee, who does not own an
automobile and thus has no basis to secure family PIP coverage
• Medical Payments and/or Personal Injury Protection (PIP) – adds
coverage for the named insured, relatives, members of the household, etc.
(but not employees – they get Workers Comp) if they get injured in an
accident. It covers reasonable and necessary medical expenses resulting
from an accident if the injury is incurred within three years from the date
of the accident.
• Individual Named Insured – used when the insured wants to include
his/her own auto under the business policy. It adds the insured and their
family members to the business policy.
• Drive Other Car Coverage This endorsement covers persons named
therein (including their spouses) for use of automobiles (1) which are not
covered autos under the BAP, and (2) which they do not own. Without this
endorsement, for example, there would be no BAP coverage provided for
an employee's personal use of a rental car while on vacation. Its use is also
indicated in the same situations as Broadened PIP, described above.
• Employee as Additional Insured – Although employees are covered under
the BAP while driving a company car for business purposes, they are not
covered under the BAP while driving their own car for business purposes.
This endorsement states that employees are covered when driving an auto
the company does not own, hire or borrow (e.g. their own car) for business
purposes.
• Mobile Equipment – states that mobile equipment is considered a covered
auto (remember; mobile equipment is otherwise excluded).
• Extended Non-Owner Liability - provides broader liability coverage for
specifically named people operating any non-owned automobile. It covers
non-owned autos, use of autos to carry people or property for a fee, and
individuals driving employer-furnished cars who do not own vehicles
themselves.
Garage and Garage-keepers Insurance

Garage insurance is designed to offer insurance protection for those in the
business of selling, servicing, repairing, parking and storing automobiles.
A garage policy is nearly identical to the business auto policy, but combines a
general liability policy (CGL) to cover the business owner for damages to vehicles
they do not own, yet for which they are responsible. A garage policy also provides
coverage for physical damages to autos in the insured's care. In other words, a
garage policy is broader than the BAP liability because it adds two hazards:
• Premises/Operations (i.e. coverage for bodily injury or property damage to
others while on the business premises)
• Products/completed Operations (i.e. coverage for bodily injury or property
damage arising out of the sale of defective items or defective service).
A garage policy will contain the following sections:
Section I: Covered Autos

Section II: Liability Coverage
Section III: Garage-keepers Insurance
Section IV: Physical Damage
A garage policy provides insurance coverage for the insured, its employees, and
anyone given permission to use a covered auto.
Section I Garage-keepers Policy: Covered Autos
Like the business auto policy, the garage policy utilizes a series of numbers
(called symbols) to distinguish the types of covered autos and the coverage
provided to each. The symbols used in a garage policy are just like the BAP, but
add the number 2 in front (e.g. instead of Symbol 1, “Any Auto” would be symbol
2 1) as follows:
• Symbol #21 Any Auto
• Symbol #22 Owned Autos Only
• Symbol #23 Owned Private Passenger Autos Only
• Symbol #27 Specifically Described Autos
• Symbol #28 Hired Autos Only
• Symbol #29 Nonowned Autos
Garage-keepers only:
• Symbol #30 Autos Left For Service, Repair, Storage and Safekeeping
(mandatory for garages)
• Symbol #31 Dealers Autos
In an auto dealers garage policy, the policyholder would apply liability coverage
to #21 Any Auto.
In a nondealer garage policy such as a parking garage, car repair business, or car
storage unit, liability coverage would apply to #29 Nonowned Autos.
Section III Garage-keepers Insurance
Garage-keepers insurance provides insurance protection against damages to
customers’ autos while in the care of the insured, for which the caretaker would
be found legally liable. When goods are in someone’s care, custody and control
this is called “bailment” or “bailee coverage”. Garage-keepers insurance is
required because a general business liability policy specifically excludes "items in
the care, custody and control" of the insured.
Garage-keepers insurance provides three different forms of protection:
• comprehensive
• collision or overturn
• specific causes of loss (fire, lightning and explosions; theft; malicious
mischief and vandalism)
Section III Garage-keepers Insurance
Because a garage-keepers policy indemnifies policyholders only for damages for

which they would be found legally liable, many of auto damage cases might end
up in court.
If a garage business owner denies responsibility for damages to a car while under
his control, the owner of the car would have to prove the garage business was
legally liable for the damage in a court of law, which might create a bad
reputation for the business owner amongst his / her customers.
For this reason, direct excess and direct primary coverage was developed to
guarantee coverage for damaged autos without regard
Chapter 4.7: Mechanical
Breakdown
Mechanical Breakdown Insurance
Mechanical breakdown insurance is designed to indemnify the policyholder for
costs associated with replacing or repairing original or replacement parts on a
motor vehicle. Generally, mechanical breakdown policies will cover each of the
following major vehicle operating components:
• engine
• transmission
• drivetrain
• steering assembly and mechanisms
• air conditioning systems
• front suspension
Mechanical breakdown insurance requires vehicle owners to provide proof of

regular maintenance, usually along the exact guidelines suggested by the auto
manufacturer (e.g. 50,000 miles, 100,000 miles etc.). In addition, the insurer
may require a full inspection of the automobile before the policy is written.
Repairs can be done at any auto service shop as long as the repair costs align
within industry standards. However, repair costs cannot exceed the actual cash
value of the car. For example, if a transmission replacement costs $3,000 and the
current actual cash value of the vehicle is $2,000, the policy will only pay up to
the $2,000 actual cash value.
Exclusions from coverage:
• Mechanical breakdown due to neglect or delays in maintenance.

• Mechanical breakdown due to fire, hail, lightning, theft, vandalism,
explosion, earthquake, windstorm or flood.
• Vehicles with altered odometers.
• Mechanical damage during racing or reckless driving.
• Towing and road service.
• Breakdown during towing or overloading the vehicle.
Common Conditions- Mechanical Breakdown Insurance:
• The operator must take reasonable care to minimize repair costs (i.e. not
continue to drive if a problem is apparent).
• The vehicle is subject to inspection before repairs are done.
• The insurer may ask for proof of loss.
• Mechanical breakdown insurance is subject to a subjugation clause, which
transfers the rights of the insured to the insurer up to the extent of
payment.
Chapter 5.1 - Inland Marine
Inland marine insurance is designed to indemnify an insured party for losses to
property in transport, and for insuring items involved in the transportation of
goods.
The word “marine” is misleading, as inland marine insurance doesn't always
apply to bodies of water.
Inland marine insurance is simply an offshoot of ocean marine insurance, where

property was insured during ocean transport. Naturally, property must be moved
over land as well, and that is exactly what inland marine insurance is designed to
protect.
Inland marine insurance policies are typically known as floaters, and can involve
insurance protection to any property involved in the transportation of goods, or
the transported goods themselves.
Inland marine policies are designed to protect the property being transported,
property related to transportation like bridges and tunnels, and property related
to transportation communications like radio and television towers, power
transmission lines and even dams, since they all affect transportation in one way
or another.
Inland marine insurance does not protect the actual means of transport and
related machinery, such as trucks, airplanes, ships, forklifts, cranes or roads.
Those items are insured by their own policies.
Inland marine insurance policies can provide insurance protection for a variety of
objects involved or assisting in the transportation of goods. These objects are
known as instrumentalities of transportation and communication.
Instrumentalities can include, but are not limited to:
• bridges
• tunnels
• antennas and towers for radio and TV
• dams
• piers and docks
• pipelines
• power transmission lines
There are six different national classifications of inland marine insurance:
1. Imports, when not subject to import risk under ocean marine policies
2. Exports, when not subject to export risk under ocean marine policies
3. Domestic shipments
4. Instrumentalities of Transportation or Communications
5. Personal property floater risks
6. Commercial property floater risks
Imports.
(A) Imports may be covered wherever the property may be and without
restriction as to time, provided the coverage of the issuing companies
includes hazards of transportation.
(B) An import, as a proper subject of marine or transportation insurance,
shall be deemed to maintain its character as such, so long as the property
remains segregated in such a way that it can be identified and has not
become incorporated and mixed with the general mass of property in the
United States, and shall be deemed to have been completed when such
property has been:
(i) sold and delivered by the importer, factor or consignee; or
(ii) removed from place of storage and placed on sale as part of
importer's stock in trade at a point of sale-distribution; or
(iii) delivered for manufacture, processing or change in form to the
premises of the importer, or of another used for any such purposes.
Exports
(A) Exports may be covered wherever the property may be, without
restriction as to time, provided the coverage of the issuing companies
includes hazards of transportation.
(B) An export, as a proper subject of marine or transportation insurance,
shall be deemed to acquire its character as such when designated or while
being prepared for export and it retains that character as such when
designated or while being prepared for export and it retains that character
unless diverted for domestic trade, and when so diverted, the provisions of
this Ruling respecting domestic shipments shall apply, provided, however,
that this provision shall not apply to long established methods of insuring
certain commodities, e.g., cotton.
Domestic Shipments
Domestic shipment policies are insurance policies designed to protect businesses

that regularly ship or receive merchandise and property.
Domestic shipment policies protect the business from losses that occur during
shipment or transport of goods. This can include travel by truck, train, ship, mail,
or plane.
Insurance companies may offer a variety of inland marine domestic shipment

policies to protect shippers of goods.
We'll look at a few examples of domestic shipment policies below:
Annual Transit Policies
Annual transit policies can protect the shipper or receiver on a named

peril or open peril basis.
The coverage protects all of a company's incoming and outgoing

shipments usually over the course of a year.
Annual transit policies are common among businesses who have a very
large number of small to medium shipments each year.
Trip Transit Policies
Trip transit policies insure a single shipment of goods from the time they
are received to the time they are released.
Trip transit policies are frequently used for rare or valuable shipments.
Motor Truck Cargo Policies

Motor truck cargo policies protect a carrier only from damage to goods in
transport.
Motor truck cargo policies protect the carrier from damages to goods in
their care and custody while in transport. A motor truck cargo policy
expires once the goods have reached their final destination and have been
inspected by the receiver of property.
Mail Coverage Policies
Mail coverage policies protect items shipped through registered mail, first-
class mail, express mail or certified mail.
Businesses and individuals often use mail coverage policies when shipping
jewelry, securities, documents, or other important items through the mail.
Instrumentalities of Transportation:
Inland marine insurance policies can provide insurance protection for a variety of
objects involved or assisting in the transportation of goods. These objects are
known as instrumentalities of transportation and communication.
Instrumentalities can include, but are not limited to:
• bridges
• tunnels
• antennas and towers for radio and TV
• dams
• piers and docks
• pipelines
• power transmission lines
Personal Property Floaters
Personal property floaters are designed to protect property owners from damage
or losses to personal articles while in the process of transport.
Personal property floaters allow an individual to acquire more complete

protection of valuable possessions not covered to full value by other policies such
as a homeowners or commercial policy.
These insurance policies are written on a single policy form called a Personal
Articles Floater, or PAF.
Personal Articles Floaters all the share the same characteristics:

• PAF's cover property on an open-peril basis (not named-peril
policies!)
• there is no deductible
• coverage is worldwide
• valuation is determined by the lesser of the following: actual
cash value; the cost to repair or replace; coverage limits.
• subject to “pair and set” provision.
The pair and set provision of a inland marine policy dictates that if part of a set,
or an instrumental part of a whole is lost or destroyed, the policy can pay to
replace, restore or repair the set or pay the difference of the actual cash value
before and after the loss.
Inland marine exclusions to coverage include:
• war
• nuclear hazards
• wear and tear
• insects and vermin
• spoilage
• gradual deterioration
Personal inland marine insurance and PAF's cover a wide variety of seemingly
unrelated items that are divided into classes, including but not limited to:
• cameras and photographic equipment
• fine arts
• jewelry and furs
• musical instruments
• stamp and coin collections
• precious metals including silverware, trophies, medals
• golfer's equipment
• china and crystal
Each class of personal article floater will have it's own provisions, restrictions and
limitations.
Commercial Property Floaters
Commercial property floaters are designed to protect the property of a business

that is not at a fixed location. Generally speaking this property may not be 100%
in the control of the business holding the policy.
These are different from a business Workers Compensation policy or a business

auto policy.
We're going to look at some of the more popular commercial floaters:
Bailee's Customer Floater
A bailee is an individual or company that receives the property of someone else

for a special purpose (cleaning, storage, repair), and then returns the property to
the owner when they have completed a service or activity related to the property.
For example, a dry cleaner receives the property of another party, cleans it, and
then returns the property to the owner. Therefore, a dry cleaner acts as a bailee.
A bailee's commercial property floater protects the bailee from damages that may
occur to someone else's property while in possession of the bailee.
Dry cleaner and laundry policies, furrier policies, and warehouse / storage
policies are examples of bailee policies.
Contractors Equipment Floater
Contractor’s equipment floaters provide coverage to the very expensive

machinery used in construction while it is being transported, while it is on-site,
or while it is in storage.
Contractor’s equipment floaters can be used to insure tractors, backhoes, pavers

and other expensive items used by contractors.
Contractors Equipment Floater
Contractor’s equipment floaters provide coverage to the very expensive

machinery used in construction while it is being transported, while it is on-site,
or while it is in storage.
Contractor’s equipment floaters can be used to insure tractors, backhoes, pavers

and other expensive items used by contractors.
Cold Storage Locker Floater
Protects perishable items held in cold storage.
“Block” Policies
Block policies are used by furriers and jewelers to protect inventories. "Block" is
one of the oldest types of floaters and means "all together". This kind of floater is
designed to cover a business inventory and any customer's small but very
expensive items that are held by the business.
Physicians and Dental Equipment Floater
Covers valuable medical equipment, materials, and supplies used by medical

professionals. An example might be a mobile dental clinic that visits and sets up
inside schools.
Theatrical Property Floaters
Provides all-risk coverage for equipment and supplies used in theatrical

productions.
Chapter 5.2 - Ocean Marine
Ocean Marine Insurance
Ocean marine insurance is the oldest form of insurance. Ocean passage for
passengers and cargo was the leading from of transportation for centuries.
Insurance for this type of transportation began in the 1600's but it only protected
the actual vessel. Passengers and cargo were not covered until later when
companies began offering extensions to the contracts that covered cargo when
the ship was docked and eventually it covered the cargo while the ship was at sea.
And eventually, liability coverage came to include passengers.
Ocean marine insurance contracts are always considered "utmost good faith"
contracts, as it's difficult for underwriters to fully investigate the risks involved.
There are four types of ocean marine insurance:
• Hull Coverage;
• Cargo Coverage;
• Freight Insurance;
• Protection and Indemnity (P&I)
These can be offered as packages or individually.
Implied Warranties
Ocean marine insurance has specific implied warranties that must be strictly
observed. Although these are not directly stated in the contract, they are as
binding as the written terms. You could consider these to be pre-requisites to any
Ocean Marine Contract.
The following are the most widely known implied warranties. These are binding
terms of any Ocean Marine Contract:
• Seaworthiness - The vessel must be in a seaworthy condition, be fit for

voyage, not be overloaded, and must have a competent captain and crew.
• Condition of Cargo - The owner of the cargo must guarantee that the
cargo is sound and loaded properly.
• Legality - The voyage must be legal. Involvement of contraband,
smuggling, or any other illegal activity will nullify the insurance
contract.
• No Deviation in Voyage - The route of the voyage must be clearly stated
prior to departure and it must be adhered to throughout the voyage with
no change in destination or unnecessary delays.
These warranties initiate a strict adherence to good maritime practices. The

insurer bases the insurance coverage on the risk involved. The condition of the
ship or its Captain, the loading of the cargo, the activities involved along the way
or the route that a ship takes all add to the risk that is involved in the voyage.
Premiums
As with most insurance contracts, there are specific rules re: the payment of
premiums. In the case of Ocean Marine Insurance, the following applies:
• Upon the inception of the policy, the policy-holder has 45 days to pay the
premium in full or develop a payment option that is acceptable to the
insured and the insurer.
• Upon Cancellation, the premium will be paid on a pro-rata basis.
The insurer has the option to cancel the policy if the premium is not paid when
due. The insurer, however, must give a 15-day advance, written notice of the
cancellation to the insured.
Ocean Marine Insurance
Ocean marine insurance can insure against the loss of a vessel or its cargo, and
can also extend coverage to property stored on docks and piers if specified in the
insurance contract.
These policies are written on either a valued basis, unvalued basis or agreed value
basis. Most Hull and Cargo policies are written on a Valued basis because the full
amount of the policy is paid in the event of a total loss. If a policy is written in an
unvalued basis then the amount of the settlement must be determined after the
loss. In an agreed value basis the insured and insurer agree on a value of the
vessel at the time of the creation of the policy.
In the Next few sections, we will discuss the different types of Ocean Marine
Policies: Hull, Cargo, Freight, and Protection & Indemnity.
Hull Coverage
Hull policies provide insurance coverage to indemnify the policyholder for
damages to, and loss of, a marine vessel.
Hull policies offer protection from a number of sea-related perils. Some of these
include:
• fire
• lightning
• earthquake
• jettisons- voluntarily removing cargo from a ship in order to save the
vessel or its crew
• barratry- intentional theft of a vessel and / or its cargo, or intentional
sinking or deserting of a vessel
• fighting and piratry
Exclusions to hull coverage include:

• acts of war
• rioting and civil commotion
• employee strikes
• confiscation
• damage due to dampness or breakage
Hull policies usually require either an average deductible or a franchise

deductible.
An average deductible is a standard flat rate deductible.
A franchise deductible provides no insurance coverage to a policyholder until a

certain level of financial damage or loss is met, at which point the policy pay the
full costs damage.
For example, a hull policy may have a franchise deductible of $100,000. If the
insured vessel sustains under $100,000 worth of damage, the insurer pays
nothing. But if the vessel sustains $110,000 in damage, the insurer will be
responsible for $110,000.
Hull policies usually have a policy period of one year, and usually will establish a
defined geographic coverage area. Hull policies are often not applicable
worldwide.
Hull policies are written on a valued basis. As we studied earlier, a valued policy
sets a pre-determined value of the vessel agreed upon by the insurer and the
policyholder.
Cargo Coverage
Cargo is defined as the actual goods or property being shipped.
Cargo coverage provides insurance protection to the goods and property in

transport.
Single risk form coverage can be purchased to insure the cargo on a single
shipment only.
Floating, open or long term coverage provides extended coverage to

accommodate multiple trips over a specified period of time.
Warehouse-to-warehouse coverage insures cargo from the point of origin to the

point of destination, even if these points are located inland from the drop off
location.
Freight Insurance
Where cargo is defined as the actual property being shipped, freight is defined as
the charge made for shipping cargo.
Therefore, a load of televisions would be the cargo, and the cost to send those
televisions overseas would be the freight cost on the cargo.
Freight insurance protects the vessel owner in the event the freight costs are not
paid.
Vessels are usually paid their freight fee after a load of cargo is delivered.
Therefore, if a vessel is lost at sea, the owner of the vessel will not only lose the
vessel and the cargo on the vessel, but the owner will also lose the freight cost of
the cargo on the vessel since the cargo was not delivered to the point of
destination.
Freight insurance will therefore indemnify the policyholder for these uncollected
freight fees.
Freight insurance is often combined with hull coverage.
Protection and Indemnity Insurance (P & I Insurance)
P& I coverage is a form of liability insurance that protects a vessel in the event of
a collision with another vessel, also commonly known as "running down"
coverage.
P & I coverage protects a vessel owner from damages and / or losses caused to
another ship and / or its cargo.
P & I coverage is also often included as part of the hull coverage.
Ocean Marine Insurance- General Terms

Ocean marine policies contain language not found in other types of insurance.
Over the next few pages, we'll take a look at some of the terms frequently used
when discussing ocean marine insurance.
Total Loss Classifications
Actual Total Loss
An actual total loss refers to insured items that have either completely
disappeared or are not salvageable. A hull or cargo that has sunk to the bottom of
the ocean would be considered an actual total loss.
Constructive Total Loss
A constructive total loss refers to insured items that have been damaged beyond
repair, or to items where the cost to salvage and repair would exceed the value of
the item.
A constructive total loss is similar to what we refer to cars when we say they are
"totaled."
Sue and Labor Clause
Sue and labor is similar to preservation of property coverage in commercial

property insurance. Sue and labor is a provision in ocean marine insurance
requiring the insured party to attempt to minimize or prevent further losses if
damaged by an insured peril. The insured is required to attempt to preserve the
property, and if they fail to do so, they could lose all coverage. Like preservation
of property, the insurer will indemnify the insured for costs associated with
attempting to curb losses.
Ocean Marine Insurance- General Terms
General Average Clause
The general average clause obligates the insurers of various interests to share
the cost of losses associated with a captain's decision to voluntarily sacrifice a
part of the ship or its cargo in order to save the ship or its all its cargo from
certain destruction.
• For example, lets say Company X is shipping $200,000 in cargo to

London. Company Y is transporting $200,000 worth of cargo on the same
ship. The ship runs into trouble, and the captain must save the ship by
jettisoning a large portion of cargo. The captain orders his crew to jettison
half of Company X's cargo because it is stored very near the edge of the
ship, and the ship is saved.
• In this case, Company X suffers the loss, but for the good of Company Y.
The general average clause in ocean marine insurance creates a sense of equity
in that both insurers (of Company X and Company Y) must split the cost of the
lost cargo.
Free of Particular Average Clause
The free of particular average clause excludes from coverage accidental or partial
losses to cargo or the hull except those losses from stranding, sinking, burning or
collision.
Essentially the FPA clause serves as a deductible for cargo, as it limits the
liability of the insurer to losses that exceed a specific percentage (usually 10%) of
the value of the insured items.
• For example, if the losses do not exceed 10% of the total value of the
insured item, the insurer does not pay at all, unless the losses were caused
by stranding, sinking, burning or collision.
Free on Board
When cargo is shipped free on board (F.O.B), the seller of goods assumes
responsibility for the cargo until it reaches a specific point, where the buyer
assumes responsibility. The responsibility will include transportation costs,
damages or losses to the cargo.
• For example, if a seller in Houston says "FOB, Warehouse #42, New

Orleans", then the seller is responsible for all transportation costs in
getting the cargo to Warehouse #42 in New Orleans. Once the cargo
reaches its destination point in New Orleans, the buyer is responsible for
all remaining costs associated with storage and transporting the goods.
Cost, Insurance, and Freight
With CIF coverage, the seller of goods is responsible for the freight costs and
insurance for cargo. The buyer takes only responsibility for the cargo only when it
is offloaded from the ship.
Cost and Freight
With CF coverage, the buyer of goods is responsible for the freight costs and
insurance for cargo.
Chapter 5.3 - Aviation
Insurance
Aviation Insurance
Overview
Aviation insurance products are designed to provide property coverage for the
hull of an aircraft and various liability coverages for bodily injury and property
damage resulting from the use of an airplane.
In addition, different types of aviation insurance can provide coverage for:
• airports
• pilots
• aircraft manufacturers
• flight instructors
• fixed base operators
• aircraft maintenance companies
Due to the enormous and catastrophic damages often caused by airplane crashes,
no single insurer could possibly assume the entire risk of providing adequate
insurance coverage for an airline. Rather, insurers and re-insurers often pool the
risks of airplane coverage into a separate entity such as the United States Aircraft
Insurance Group, which in turn underwrites insurance policies for various forms
of airline transportation.
Hull Coverage
Also known as hull aircraft insurance, hull coverage is an "all-risks" coverage for
property damage to the hull of an aircraft. The "hull" or "aircraft" refers to the
body and wings of a plane, its machinery, engines, instruments, radios,
autopilots, and other equipment specifically named in the policy.
All risks of physical damage on the aircraft not in flight and named peril coverage
while the aircraft is in flight, or all-risk policy to cover whether the aircraft is in
flight or not are the three basic plans that most policies follow.
• Hull policies are valued policies, meaning the insurance contract sets a
pre-determined value for the aircraft. Also called "Agreed Value Basis."
• Partial losses are subject to a deductible, usually expressed as a
percentage of the aircraft valuation. With larger planes such as a 747,
this deductible can head well north of $1 million for heavy partial
damages. Therefore, some insurers offer a separate "Deductible
Insurance Policy."
• Since many aircraft regularly interchange parts, many aircraft operators
see fit to purchase a "Spares Policy," which covers plane parts such as
engines when not attached to the plane. Spares policies and hull policies
are automatically interchangeable and are designed to fill gaps in
insurance coverage- when a spare engine is transferred to the plane, it
likewise transfers from spares coverage to hull coverage. The engine
removed from the plane then transfers to the spares policy.
• Replacement cost and ACV (Actual Cash Value) hull policies are also
available.
Aircraft Liability Coverage
Aircraft liability insurance is very similar to what you see in automobile liability.
A typical policy will include the following: Bodily Injury Liability, Passenger
Liability, and Property Damage Liability.
Aircraft liability insurance coverage provides two different types of liability

insurance protections:
1. General Liability property damage liability bodily injury liability (non-

passenger)
2. Bodily injury liability (passenger)
Aircraft liability insurance per incident can be written in two ways:
Split limit coverage
Single limit coverage (also called smooth or combined)
For example, if an aircraft liability policy offered 100 / 500 / 100 coverage, the
policy split limits would be as follows:
$100,000 maximum per person per occurrence for bodily injury
$500,000 maximum per occurrence all bodily injury
$100,000 maximum per occurrence for property damage
In a single limit policy, or smooth limit policy, the insurance contract would pay
up to the policy limit for all legally liable property and bodily injury damages per
occurrence. There is no split and this kind of insurance is generally more
expensive.
Coverage territory varies according to policy, but often includes the United
States, Canada, Mexico, and the Bahamas if specified in the insurance contract.
Admitted Aircraft Liability Coverage
Also known as "Guest Voluntary Settlement", admitted aircraft liability insurance

is an aviation specific coverage written on a per-seat basis that provides non-
paying passengers coverage for bodily injury whereby a settlement is offered on a
pre-determined basis in exchange for a release of liability.
When voluntary settlement payment is offered to a passenger, the passenger

must sign a release. If the passenger does not sign a release, then the regular
liability policy applies.
Medical Payments Coverage
Medical payments coverage is a no-fault coverage provided for bodily injury

resulting from damages realized on board of an aircraft, or while entering and
exiting an aircraft on devices such as ramps or stairs. Medical payments coverage
provides for medical, hospital, transport and recovery bills.
Hangar Keepers Legal Liability Coverage
Hangar keepers legal liability provides liability coverage to owners and operators
of aircraft hangars, storage units and maintenance facilities. A form of bailee
insurance coverage, it provides protection against damage and destruction to the
property of others while in the custody of the insured party.
Non-Owned Aircraft Liability Coverage
Non-Owned Aircraft Liability coverage provides coverage for employers when

employees or agents use an aircraft on behalf of an employer.
Aircraft Product Liability Coverage
Aircraft product liability coverage provides protection for aviation

manufacturing, maintenance and sales companies against defective work or
products.
Fixed Base Liability Coverage
Provides insurance protection for certain aircraft dealers, flight instructors and
charter companies.
Airport Liability Insurance
Provides premises and operations liability for airports, landing strips and landing
pads.
Cargo Liability Coverage
Cargo liability coverage provides protection against lost or damaged baggage and
airplane cargo.
Exclusions - Common Exclusions in Aviation Policies
• using an aircraft for illegal purposes

• using an aircraft for purposes other than those recognized in the policy
• operating an aircraft outside specifically allowed geographical areas.
• general wear and tear
• war, riots and civil commotion
• mechanical or electrical breakdown
• structural failure
• flood and freezing
Chapter 5.4 - Workers'
Compensation
Workers' Compensation (WC) is a form of insurance that provides compensation
for injuries, disability, and lost earnings to employees who are injured while in
the course of their employment. In exchange, the employee gives up his/her right
to sue the employer for negligence. The forfeit of the right to sue makes Workers'
Compensation an “exclusive remedy” for qualifying job-related injuries.
Workers' Compensation is a “no-fault” policy, which means that work-related

injuries are covered, regardless of fault. This eliminates litigation in the
determination of benefit eligibility (that is, employers and employees aren’t suing
each other in court, fighting over whose fault the injury is). So – with a few minor
exceptions - if you are injured on the job, you are eligible for Workers'
Compensation benefits.
Each of the United States has a Workers' Compensation law.
Coverage is typically offered through private insurance companies and regulated

by the state. In some states, WC benefits are provided entirely by the state
(referred to as “monopolistic” state). In others, the state’s WC offering is
competitive with private insurers. In the majority of states, the benefits are
regulated by the state but paid entirely through private insurance or self-
insurance means (we’ll discuss self-insurance later).
WC is compulsory in most states. Even in states where it’s elective, many

companies choose to carry it rather than expose themselves to lawsuits by “going
bare” (i.e. self-insuring or going without WC).
Note - because WC benefits are state-specific, we have outlined the general WC

knowledge for the purpose of the exam. When necessary, state-specific
information will also be detailed in the state-specific section of this course.
Please reference your state’s statutes and laws for state-specific details beyond
these general principles.
Workers' Compensation Policy
Each State regulates Workers' Compensation coverage. There are two approaches
to regulating Workers' Comp coverage; Monopolistic and Competitive.
Competitive State Fund -
A competitive state fund is a state-owned and operated fund that provides

workers compensation insurance to employers who operate within that
state. Some states operate a state workers compensation insurance fund in
direct competition with private insurance carriers. Employers in these
states can choose to purchase their workers compensation coverage from
the state fund or a private insurer. State funds are typically formed with
the help of the state legislature who establishes the fund and provides
initial start up capital and brings in start up management.
The key here is competition. In contrast, there are some states who are
monopolistic, meaning workers comp insurance can only be secured in
their state from the state fund.
Monopolistic:
Monopolistic States have special legislation that requires Workers

Compensation Coverage be provided exclusively by that State's Designated
Workers Compensation program. Insurance through private insurance
companies is not allowed. There is no open market within the
monopolistic states. You will find that some of these States will allow
limited self-insurance however upon further inspection the requirements
to qualify are so restrictive that only few very large well funded employers
could possibly qualify. The only remaining monopolistic states are Ohio,
Washington, North Dakota and Wyoming.
Compulsory vs. Elective
In all but two states, the laws regarding workers’ compensation are compulsory.
In these two states (New Jersey and Texas) with elective laws, either the
employer or the employee can elect not to be covered under workers’
compensation law. An employer who opts out loses the common law defenses
discussed earlier. If the employer does not opt out but an employee does, the
employer retains those defenses as far as that employee is concerned. If both opt
out, the employer loses the defenses. It is unusual for employees to opt out
because those who do must prove negligence in order to collect and must
overcome the employer’s defenses.
An employer who does not opt out must pay benefits to injured employees in
accordance with the requirements of the law, but that is the employer’s sole
responsibility. Thus, an employee who is covered by workers’ compensation
cannot sue his or her employer for damages because workers’ compensation is
the employee’s sole remedy (also called exclusive remedy).
Exclusive remedy provisions of workers' compensation statutes protect

employers from common law suits by employees to recover for work-related
injuries.
All states have incorporated an exclusive remedy provision into their workers'
compensation statute. Workers' compensation laws apply only to work-related
injuries. Workers' compensation statutes in most states limit a worker's remedies
for work-related injuries to a workers' compensation claim against the employer.
These limited benefits are the exclusive remedy for injured workers against their
employers.
The Workers' Compensation Policy

The Workers' Compensation insurance policy is simple, because its primary
function is to provide an employer the coverage required by the law. The parts of
the policy are as follows:
• Part I: Workers' Compensation

• Part II: Employers' Liability
• Part III: Other States' Insurance
• Part IV: Duties if Injury Occurs
• Part V: Premium
• Part VI: Conditions
Part I: Workers' Compensation

Let’s define the terms first:
Employee:
“ Employee” is defined to mean every person engaged in any employment under

any appointment or contract of hire, including aliens and minors, full-time, part-
time, and day labor, and even when the employee is directed to do work outside
of their normal duties. However - "employee" does not include:
• independent contractor
• "casual" work
• household servants
• professional athletes
• sports officials
• court-ordered labor
Employer:
An “employer” is defined as “one who must secure WC benefits for employees.”

The criteria for when WC is required differs from state to state. For instance, in
Florida, if a business has 4 or more employees or if one or more of them is in
construction, that business is an “employer” and must carry WC (this example is
simplified; it’s slightly more complicated than this in reality).
Injuries covered:
Benefits are payable to an employee who suffers "injury." That term is defined to
mean personal injury or death by "accident" "arising out of" work performed in
the course of employment, and such diseases or infection as naturally or
unavoidably result from such injury. This means that the injury must be caused
by work duties.
Example: a teacher twisted her knee while water skiing, in 2004. In 2009 while
teaching a class, her leg brace gave out causing her to strike her head on her desk.
The cause of the fall was not teaching (it was the water skiing accident) so there
would be no benefits.
Also, an "accident" means only an unexpected or unusual event or result,

happening suddenly.
Examples of injuries typically not covered:
a) Self-inflicted injuries
b) Injuries caused by horseplay
c) Injuries arising from voluntary intoxication
d) Injuries resulting from voluntary, off-duty activities (e.g. softball)
e) Disability or death due to the accidental acceleration or aggravation of

a venereal disease
f) Mental or nervous injury due to fright or excitement only (i.e. unless
accompanied by physical injury)
g) A disease due to the habitual use of alcohol or drugs
h) A disease that manifests itself in fear or dislike of an individual due to

the individual's race, color, religion, sex, national origin, age or handicap
Intoxication:
It is important to address the definition of intoxication when referring to

Workers' Compensation laws. In the State of Texas, for example, the following
defines intoxication:
• having an alcohol concentration which qualifies by law as intoxicated, or

• having an impaired use of mental or physical faculties resulting from the
voluntary introduction into the body of: (a) an alcoholic beverage, (b) a
controlled substance, (c) a dangerous drug, (d) abusable glue or paint,
(e) any similar substance.
Intoxication does not include the introduction of substances that are (a) taken in
accordance with a prescription written by a physician, or (b) by inhalation or
absorption that occurs incidentally at the employee's work.
It is important to note the specific definitions regarding intoxication because this

is one of the most common reasons for denied Workers' Compensation claims. It
is of utmost importance that adjusters review all claims promptly.
Part I: Workers' Compensation Benefits:
1. Medical Expenses:
Under WC law, the employer must cover any legitimately required and
necessary medical expenses such as doctor bills, crutches, surgery,
physical therapy, rehabilitation, etc. There’s no waiting period to be able
to collect benefits (an employee is covered for any expense from the time
of the injury on), nor is there any dollar limit for medical expenses.
2. Disability Benefits:
“ Disability" means incapacity because of the injury to earn in the same or

any other employment the wages that the employee was receiving at the
time of the injury. Compensation is for such "wage loss," being the
difference between post-injury wage (if any) and pre-injury wages.
There is a waiting period for disability benefits. The waiting period differs
from state to state, ranging from 2 to 7 days. This means that the
employee cannot collect unless his/her injury lasts longer than the
waiting period. Many states allow for reimbursement for the unpaid days
if the injury lasts longer than some specified period of time, depending on
the state (e.g. after 21 days the employee is entitled to reimbursement for
the first 7 unpaid days).
The benefit amount is typically a percentage of normal wages, often based

on the “average weekly wage” of the employee and the class of disability
incurred.
Benefits depend upon which of four classes of disability is

incurred:
1. Permanent Total (e.g. a broken neck/paralysis – cannot work

at all – ever again).
2. Temporary Total (e.g. a temporary full-body cast – can work

again after 8 mo.).
3. Permanent Impairment (e.g. loss of a hand – can work but

modified duty).
4. Temporary Partial (e.g. broken leg – can work light duty)
Permanent total disability is paid for the duration of the

disability and can be a life-long payment.
Temporary total disability is paid for the duration of the

disability. A review may be performed if the injury lasts longer than
a specified period of time to determine if the employee qualifies for
permanent total disability benefits.
Permanent impairment disability benefits are based on a

“rating” of the impairment. Loss of an eye or loss of a finger is all
listed on a schedule, and the percentage of the wage paid and the
duration of the benefits are determined by this rating system.
Temporary impairment disability benefits are based on a

percentage of the “average weekly wage” while the employee is
injured, and if the disability lasts longer than a specified period they
may qualify for permanent benefits.
3. Death Benefits:
Death benefits are payable to dependent relatives when the death occurs
due to “compensable” injury. The dollar amount is typically a percentage
of the wage that the deceased employer would have earned, up to a state-
specified maximum dollar amount. Funeral expenses up to a specified
dollar amount are also paid. These dollar amounts are typically limited
(e.g. in Florida it’s $7,500 max for funeral expenses, and $150,000 max
benefits for all dependent relatives).
Part II: Employers' Liability:
Workers' Compensation generally shields the employee from lawsuits due to on-
the-job injuries, but there are situations in which the employee can sue. Part Two
is legal liability coverage for employer negligence. It covers the insured for:
a) claims by employees for injuries not subject to a Workers'

Compensation law, such as injuries or diseases caused by the employer’s
negligence;
b) claims by others for the liabilities to insured's employees;
c) claims by relatives of injured employees for consequential damages.
There are three ways that employers can meet the state-mandated
Workers' Compensation insurance requirement. They can chose to
self-insure, to purchase private insurance, or to use State Funds.
1. Self-Insurance
• With this type of insurance the employer retains risk of injury or fatality;
• The employer must show that they are able to financially handle the risk.
This is usually achieved through a surety bond. Permission must be given
through the State Workers' Comp Division.
2. Private Insurance
• Most popular way to comply with state law;
• Provides protection in state listed on Information Page;
• Provides protection for situations arising in states where the employer had
not foreseen activity by using Other States endorsements.
3. State Funds
• Some states provide Workers' Compensation coverage as another
insurance option. This is in direct competition with private insurance
carriers.
Losses Covered
Workers' Compensation coverage applies to bodily injuries and diseases "arising

out of and in the course of employment." Covered losses must be work-related
(losses that are non-work related are not covered by Workers' Compensation) but
may be covered under another type of insurance.
Covered injuries must be accidental and may include accidental death.
Generally, in the event of covered diseases, the contraction of the disease must be
due to working on the job. If a disease is wide-spread in the community, then it
most likely would not be covered. However, in the event of a work-related
disease, such as a lung disease from years of mining coal, the disease would be
covered by Workers' Compensation.
Part III: Other States
Part Three of the policy deals with “Other States” – states not listed on Part One
can be used to provide automatic coverage in states not listed for Part One
coverage. For coverage to apply, the state must be listed for Part Three coverage.
Then, if the insured begins operations in any such states, and is not otherwise
covered, the policy covers as though such states were identified in Part One. The
insured is obligated to notify the insurer if work is begun in any state listed in
Part Three.
Part IV: Your Duties if Injury Occurs
This part deals with the employers duties: obligations when there’s a
compensable injury, cooperation with the insurer in any investigation, reporting
and timeframes, etc. The duties of the employer are spelled out in the policy. It is
important to remember that all matters of ethics that apply to the insured,
insurer and adjuster are also applicable to the employer. It is of utmost
importance in any claim situation that all parties conduct themselves in an
ethical manner. Honesty and integrity are an integral part of claims handling and
successful, fair negotiation and settlement.
Part V: Premium
This part describes how the premium is determined, so let’s discuss “rating."
Rating: Some employees are “high risk” (e.g. loggers or roofers), and some are
low-risk (e.g. accountants, receptionists); they, therefore, fall into different
“classifications." For each classification, a rate is applied for each $100 of
payroll.
Let’s look at a simplified, hypothetical example:

Suppose Bob’s Roofing Co. has one roofer and one receptionist. The roofer
makes $25/hr, the receptionist makes $10/hr. The roofer worked exactly 4 hours
in 2009, so he made $100. The receptionist worked 10 hours, so she too made
$100. Therefore, Bob’s entire payroll for 2009 was $200. Now suppose
hypothetically that for every $100 of payroll the WC rate for roofers is $50 and
the rate for receptionists is $2. Since Bob had $100 payroll for roofers and $100
for receptionist, Bob owes WC premiums of $52.
This is oversimplified, but it basically describes how it works. At the beginning of

the year, payroll is estimated; at the end of the year, the final premium is
determined. Of course, there are other factors that can modify the premium.
Part VI: Conditions
This part outlines the rights of the insurance company, for example:
• The insurer has the right to inspect the workplaces at any time.
• The insured cannot transfer any of its rights or duties without the
written consent of the insurance company.
• It provides details on how the policy may be cancelled by either party.
• It requires the first named insured on the Information Page to act on
behalf of all insureds with respect to all policy transactions.
Laws that pertain to WC:

Some exposures fall outside the area of Workers' Compensation benefits. Here
are a few:
Federal Employees Compensation Act: federal government insurance for
civilian employees. This act is regulated by the federal Office of Workers'
Compensation Programs. As with most Workers' Compensation policies, the
awards are issued as a result of disability or death that is sustained while the
employee is on the job. This Act covers medical expenses, and it pays the
employee a two-thirds of normal monthly salary for when they are disabled and
away from the job. Additional payments may be made for permanent injuries or
to dependents. Additionally, if an employee is killed, the act provides
compensation for survivors.
Federal Employers Liability Act: FELA was enacted in 1908 before Workers'
Compensation. It protects only interstate railroad workers and their families, and
allows workers who are not covered by regular Workers' Compensation laws to
sue their employer. Railroad workers have successfully held on to their rights
under this act.
Jones Act (also known as Merchant Marine Act): Protects injured seamen
by allowing them to sue for damages and to choose a jury trial. Coverage falls
under the Employers' Liability section, and insurers usually require a Maritime
Coverage endorsement for these exposures. The Voluntary Compensation
Maritime Coverage endorsement provides Workers' Compensation benefits for
seamen, and is an option for employers who don’t want injured seamen to have to
sue for coverage.
Longshore and Harbor Workers' Compensation Act: This Act provides

Workers' Compensation to employees of private maritime employers. This
compensation is for medical care to employees who are disabled while on the job
on navigable waters of the United States. This also covers areas that adjoin these
waters such as docks and machinery for loading and unloading or for repairing or
building of vessels. This covers disability or death. Covered employees receive
two-thirds of their weekly salary for as long as the injury continues. Fifty percent
pay is given to a surviving spouse and sixteen percent to any dependent children.
The Black Lung Benefits Act: This act provides benefits in the form of
monthly payments and medical coverage to coal miners who become totally
disabled from Black Lung Disease. This is a clear example of when a disease is
specifically linked to the occupation of the employee. These benefits are given to
individuals who are employed in our nation's coal mines. Monthly benefits are
also given to dependent survivors of the miner if it is determined that
pneumoconiosis substantially contributed to the miner's death.
There are two parts to the Black Lung medical program: Diagnostic
testing is done to determine whether Black Lung Disease was present and the
degree of its contribution to the disability; and the medical coverage for
treatment for any miners who receive monthly benefits. Diagnostic testing
includes x-rays, breathing tests, blood gas studies, etc. Medical coverage includes
prescription drugs, office visits and hospitalizations. Claims may be filed by
present and former coal miners as well as their dependents. Payments for these
claims are the responsibility of the last coal mine operator that the miner worked
for a one-year period. The National Government has established, however, a
Black Lung Disease Trust Fund for the following scenarios:
• The miner's last coal mine employment was prior to January 1, 1970.
• The coal mine operator cannot be determined.
• The coal mine operator was an authorized, self-insured employer and is no
longer financially capable of covering the benefits.
Chapter 6.1 - What is
Adjusting?
Types of Adjusters:
In the field of insurance, we find many different types of adjusters.

In this section, we will take a brief look at the different types of insurance
adjusters, and some of the businesses they represent.
What is adjusting?
In the insurance business, adjusting refers to the process of comparing the losses
of a claimant to the promises made by an insurer in an insurance policy. How
does the insurance company's promise to pay apply to the losses of the claimant?
How do we resolve the promise to pay?
Adjusting, in order, is the practice of:

• investigating a claim
• acting as a liaison between a claimant and an insurance company
• evaluating a claim
• reporting and managing a claim
• negotiating a claim
• resolving a claim
Once a claim is resolved, the adjusting process is complete.
An insurance adjuster is a person who on behalf of an insured or insurer, for

compensation, investigates and evaluates claims arising under insurance
contracts and negotiates the settlement of such claims. An insurance adjuster
adjusts insurance claims for a living, collecting a salary, a fee, or commission for
practicing their adjustment skills.
An adjuster can work for an insurance company, a private company, a claimant,

or an adjusting company.
Staff Adjusters - Staff adjusters are insurance adjusters employed by insurance
companies.
Staff adjusters are salaried employees that can work either locally, regionally, or
nationally. Staff adjusters are employed by companies such as Aetna, Nationwide
Insurance, and State Farm Insurance.
Also known as "company" adjusters.
Public Adjusters - Public adjusters are insurance adjusters hired by

policyholders to represent them in insurance claims, and usually specialize in
appraising and negotiating claims.
Public adjusters are usually only hired when there is absolute certainty that an
insurance company will be making a payout, and the only matters yet to be
determined are the proper identification and valuation of a loss.
Public adjusters usually work for a commission, calculated as a percentage of the

insurance settlement. Most public adjusters charge around 10% of a settlement.
Fee Adjusters - Fee adjusters are insurance adjusters that contract with a
variety of insurance providers at once, and adjust insurance claims on behalf of
the contracted companies for a fee-for-service basis.
Independent Adjusters - Independent adjusters are similar to fee adjusters,

only independent adjusters are not contracted to any particular insurer.
Independent adjusters are self-employed individuals who adjust insurance claims

on behalf of insurers, and charge on a fee-plus-expenses basis for each claim they
handle. Some independent adjusters may also work on a commissioned basis,
taking a percentage of the final settlement amount.
Bureau Adjusters - Bureau adjusters are essentially "adjustment consultants"

that works on behalf of adjustment bureaus.
Adjustment bureaus are risk management and claims-specialization companies

that provide specialized adjustment services to a wide variety of business clients,
including insurers, brokers, and large corporations.
Emergency Adjusters
Insurance Adjusters are employed throughout the country in multiple fields of
insurance. Daily claims are abundant in the areas of automobile insurance, hail
storm damage, or for an on-the-job injury, just to name a few. The possibilities
are endless in the field of insurance adjusting. This reality becomes even more
evident in the occasion of a natural disaster. A hurricane, for example, gives way
to an enormous number of claims and concentrates them into one area. This
scenario creates an overwhelming need for catastrophe adjusters. Most insurance
companies have a limited number of staff adjusters on salary and pull, when
needed, from a list of independent insurance adjusters. In a catastrophe
situation, even that list may not be enough. In these situations, the insurance
commissioner can license Emergency Adjusters to help service the countless
number of claims.
The definition of adjuster does not include, and a license as an adjuster is not
required of, the following:
• attorneys allowed to practice in the state
• a person employed solely to obtain facts surrounding a claim or to furnish
technical assistance to a licensed adjuster
• an individual who is employed to investigate suspected fraudulent
insurance claims but who does not adjust losses or determine claims
payments
• a person who solely performs executive, administrative, managerial, or
clerical duties or any combination of these duties and who does not
investigate, negotiate, or settle claims
• a person who investigates, negotiates, or settles life, accident and health,
annuity, or disability insurance claims;
• an individual employee, under a self-insured arrangement, who adjusts
claims on behalf of the employee's employer;
• a licensed insurance producer, attorney-in-fact of a reciprocal insurer, or
managing general agent of the insurer to whom claim authority has been
granted by the insurer;
• a person authorized to adjust workers' compensation or disability claims
under the authority of a third-party administrator license pursuant to state
law.
Adjuster Practices:
Negotiations - Negotiation is a process by which two opposing parties attempt
to merge their respective interests in an effort to yield a balanced and beneficial
outcome for both parties. In the field of insurance, negotiating is a very important
skill; in nearly every adjusting case, the claimant and the insurer will have a
differing opinion on the proper amount of indemnification due the claimant. The
difference can be slight, or as often seen in liability claims, the differences can
prove enormous. In this chapter, we will examine the settlement of a claim
through negotiations.
As we learned earlier, an insurance company, through an insurance contract,

makes a "promise to pay" a policyholder if certain defined events occur.
If a policyholder realizes bodily injury or property damages, they have every right
to file a claim against their insurance policy if they feel their damages fall under
the terms of the contract. In all insurance cases, it is the duty of the claimant to
prove the damages to the insurance company, which is done through an
insurance adjuster.
Typically, a claimant will compile proof of financial damages and submit the total
to an insurance company. From a legal standpoint, the total damages presented
to the insurance company by the claimant for payment represents an offer; the
claimant is stating an amount they feel they are due under the terms of the
insurance contract.
Once an insurance adjuster has received an offer from a claimant, the adjuster,
acting as an agent of the insurance company, has three options to settle the claim.
• Accept the offer and pay the claim.

• Reject the offer and refuse to pay the claim.
• Negotiate a settlement with the claimant.
The last available option is to have a court of law dictate a proper settlement, but
adjusters need to avoid a lengthy court proceeding at all costs. Court settlements
can prove extremely costly for insurers, and are only a method of last resort. An
adjuster's primary motivation is to settle the case promptly and efficiently
without the added hassle and legal expenses of a court case.
Accept the Offer and Pay the Claim - After a thorough investigation and
evaluation of a claim, an adjuster will develop an adequate settlement figure in an
effort to resolve the claim with the claimant. If the claimant has proven all his /
her damages, and the adjuster's settlement figures somewhat match the offer of
the claimant, the adjuster and the claimant can then construct an agreed upon
figure of financial restitution and close the claim. Minute differences can be
settled in favor of the claimant. The adjuster will issue a settlement check and
close the case.
Reject the Offer and Refuse to Pay the Claim - There are an infinite
number of reasons an adjuster might reject a claim. The adjuster may determine
the claimant had no coverage for the damages, the claimant may have submitted
a fraudulent claim, or perhaps the claimant cannot prove the damages for which
they are seeking indemnification. Regardless, if the adjuster rejects the claim,
they must do so in writing with a full explanation as to why the claim was
rejected.
The last option is negotiating a claim, which occurs when the offer of the claimant
and the offer of the insurer fall somewhat in range.
Negotiating a claim is not used when the offers are very similar (which can be
fixed with an on-the-spot negotiation), nor are they used when the offers are
simply too enormous to possibly close.
We'll cover methods of negotiations in the next section.
Negotiations can take place one of three ways:

• Arbitration
• Mediation
• Adjuster / claimant negotiations
Arbitration - Arbitration is a legal technique used for the resolution of disputes

outside a court of law. In arbitration, the opposing parties to a dispute each
submit their evidence to a mutually agreed upon and neutral third party, called
an arbitrator. The arbitrator reviews the positions of each opposing side, and
makes a final and legally binding decision on the case based upon the evidence
presented.
Due to the tremendous financial cost of litigating matters of dispute in a court of

law, many insurance companies opt to enter into arbitration to resolve insurance
cases. Arbitration not only provides significant cost savings, but also provides a
much less formal atmosphere where the relaxed rules of arbitration may allow
evidence to be presented which would not be allowed in a courtroom trial. In
addition, professional arbitrators tend to be more knowledgeable, thorough and
objective than the members of a civil jury.
Mediation - Mediation is similar to arbitration in that the opposing sides of a
dispute rely on a third, and neutral, party called a mediator to assist in the
resolution of a dispute. In mediation however, the third party doesn't bind the
opposing parties to a final and binding decision; rather the opposing sides to a
dispute come together in an effort to determine an equitable settlement. The
mediator merely plays an advisory role in dispute resolution, and encourages a
swift and equitable solution both parties can agree on.
In some jurisdictions, a court judge may order the opposing parties in an

insurance dispute into mediation. The case will be assigned, by the court, to a
mediation firm whose fees will be split between all of the parties involved in the
dispute.
If the court does order mediation, a representative of the insurance company

must appear, with the granted authority to negotiate and agree to a settlement up
to a reasonable level. If the company does not comply with the order, it and/or
the insured defendant may be held in contempt of court. If the plaintiff does not
appear for a mediation session, the consequences are rarely as severe.
Direct Negotiations Between Adjuster / Claimant
When an insurance claim reaches a point of negotiation, the adjuster often

becomes the negotiator. The negotiator must first decide if the differences
between the parties are in fact negotiable. Policy coverage, policy limits and the
like are never open to discussion. Further, adjusters will not offer, discuss or
agree to “punitive” damages. Finally, the adjuster must enter negotiations with a
maximum amount of indemnification the insurer is prepared to offer to settle a
case. If the plaintiff’s demands are outrageous and he /she is not willing to
further discuss the matter, valuable time is being wasted by both sides and the
case should be left up to an arbitrator or the courts.
All parties involved in a negotiation must have a strong desire to come to some
sort of equitable conclusion quickly. The adjuster and his company want to get
the file closed and move onto other claims, and certainly want to avoid a costly
court case. The claimant wants to get a “fair” amount of money in his pocket as
soon as possible, as the process of litigation is long, expensive and arduous.
Negotiations: The "Give and Take" - Understanding the complex process of

give and take is the heart and soul of a successful negotiation session. What is
most important to the claimant? What is most important to the insurer? A
successful negotiator must approach the process with an open mind, realizing it
will not be possible to leave the table having prevailed on every point. An adjuster
must concede on some points and the claimant must concede on others.
If either side presents itself as inflexible and refuses to concede on any point
whatsoever, there is no longer any need to negotiate. An inflexible approach
causes frustration and allows emotions to enter the proceedings, and as we
mentioned earlier, emotions should never play a role in the negotiating process.
Negotiations: Developing Trust - In order to conduct a successful

negotiation session, both the claimant and the adjuster must establish an element
of trust between one another. If either party enters the negotiation process
unwilling to believe the statements or promises of the other party, odds are they
will not come to an agreement on anything and there will be no point in further
attempting to negotiate.
Unless the negotiator and the opposing representatives have experience with
each other in previous negotiations, the first impression is all-important. If there
is a favorable history between the parties, it is important the trust established in
previous encounters be continued and maintained.
The first impression is very important, and an adjuster must foster an element of
trust from the outset. Creating a good first impression requires an adjuster to
keep the following in mind:
Maintain a professional appearance

Have a good attitude
Maintain a level of respect for the claimant
Chapter 6.2 - Successful
Negotiations
Qualities of a Successful Negotiator

1.A skilled negotiator must be able to remain objective at all times.
Technically defined, objectivity refers to an adjuster properly dealing with a set of

facts and conditions without allowing personal feelings, prejudices or
interpretations distort the end result. Negotiations can often become heated, and
a skilled adjuster realizes that negotiation is simply a business process, not an
affront to an adjuster's skills or integrity. The adjuster must keep the ultimate
goal of negotiation in mind at all times: an equitable settlement.
2. A skilled negotiator must remain tactful.
Negotiating with a claimant requires a clear understanding of, and utmost

appreciation of, the delicacy of the situation at hand. An adjuster must use
caution in expressing the opinions of the insurer, and refrain from using language
that might upset the plaintiff and his / her representative. Keep in mind, even the
slightest affront to the opposition can stir up a cauldron of emotions, especially
when a large amount of money is involved. If you are in doubt as to what to do,
the best strategy is to say nothing and to LISTEN.
3. It is imperative for a negotiator to understand the needs of the

plaintiff.
A successful negotiator must at least partially fulfill the needs of a plaintiff in

order to reach a successful outcome in the negotiation process. An adjuster can
only develop an accurate sense of the plaintiff's needs by listening to the plaintiff
during the proceedings, and keeping an open mind as to how the adjuster might
appease the plaintiff's expressed desires.
By listening to a plaintiff, an adjuster accomplishes the following:
• Develops trust with the claimant.
• Shows respect to the claimant.
• The claimant can express his / her wants and needs in a successful
resolution.
• The adjuster refrains from divulging the insurer’s position.
• Listening reveals nothing, but produces important information.
4. A negotiator must be adept at analyzing human behaviors.
People's behaviors can be attributed directly to the desire to satisfy their

immediate and long-term needs and goals. While it is impossible to pinpoint the
priorities of each individual, successful adjusters must have a basic
understanding of human needs. Studies have shown that, in general, people have
the following needs in order of importance:
• Food, Shelter and Dress
• Financial security
• Acceptance by one’s peers
• Attention
• Achievement
• Affection
• Desire to be needed
• Freedom to adhere to his ethical and moral standards
• Freedom from fear and anxiety
5. A negotiator must have the ability to differentiate facts from

opinions.
Both parties may initially enter the negotiation process loaded with opinions. A
successful adjuster comes prepared to negotiate on the basis of facts only. Facts
help resolve a case, while opinions can only distort a case. Opinions are fueled by
emotion, and as we noted earlier, emotions tend to play only a destructive role in
the negotiation process. Adjusters need to remain calm, and always keep the facts
in perspective.
6. A successful negotiator must utilize patience and sincerity.
An adjuster must refrain from becoming involved in the emotional turmoil of a
plaintiff. Plaintiffs may act out and appear visibly upset at times; yet an adjuster
must keep his / her emotions in check and listen to what the plaintiff has to say
without becoming emotionally involved in the situation.
The adjuster must also complete the negotiation process with full sincerity; an
adjuster must never lie, use trickery, nor make promises they do not intend to
keep.
7. A negotiator must learn to control his / her non-verbal

communication.
Humans communicate verbally, but our non-verbal communication speaks

volumes over the things we say. Researchers have determined that nearly 93% of
the message we communicate comes through our non-verbal cues, including tone
of voice, facial expression, stance, posture, and eye contact amongst others.
If an adjuster displays shock at the sight of a seriously injured claimant, the

adjuster is at an immediate disadvantage from that point forward in the
negotiation process.
It is extremely important for an adjuster to learn to manage all forms of non-

verbal communication. Involuntarily expression of fear, frustration or relief on
the part of a negotiator might cause a plaintiff to change his / her demands
accordingly.
8. Knowledge and experience with the particulars of negotiation.
The negotiator must have the expertise necessary to discuss technical questions
regarding the claim with utmost confidence and intelligence. Preparation,
organization, and research will help an adjuster successfully negotiate the
particulars of a case.
9. A negotiator must maintain a realistic attitude towards the task at

hand.
Adjusters who are new to the process tend to view negotiations as a debate that
ends with a winner and a loser. If a debate must take place to solve the
differences, it will happen in a court trial. Lawyers are paid debaters; negotiators
reach an agreement without the necessity of trial.
10. Negotiators do their homework on each negotiation.
Insurance adjusters work on a number of active claims at any given time; as such,
some adjusters tend to approach each negotiation as "just another negotiation
session." For the claimant however, this is their only chance to negotiate a fair
settlement. The claimant may be overwhelmed with the process and the
surroundings, but more likely than not will be very well prepared for their case.
Adjusters need to be equally prepared for each case negotiation. Once an adjuster
begins to treat negotiations as "routine," they will find themselves at a severe
disadvantage to the claimant.
11. Negotiators must approach negotiations with a good attitude.
Even the most experienced negotiators often fail to achieve their negotiation
goals; in cases where the adjuster feels he / she has an upper hand, the adjuster
may come out with much less than they expected. In other cases, they may come
out with much more than they expected even when they felt they had a weak case.
A good negotiator realizes that negotiations can prove successful or unsuccessful
for any number of reasons, and often the end result is way beyond the control of
the negotiator. Over the long-term, simply having a good attitude about the
negotiations process will lead to more successes.
Negotiation is a necessary skill practiced on some level by all claims

professionals. Whether you are a staff adjuster negotiating liability claims with
third party claimants and/or their attorneys, or a property adjuster negotiating
with the insured claimants and/or their public adjusters, negotiation skills are a
vital part of the process. Adjusters must dedicate themselves to learning the finer
aspects of the negotiations through practice and experience.
Chapter 6.3 - Negotiations
Negotiations
Negotiation is a process in which two opposing parties attempt to merge their

respective interests in an effort to yield a balanced and beneficial outcome for
both parties.
In the field of insurance, negotiating is a very important skill; in nearly every

adjusting case, the claimant and the insurer will have a differing opinion on the
proper amount of indemnification due to the claimant.
The difference can be slight, or as often seen in liability claims, the differences
can prove enormous. In this chapter, we will examine the settlement of a claim
through negotiations.
The Offer
As we learned earlier in our test, an insurance company, through an insurance

contract , makes a "promise to pay" a policyholder if certain defined events occur.
If a policyholder realizes bodily injury or property damages, they have a right to

file a claim against their insurance policy if they feel their damages fall under the
terms of the contract. In all insurance cases, it is the duty of the claimant to prove
the financial damage to the insurance company .
Typically, a claimant will compile proof of financial damages and submit the total
to an insurance company. From a legal standpoint, the total damages presented
to the insurance company by the claimant for payment represents an offer; the
claimant is stating an amount they feel they are due under the terms of the
insurance contract.
Offers and Claims
Once an insurance adjuster has received an offer from a claimant, the adjuster,
acting as an agent of the insurance company, has four options to settle the
insurance claim.
• Accept the offer and pay the claim.

• Reject the offer and refuse to pay the claim.
• Negotiate a settlement with the claimant.
• Court settlement
The last available option is to have a court of law dictate a proper settlement, but
adjusters need to avoid a lengthy court proceeding at all costs.
Court settlements can prove extremely costly for insurers, and are used only a
method of last resort. An adjuster's primary motivation is to settle the case
promptly and efficiently without the added hassle and legal expenses of a court
case.
Accept and Pay
Accept the Offer and Pay the Claim
After a thorough investigation and evaluation of a claim, an adjuster will develop

an adequate settlement figure in an effort to resolve the claim with the claimant.
If the claimant has proven all his / her damages, and the adjuster's settlement
figures somewhat match the offer of the claimant, the adjuster and the claimant
can then construct an agreed upon figure of financial restitution and close the
claim. The adjuster will issue a settlement check and close the case.
Reject and Refuse
Reject the Offer and Refuse to Pay the Claim
There are an infinite number of reasons an adjuster might reject a claim. The
adjuster may determine the claimant had no applicable insurance coverage for
the damages, the claimant may have submitted a fraudulent claim, or perhaps the
claimant cannot prove the damages for which they are seeking indemnification.
Regardless, if the adjuster rejects the claim, they must do so in writing with a full
explanation as to why the claim was rejected.
Negotiate Settlement
Negotiate a Settlement with a Claimant
Many of claims cases an adjuster faces are neither accepted nor rejected; most
cases will advance to a stage of negotiations.
Once an adjuster has determined the insured does have coverage in a particular
case, the adjuster must determine the possible source of dispute between the
insurer and the claimant: is it a question of liability or a question of total
damages?
As we learned earlier, liability policies provide insurance protection for

policyholders against accusations that an action of the insured party resulted in
bodily injury and / or property damage to a third party. Property policies, on the
other hand, cover defined causes of damage to physical property owned by the
insured.
Offers and Claims
As a general rule, property damage disputes are much easier to negotiate; repair
and replacement costs are definite and verifiable.
Liability disputes are infinitely more difficult to negotiate. Would the insured be
found legally liable for the loss? Did the third party play a role in his / her own
damages? If so, to what extent?
Negotiating liability settlements
Due to the difficulty in negotiating liability settlements, we will focus on liability

negotiation issues from here on out.
Whether a claim is a liability or property claim, there are four things required of
the adjuster:
• Gather as many facts as possible.

• Recognize your objectives and follow company guidelines in establishing
them.
• Understand the circumstances of the loss.
• Complete an estimate.
While liability claims may have no merit in a court of law, all liability insurance
contracts require the insurer to vigorously defend their policyholder against such
claims. Therefore, establishing coverage is only the beginning of the liability
adjustment.
Once an adjuster verifies the claim is actionable, the adjuster must thoroughly
investigate and keep detailed reports on the claim in order to construct a
thorough record of the circumstances surrounding a claim, called a "claims" file.
Claims Files
From the moment a claim lands on an adjuster’s desk, the adjuster must treat
every adjusting case as if the claim would eventually be decided in a court of law.
Careful and detailed documentation of claimant testimony, witness statements,

investigations and other evidence should be recorded accurately as it transpires.
Clarity, organization and professionalism are essential. Conversely, refrain from

placing anything in the file which would negatively reflect upon the claimant, the
insured, or the professionalism of the adjuster or the company he / she
represents.
Claims Files - Discoverable
The entire file is called "discoverable" and is considered evidence by the Court.
Both the Plaintiff and the Defendant have to completely share physical evidence
that may be used to prove their side of the case or disprove the other side.
Obviously the claims file is important to both parties.
Always remember, if the claimant decides to file suit, a full copy of the claim file
for the case goes directly to the attorney representing the claimant. As you
learned in Ethics, Florida law requires you to respect all parties.
Liability Issues in Court
Insurance companies and insurance adjusters alike generally only use a court of
law to settle a claim as a measure of last resort.
Civil courts are notoriously unpredictable, and many argue that jurors in a civil
trial against an insurance company may incorporate their pre-conceived notions
about insurance companies as a factor in their decision-making, regardless of the
case before them. As a result, adjusters often feel they enter a civil court case
playing the role of the underdog, even before the first piece of evidence has been
presented.
Jury Responsibilities
The jury in a civil trial essentially has two tasks before them:
1. To determine the level of liability of each of the parties, otherwise known

as comparative negligence.
2. To determine the amount of damages.
Criminal Trials - Beyond Reasonable Doubt Proof
Many people are familiar with the theory of a criminal trial. In this type of trial a
person or company is accused of a crime against "The State". These crimes are
spelled out by Laws and further refined by previous Court rulings. These are
called elements of the crime. The State's is the plaintiff. The State's job is to prove
the defendant committed the crime by proving each element.
A criminal trial requires an extremely difficult burden of proof. The State must
convince all 12 of the jurors that it has proved each of the elements of the crime
"beyond a reasonable doubt."
A civil trial has a lower standard of proof.
Civil Trials - Preponderance of Evidence Proof
In a civil trial, one citizen (the plaintiff) accuses another citizen (the defendant)
of causing the plaintiff some sort of harm that is defined by law.
In a civil trial, the plaintiff needs only to convince 10 of the 12 jurors that the
plaintiff has proven the elements by only a "preponderance of the evidence."
Preponderance of the evidence simply states that the plaintiff must present more
evidence supporting their case than the defendant. Usually the defendant is the
insurance company. If a plaintiff successfully presents more evidence to support
their case (50%+) than the insurer, the jury should find in favor of the plaintiff.
It is much easier for the plaintiff to prevail in a civil procedure. Thus, it is much
more difficult to successfully defend an allegation a harm before a jury.
Liability Issues in Court
Going to court is truly a risky undertaking, and very few adjusters feel
comfortable placing the outcome of a claim in the hands of a jury. By allowing a
jury to settle a case, the adjuster relinquishes control of the claim and has little
influence on the outcome.
The decision whether or not to go to court must also include consideration or

how much must be surrendered to avoid a trial. Obviously, the amount of money
involved is a prime concern, however, the reputation of the insured may very well
be affected, along with the reputation of the company. If an insurance company
becomes known as a “push over” and rarely, if ever, takes a case to trial,
regardless of the circumstance, successful negotiation becomes much more
difficult, if not impossible.
Arbitration
Arbitration is a legal technique used for the resolution of disputes outside a court
of law.
In arbitration, the opposing parties to a dispute each submit their evidence to a

mutually agreed upon and neutral third party, called an arbitrator. The
arbitrator reviews the positions of each opposing side, and makes a final and
legally binding decision on the case based upon the evidence presented.
Due to the tremendous financial cost of litigating matters of dispute in a court of

law, many insurance companies opt to enter into arbitration to resolve insurance
cases.
Arbitration not only provides significant cost savings, but also provides a much
less formal atmosphere where the relaxed rules of arbitration may allow evidence
to be presented which would not be allowed in a courtroom trial. In addition,
professional arbitrators tend to be more knowledgeable, thorough and objective
than the members of a civil jury.
The advantages of arbitration are “two edged swords” however, and provide the
same advantages and disadvantages to all parties. It is imperative to know the
rules of the arbitration in order to make a reasonable case for using this
procedure.
Mediation
Mediation is similar to arbitration in that the opposing sides of a dispute rely on a

third, and neutral, party called a mediator to assist in the resolution of a dispute.
In mediation however, the third party doesn't bind the opposing parties to a final
and binding decision; rather the opposing sides to a dispute come together in an
effort to determine an equitable settlement. The mediator merely plays an
advisory role in dispute resolution, and encourages a swift and equitable solution
both parties can agree on.
In some jurisdictions the judge may order the opposing parties in an insurance
dispute into mediation. The court will assign the case, to a mediation firm whose
fees will be split between all of the parties involved in the dispute.
If the court does order mediation, a representative of the insurance company

must appear, with the granted authority to negotiate and agree to a settlement up
to a reasonable level.
If the company does not comply with the order, it and/or the insured defendant
may be held in contempt of court. If the plaintiff does not appear for a mediation
session, the consequences are rarely as severe.
Chapter 6.4 - Ethics
Ethics describes the system of moral values we utilize to differentiate between

appropriate and inappropriate behaviors in any given situation.
When we make decisions that affect other individuals in our immediate

environment, our sense of ethics nearly always comes into play: Will my decision
ultimately have an impact on someone else? Will my actions negatively influence
others? What is my moral duty or obligation in this situation? What would be the
right thing to do?
Our sense of ethics describes more than just what we think is "right" or "wrong."
Ethics encompasses an entire platform of social norms and standards created by
society, that, in turn, attempt to prescribe what an individual ought to do in a
situation.
If we are held to a high ethical standard, we are expected to behave in a manner

that takes into consideration the rights, obligations and feelings of other
individuals or society as a whole; if we are said to maintain poor ethical
standards, it reflects our inability to take into consideration the negative
repercussions of our actions on other people, or society in general.
Our personal sense of ethics reflects our level of adherence to societal approved
behaviors. Most people are ethical, and their behaviors and decisions generally
take into account a sense of:
• Honesty
• Integrity
• Fairness
• Loyalty
• Compassion
• The rights and feelings of others
Others, however, may behave in ways that seem to emphasize a sense of self-
interest to the detriment of others. They may display behaviors that highlight an
ignorance to, or complete disregard for, societally accepted norms. We often label
these types of behaviors as "unethical".
Some types of behavior we generally regard as unethical might include:
• Dishonesty
• Disloyalty
• A lack of concern for the feelings of others
• A disinterest in the consequences of one's actions
• Selfishness or self-serving behaviors
• Lying
In this chapter, we will briefly examine some basic guidelines developed to

encourage and enforce ethical behaviors amongst insurance adjusters while
performing under the scope of their employment.
Insurance Adjusting Code of Ethics

1. An adjuster shall disclose all financial interests in any direct or
indirect aspect of an adjusting transaction.
Adjusters should not attempt to direct any claimants in need of repairs, medical
services or replacement property to any businesses with which the adjuster has a
direct or indirect relationship, or which the adjuster may have an undisclosed
financial interest.
For example, an adjuster cannot refer a claimant to a family member's auto

repair business without first disclosing his relationship with that business to the
claimant. Adjusters also are prohibited from referring claimants to particular
businesses that may have agreed to provide direct or indirect compensation to
the adjuster for the referral, or for any resulting business for such referrals.
2. An adjuster shall treat all claimants equally.
An adjuster's job is to adjust all claims strictly in accordance with the insurance
contract. Adjusters may frequently encounter hostile or impolite claimants, and
may feel a desire to "exact revenge" upon the claimant for their behavior by
stalling the claim, ignoring communications with the claimant, favoring other
claimant's cases, or even refusing to properly acknowledge an unruly claimant's
total damages.
Adjusters must conduct themselves professionally at all times, and not provide
favored treatment to any claimant, nor punish claimants for their unacceptable
behaviors.
3. An adjuster shall never approach investigations, adjustments, and

settlements in a manner prejudicial to the insured.
Particularly in matters of liability, an adjuster may approach a case with a

predilection to "protect" the insured party and therefore the insurance company
that employs the adjuster. While adjusters are required to protect the financial
interests of their employer, they cannot attempt to cut costs for the insurer by
acting in a prejudicial manner toward the insured party. An adjuster's job is
simply to adjust all claims strictly in accordance with the insurance contract.
4. An adjuster shall make truthful and unbiased reports of the facts

after making a complete investigation.
An adjuster’s job is strictly to investigate, record and evaluate a claim thoroughly.

Opinions, judgments and prejudices have no place in the adjusting process, and
could prove damaging to all parties involved in the event a claim reaches the
courtroom.
5. An adjuster shall handle every adjustment and settlement with

honesty and integrity.
An adjuster should ensure a fair adjustment or settlement to all parties without

any remuneration to himself except that to which he is legally entitled.
6. An adjuster, upon undertaking the handling of a claim, shall act

with dispatch and due diligence in achieving a proper disposition
thereof.
Essentially, this means adjusters need to handle claims promptly and efficiently
from inception to completion. While an adjuster may view each case as "just
another claim", claimants are often financially stressed and psychologically
distraught individuals who have just gone through a traumatic circumstance of
events. Adjusters should act accordingly, and treat every case with a sense of
urgency and importance for the benefit of all parties involved.
7. An adjuster shall promptly report licensed insurance

representatives whose conduct violates any insurance law, rule or
order.
An insurance adjuster has an ethical duty to report any malfeasance in the

insurance industry to the proper authorities immediately. While violations may
not affect the adjuster personally, wrongdoers damage the reputation of the
insurance industry as a whole, and that affects an adjuster's work environment in
the long run. Plus, it's simply the right thing to do.
8. An adjuster shall exercise extraordinary care when dealing with

elderly clients, to assure that they are not disadvantaged in their
claims transactions by failing memory or impaired cognitive
processes.
Adjusters frequently handle the cases of elderly individuals, some of whom may
not have a clear recollection of the circumstances surrounding an insurance
claim. Adjusters must use due diligence in investigating these claims to ensure
the claimant receives proper indemnification.
Adjusters may want to contact family members or neighbors to aid in the

investigation of damages, or perhaps just to facilitate communication. Are there
damages the claimant may have missed? Does the elderly claimant need help in
understanding their policy? Does the elderly claimant have any policy coverage
that could help them immediately, such as additional living expense coverage
that could help put them up in a hotel if their home was damaged?
9. An adjuster shall not negotiate or effect settlement directly or

indirectly with any third-party claimant represented by an attorney, if
said adjuster has knowledge of such representation, except with the
consent of the attorney. For purposes of this subsection, the term
“third-party claimant” does not include the insured or the insured’s
resident relatives.
A claimant has the right to representation by an attorney, and adjusters are

strictly prohibited from dealing directly with a claimant in order to circumvent
the advice of an attorney.
10. An adjuster is permitted to interview any witness, or prospective

witness, without the consent of opposing counsel or party.
Adjusters have full authority to interview any and all witnesses during the
investigation process. But adjusters shall scrupulously avoid any suggestions
calculated to induce a witness to suppress or deviate from the truth, or in any
degree affect their appearance or testimony at a trial or on the witness stand.
Witnesses are also permitted, upon demand, a copy of any signed or recorded
statements.
11. An adjuster shall not advise a claimant to refrain from seeking
legal advice, nor advise against the retention of counsel to protect the
claimant’s interest.
A claimant has the right to representation by an attorney, and adjusters are

strictly prohibited from trying to convince a claimant otherwise, whether verbally
or by inducement.
12. Adjusters shall not attempt to negotiate with, or obtain any

statements from, claimants or witnesses who appear to be in shock or
under severe emotional distress.
Adjusters frequently deal with claimants who have just experienced traumatic
and life-altering events. Consequently, adjusters may come upon claimants under
serious mental or emotional distress as a result of physical, mental, or emotional
trauma associated with a loss.
Severe psychological stress can impair an individual’s recollection of events, their

ability to think rationally, and their judgment; adjusters must refrain from
conducting business affairs when a claimant is in such a state.
Furthermore, adjusters shall never offer a settlement when such settlement

would be disadvantageous to a claimant who is in the traumatic or distressed
state described above.
13. An adjuster shall not knowingly fail to advise a claimant of their

claim rights in accordance with the terms and conditions of the
contract and of the applicable laws of this state.
While an adjuster has thorough knowledge of insurance contracts and the

coverages contained therein, members of the general public generally do not. A
claimant may not understand what type of property is covered, how much
medical care they are entitled to, or whether an insurance company will pay for a
hotel. The insurance adjuster has a duty to inform the claimant of every right and
protection afforded by their insurance contract, without attempts to deceive,
distort or falsify the tenets of coverage.
14. An adjuster shall not draft, unless approved in writing in advance
by the insurer, any form of release.
An adjuster’s job is to investigate, report and evaluate a claim. Upon

determination of a settlement figure, an adjuster must seek approval from the
insurer to offer a release to a claimant. Adjusters, in practice, are only permitted
to only fill in the blanks of a release form approved by the insurer they represent.
15. An adjuster shall not undertake the adjustment of any claim

concerning which the adjuster is not currently competent and
knowledgeable as to the terms and conditions of the insurance
coverage, or which otherwise exceeds the adjuster’s current
expertise.
In fairness to the claimant and the insurer, an insurance adjuster must never
handle a specialized case for which they are either unprepared to handle or
unknowledgeable thereof. A proper settlement is highly unlikely, and could prove
detrimental to the insurer or the claimant, or possibly both.
Chapter 6.5 - Settlement
Settlement and Release Options
Now we're going to take a look at the various settlement options available to
insurers.
A settlement occurs when two parties to a dispute reach an agreement.
In insurance, a claimant files a claim for monetary damages against an insurer for
payment against an insurance policy.
The settlement to the claim occurs when both the insurer and the claimant reach
a resolution as to how much money will be paid out to a claimant, and under
what terms and conditions that payment will be made.
In turn, the claimant relinquishes some or all of his / her rights to seek further
damages against the insurer, in addition to relinquishing their right to sue the
insurer, provided the insurer follows the terms of the settlement.
In this section, we'll provide a brief analysis of some commonly used settlement
techniques employed by insurers to settle claims against their insurance policies.
Full Release Settlement
Often called a "Full Release of All Claims and Settlement Agreement", a full
release settlement allows the insurer to make one immediate lump sum payment
to the claimant to settle all claims and damages brought forth by the claimant.
Once the amount of monies due for the full release settlement is determined, the
claimant will accept the settlement by signing a document stating they have
received payment as a full settlement, and further discharge all claims against the
insurer and relinquish their right to sue the insurer.
The insurer will cut a check for the settlement amount, and the dispute is
resolved in total.
Scheduled Payment Release
A scheduled payment release, or "open-ended release", is a settlement technique
whereby the insurer agrees to pay all special damages (tangible, document-able
financial losses) and general damages (intangible losses such as pain and
suffering, mental anguish) accumulated by the claimant up until the point of the
settlement.
In addition, the insurer agrees to provide indemnification for future "incidentals"

or "special circumstances" accrued by the claimant, which are very specifically
outlined in the settlement contract.
Usually, the "incidentals" include ongoing physical rehabilitation costs or visits to

a physician’s office. The future payments relate only to general damages,
whereby the claimant must provide document-able verification of expenditures to
the insurer.
Payment of Property Damage; Bodily Injury Pending
Many claims will seek damages for both property damage and bodily injury.
Property damages are much more easily quantifiable than bodily injury damages,
and therefore much easier to negotiate.
In the payment of property damage, bodily injury pending settlement option,

the insurer agrees to indemnify the claimant for all property damages in lieu of
settling the claim in full until damages for bodily injury can be negotiated.
The payment of property damage settlement option offers some financial relief
to the claimant, while not yet settling the claim in full.
The claimant must be fully capable of understanding this settlement option.

Obviously, if the claimant is still under severe mental duress due to pain or
injury, or mentally incapacitated by injury, insurers cannot employ the payment
of property option.
Settlement Release Options Cont'd
Advance Payment Settlement
The advance payment settlement option allows the insurer to make partial
payments to the claimant in lieu of a final settlement amount.
When a final settlement figure is negotiated, the amount of the advanced

payments is then subtracted from the final settlement figure.
The advanced payment settlement technique allows financial relief to the

claimant, and is most often used when a claimant suffers bodily injury and has
mounting medical bills or other financial responsibilities. Since the claimant
likely has been unable to work due to his / her injuries, an advanced payment
settlement option allows the claimant to cover necessary costs while injured.
The advance payment settlement option also reduces any antagonistic feelings
the claimant has towards the insurer, decreasing the chances of a lawsuit.
Of course, the insurer must also ascertain the terms of the advance payment
settlement so the costs of the advance payments do not exceed the potential final
settlement amount.
No Release Settlement
A no-release settlement, also known as a "walk-away" settlement, means the

insurer simply pays the bills submitted by the claimant.
A no-release settlement offers no separate release form, though the checks issued
to indemnify the claimant often act as a substitute for a release form.
For example, the back of an indemnification check may contain legal language
that states "By endorsement, the payee on this check agrees to release XYZ
Insurance from all further payments ... "
After the indemnification checks are negotiated / cashed with the claimant's
bank, the claim file is considered closed.
Rehabilitation Settlement
A rehabilitation settlement is very similar to a "Scheduled Payment Release."
In a scheduled payment release the insurer agrees to provide indemnification for

future "incidentals" or "special circumstances" accrued by the claimant, which are
very specifically outlined in the settlement contract.
A rehabilitation settlement includes provisions that allow the claimant to seek

indemnification for continued medical rehabilitation costs related to bodily
injury claims.
A rehabilitation settlement may also include a time frame, in which the

agreement to indemnify the claimant for medical rehabilitative costs eventually
expires.
Chapter 6.6 - Practices,
Duties & Liabilities
Responsibilities of the Adjuster:

Insurance adjusters have a fiduciary duty to protect the financial interests of their
employer.
1. Fiduciary Duty:
A fiduciary duty is a legal relationship of confidence and trust between two
parties, and as a fiduciary agent for the insurance company, the insurance
adjuster promises to perform their job with honesty and in good faith in regards
to all financial matters of the insurer.
Conversely, an insurance adjuster must also act responsibly in evaluating the

financial damages realized by a claimant. The adjuster must determine whether
specified damages are covered by the insurance policy, and if so, exactly how
much is due the claimant as per the terms of the insurance contract.
In an ideal world, claimants and insurers would always agree on a proper amount
of indemnification due the policyholder for damages; in truth, however, this is
rarely the case.
Naturally, an insurance company seeks to minimize their insurance claim

payouts in order to increase profits, while individual claimants simultaneously
try to maximize their claim settlements. An insurance adjuster operates in the
middle, carefully evaluating the claim in order to reach a fair and equitable
settlement for both parties.
As you might suspect, an insurance adjuster often feels pressure from each side to
tilt a settlement in the favor of one party or another. The claimant usually wants
more money from the adjuster, while the insurer wants to pay out as little as
possible as per terms of the insurance contract.
This brings up two issues for the adjuster:
First, consider the pressure from the adjuster's employer to minimize claim
payouts. As an employee, wouldn't you want to please your bosses and develop a
track record of exemplary performance on the job? Don't you enjoy the stable and
lucrative career of insurance adjusting? As such, an adjuster may feel pressured
to satisfy his employer's desires before those of the claimant. He wants to keep
his job, he enjoys his career, and he enjoys the financial stability. Why risk all
three by upsetting your employer?
Secondly, consider the pressure from the claimant. The claimant likely has just
gone through an extremely traumatic event, and may desperately need
indemnification for a wide range of completely unexpected costs. Whether to
acquire a larger settlement or simply because of their fragile emotional state,
claimants often overestimate their financial damages.
The claimant knows you, as an adjuster, make the ultimate determination of the
insurance settlement. As such, a claimant may try to sway an adjuster to tip the
scales in favor of the claimant through a variety of inducements ranging from
bribes to kickbacks.
To make things even more difficult, consider that many insurance adjusters are
paid as a percentage or proportion of the settlement. The larger the settlement
figure, the more the adjuster earns on the claim. Wouldn't an adjuster want to
maximize his or her own income when given the opportunity?
It is easy to see how an insurance adjuster faces a multitude of employment

related ethical dilemmas every day.
With so many people depending on the outcome of their decisions, an insurance

adjuster wields an enormous amount of power, especially when large sums of
money come into play. Adding or subtracting a few specified damages from an
insurance settlement can cause wide fluctuations in a settlement figure, often by
tens or even hundreds of thousands of dollars. Which in turn, can cause huge
fluctuations in an adjuster's income.
Insurance adjusters hoping to maintain a long and lucrative career in insurance

adjusting must stick to the basic tenet of adjusting: determine a fair and equitable
settlement figure that abides by the terms stated in the insurance contract. They
must do this in each and every case, avoiding any action or practice that may
appear ethically questionable in nature.
An insurance adjuster has five main functions: Investigating, claims

management, evaluating, reporting and negotiating.
1. Investigation
Insurance adjusters are responsible for investigating insurance claims.
The investigation phase involves determining what exactly caused the claimant's
damages, and whether that particular cause is covered by the insurance policy at
hand.
An adjuster will also interview the claimant and any witnesses to the events that
led to the claim, including police reports.
If the claim has merit, the adjuster will investigate all damages applicable to the
policy, and determine whether the claimant had any liability in the damages.
2. Claims Management
Insurance adjusters are responsible for the fluid and prompt execution of claims
handling from inception to completion.
This includes:
• Ensuring the proper paperwork is distributed and completed between the

insurer and the claimant.
• Collecting and investigating information about the claim.
• Creating and maintaining a "claims file", an organized source of all
information relating to a particular claim.
• Maintaining open lines of communication between the insurer and the
claimant.
• Being proactive in expediting the claims process while adhering to all local
and federal laws.
• Utilizing time management and people management skills to negotiate a
fair and just indemnification.
3. Evaluation
• Any relevant deductibles

• Level of co-insurance
• Possible multiple coverages
• Policy limits
Insurance adjusters are responsible for determining the approximate value of a
claim. An adjuster will take note of all applicable damages relevant to an
insurance claim, and determine the cost to repair and / or replace property, or
determine the total medical bills in a bodily injury claim.
Adjusters then must take into account all the financial provisions of the insurance
policy, including:
Utilizing the collected information, an adjuster can then begin to determine the
proper amount of indemnification due the claimant.
4. Reporting
Insurance adjusters are required to maintain a thorough record of paperwork

throughout the claims process.
Insurance adjusters file initial reports to the principal detailing claimant

damages and circumstances, investigation results and liability issues.
Adjusters may also file interim reports detailing the progress of the claim and
relevant issues that may arise during the claims process.
Final reports detail adjustments, indemnification and other claim resolution

information.
5. Negotiations
Likely the most difficult part of an adjuster’s job, the practice of negotiation
entails developing a just, fair and reasonable amount of indemnification that is
fair and equitable to both the claimant and the insurance company.
Negotiations involves not only finding a fair and equitable amount of

indemnification, but working with the claimant to accept the figure established
by the adjuster. If the claimant doesn't agree with the amount of indemnification,
the adjuster and the claimant must work together to find a settlement figure that
both parties find acceptable.
Often negotiations are quick and simple if, say, a piece of covered property was
damaged and needs to be replaced. The value of the item can be determined
easily, and the insurer and the claimant have nothing to dispute. The insurer cuts
a check and the claim is settled.
But the negotiation process can become extremely complex when dealing with
liability issues, multiple coverages, disputed damages or causes of damage, legal
issues, or uncooperative claimants, or a combination of these problems.
During negotiations, an adjuster must qualify the settlement to the claimant. In
other words, an adjuster is responsible for explaining in clear terminology why a
particular settlement amount was reached, and provide step-by-step justification
for that settlement amount.
Summary
Insurance adjusting carries with it an enormous amount of personal

responsibility.
Not only are adjusters protecting the financial interests of the insurer, but they
are simultaneously guiding claimants through the claims process, and making
very important financial decisions regarding the indemnification of frequently
distressed claimants who may possess little knowledge of the rules and
regulations of the insurance industry.
Understanding the practices, responsibilities and duties of an insurance adjuster

provides us with an overview of the insurance adjusting process, and helps us
understand insurance adjusting needs to follow a clear and organized path to a
claims resolution that benefits both parties.
Chapter 6.7 - Fair Credit
Reporting / HIPAA / IIPPA
To Protect the public, Insurers are required to abide by Federal Laws that
regulate the notification of the public about their rights regarding their personal
information and privacy. The Fair Credit Reporting Act, the Insurance
Information and Privacy Act, and the Health Insurance Portability and
Accountability Act are Federal Laws that regulate this information and its
handling.
THE Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is a United States federal law that
regulates the collection, dissemination, and use of consumer information,
including consumer credit information. Along with the Fair Debt Collection
Practices Act (FDCPA), it forms the base of consumer credit rights in the United
States. It was originally passed in 1970, and is enforced by the US Federal Trade
Commission and private litigants.
IIPPA and HIPAA
You have a right to keep your personal medical information under lock and key.
The Insurance Information & Privacy Protection Act (IIPPA) regulates the
collection and use of your personal information by an insurance provider. The
law was adopted by a number of states in the early 1980s as a way of protecting
consumers' rights to privacy. It's essentially a state consumer protection law. In
2003,the federal Health Insurance Portability and Accountability Act (HIPAA)
took effect and pertains to all states. HIPAA is a set of patient privacy rules that
all health care providers, health insurance companies, physician's offices,
hospitals and pharmacies must follow. In some cases, HIPAA includes more
stringent rules to protect your medical information and complements IIPPA.
Personal Data Use
You must submit personal data about your health status, family history, as well as
other personal information as part of your application for insurance coverage or
when you're submitting an insurance claim.
Privacy Notice
IIPPA requires that the insurance provider give you a privacy notice detailing the
provider's method for keeping the information supplied to them private. The
notice also contains information about how your information is shared and
provides you the right to withhold certain information from being shared.
Declined Coverage or Denied Claims
When you're declined insurance coverage or your claim is denied, the law states
youhave the right to know why.
Renewal and Other Policy Changes
IPPAA also mandates an insurance company must give reasonable notice for
policy renewal and notify you of other policy changes it implements.
Heath Insurance Portability and Accountability Act
HIPAA was enacted by the U.S. Congress in 1996. Title I of HIPAA protects
health insurance coverage for workers and their families when they change or
lose their jobs. Title II of HIPAA, known as the Administrative Simplification
(AS) provisions, requires the establishment of national standards for electronic
health care transactions and national identifiers for providers, health insurance
plans, and employers.
Although HIPAA provides comprehensive protection when it comes to sharing

your medical information, your state privacy laws may offer you more generous
benefits which may afford you better protection, especially when it comes to
sharing your medical information and issues of discrimination.
Chapter 6.8 - Insurance
Fraud
What is Fraud?
Insurance fraud occurs when people deceive an insurance company or agent to
collect money to which they aren’t entitled. Similarly, insurers and agents also
can defraud consumers, or even each other. Insurance fraud can be "hard" or
"soft."
Hard Fraud. Someone deliberately fakes an accident, injury, theft, arson or

other loss to collect money illegally from insurance companies. Crooks often act
alone, but increasingly, organized crime rings stage large schemes that steal
millions of dollars.
Soft Fraud. Normally honest people often tell "little white lies" to their
insurance company. Many people think it's just harmless fudging. But soft fraud
is a crime, and raises everyone's insurance costs. Consider…
A car owner inflates a fender bender claim to cover her deductible, or she
understates how many miles she drives annually to lower her auto premium… A
homeowner inflates the value of his stereo equipment stolen during a robbery…
Or a printing business lists fewer employees than it really has in order to pay
lower workers compensation premiums.
Fraud is Big
Insurance fraud is hard to measure because so much goes undetected, and
complete research has yet to be done. Still, we have enough evidence to know that
fraud is widespread — and expensive.
Healthcare fraud alone costs Americans $54 billion a year, the Coalition Against
Insurance Fraud estimates.
More than one third of people hurt in auto accidents exaggerate their injuries.
This adds $13-$18 billion to America’s annual insurance bill, notes a study by the
Rand Institute for Civil Justice.
Nearly one third of doctors exaggerate the severity of a patient’s illness to help
the patient avoid early discharge from a hospital, according to the Journal of the
American Medical Association.
Why Is Fraud So Big?
Insurers sometimes back off. Most insurance companies take a tough stand
against fraud, but some companies unwittingly encourage fraud by paying
suspicious claims too easily. These companies believe it’s cheaper to pay some
smaller suspect claims than fight in court, and a quick payoff also may avoid
multimillion-dollar lawsuits for bad faith.
Health system is an easy target. America's health care system is huge and
vulnerable. The sheer number of patients and treatments plus complexity of
billing attract cons who are skilled at looting our overworked health care system.
The pressure to control costs also encourages many doctors or health firms to
cheat so they can recoup lost profits or meet rigorous treatment quotas.
Immigrants are vulnerable. Insurance cheats consider America’s large and
growing immigrant groups easy targets. Asian and Hispanic communities, for
example, report extensive insurance fraud as con artists prey on immigrants’
trust, lack of English skills and ignorance of how insurance works.
Low-Risk Crime. Insurance cheaters view insurance fraud as a low-risk, high-

reward game, and far safer than drug trafficking or armed robbery. Consider:
• Six states still don’t have specific insurance fraud laws, thus discouraging
many prosecutors from tackling tough fraud cases.
• Courts are getting tougher on convicted schemers, but too often jail
sentences still are light, with courts often reserving space in overcrowded
prisons for people convicted of more-violent crimes.
• Professional societies overseeing doctors and lawyers often are reluctant to
discipline peers convicted of insurance fraud.
Low Legal Priority. Prosecutors often give top priority to combating drugs,
violence and other high-profile crimes. Though prosecutors are tackling more
fraud cases than in the early 1990s, too many prosecutors still believe insurance
crimes often are too complex and technical to successfully prosecute.
People Tolerate Fraud. Too many consumers believe insurance fraud is
justified. This environment of tolerance makes it much easier for con artists to
operate safely. Research by the Coalition Against Insurance Fraud reveals:
• Two of three Americans tolerate insurance fraud to varying degrees;

• Two of five Americans want little or no punishment for insurance cheats;
they blame the insurance industry for its fraud problems because they
believe insurers are unfair.
All Shapes and Sizes
Insurance fraud comes in all shapes and sizes.

Here are several examples…
Staged Auto Accidents. Juan and Maria Lopez and their 2-year-old daughter
Joanna were burned alive during an auto accident two men staged on the Long
Beach (Calif.) freeway to collect insurance money in 1997. The scammers
suddenly stopped in front of a tractor trailer the Lopezes were following. A gravel
truck then rammed the Lopezes from behind, killing the young family instantly.
Isidorio Medina Gomez and Esteban Galves Solano each received 11 years in state
prison in 1998.
Arson. Helen Tidwell hired two local teenagers to torch her Tampa restaurant,
Gram’s Country Kitchen, so she could collect insurance money in 1996. But fumes
from the gasoline the boys poured in the restaurant accidentally ignited, causing
an explosion. One boy died and the other was permanently scarred. Tidwell
received 30 years in prison in 1999.
Health Insurance Fraud (corporate). Columbia/HCA Healthcare has

agreed to pay at least $754 million after overbilling taxpayer-funded Medicare for
years. If the deal stands, it will be the largest healthcare fraud settlement in U.S.
history. The chain (now named HCA) billed Medicare for unneeded lab tests,
improper diagnoses to make patients seem sicker than they were, and disguising
unreimbursable expenses as reimbursable. Criminal charges still are pending.
Health Insurance Fraud (individual). Massachusetts orthopedic surgeon

Harold Goodman routinely gave patients potentially harmful X-rays and steroid
injections they didn’t need so he could falsely bill Medicaid. Goodman spent as
few as five minutes with each patient, giving one patient 74 X-rays and 112
steroid injections in less than three years. Goodman received six months in
prison in 2000.
Faked Death. Bonnie McCaslin bought 78 life insurance policies on her ex-
husband Timothy, who knew nothing about the policies. She then tried to collect
$11 million from dozens of life insurance companies by claiming he died in an
earthquake in Mexico in 1995. McCaslin received two years in jail in Nebraska,
but blames Timothy for not cooperating with her ruse. "He's such a jerk. If it
weren't for him, I wouldn't be in here," she told Forbes magazine.
Murder for Insurance. Dina Abdelhaq suffocated her seven-week-old

daughter Tara to collect $200,000 in life insurance money to feed her gambling
addiction in 1995. Jobless and on welfare, the Illinois resident was deeply in debt
from riverboat gambling. Tara died in her crib just two weeks after Abdelhaq took
out a life policy on the child. Abdelhaq received 21 years in prison for insurance
fraud in 2000.
Insurer Fraud. Thousands of investors, many of them retirees left almost

penniless, were financially devastated when National Heritage Life Insurance Co.
collapsed in 1995 after being looted of $450 million by company insiders. The
insiders lived lavish lifestyles while retirees who invested in the company lost
their entire life savings. Four major players were convicted in 1999, and dozens
more are charged in America’s largest insurer insolvency caused by fraud.
Property Insurance. California software distributor Irwin Bransky had a lot of

useless merchandise on his hands. So when the Northridge earthquake struck
California in 1994, Bransky ordered employees to jump on the software packages
and bend them with their hands to inflate an insurance claim. Bransky filed a $5-
million claim, and the insurer paid $840,000 before an employee blew the
whistle. Bransky received 51 months in prison in 1998.
Fighting Back
Insurance Companies Respond
• Fraud-busting units. Most insurers have made fighting fraud a priority,

more than tripling anti-fraud spending in recent years. Most insurers have
created special fraud-busting units, often staffed by former detectives and
police officers.
• Educate consumers. Many insurers actively educate consumers how to
detect and protect against fraud, and often sponsor active fraud hotline so
people can phone in tips.
• Train employees. Most insurers train employees and alert insurance agents
to spot fraud.
• Track down cheaters. Insurers also sponsor the National Insurance Crime
Bureau (NICB). The NICB is increasing the number of fraud convictions by
gathering detailed data about suspected fraud crimes, and referring them
for prosecution. The NICB also runs a national consumer fraud hotline.
States Increase Pressure
• More fraud bureaus. State insurance regulators have created 37 fraud

bureaus in 45 states, whose job is to investigate and hunt down fraud.
• Closer scrutiny of companies. Stateregulators have created a model law

that makes it harder for con artists to set up fake insurance companies.
Many states also are scrutinizing insurance company finances and market
practices more closely.
• Tougher fraud laws. Increased crackdowns in the 1990s uncovered far more
insurance fraud than anyone realized existed. To give prosecutors better
legal tools to convict crooks, the Coalition Against Insurance Fraud
developed a tough model state fraud law. Some 15 states have adopted or
strengthened their insurance fraud laws based on the Coalition’s model.
Among other provisions, this model: - creates state fraud bureaus that
help hunt down fraud artists and build strong cases against them. Many
fraud bureaus even have power to subpoena and fine crooks. - requires
insurance companies to develop thorough plans for preventing and
detecting fraud. - requires insurance applications and claim forms to warn
that fraud is a serious crime. - provides immunity to insurers when sharing
fraud information with other insurers, investigators and law enforcement.
Feds Tighten Up
Tougher health fraud penalties. Stopping widespread Medicare and

Medicaid fraud is a special focus of federal efforts. Congress has enacted tougher
penalties and expanded current federal health insurance fraud laws to cover all
payers.
More pressure on white-collar crooks. Federal law imposes stiff prison

terms and fines for white-collar criminals who loot insurance companies. The law
also heavily penalizes anyone who gives false financial information to state
insurance regulators, and forbids convicted insurance felons from returning to
insurance without permission.
Information sharing. The federal government and health insurers share fraud
info on a large scale, thus helping them discover hundreds of hidden schemes and
build stronger cases for prosecution. The Justice Department began sharing with
health insurers its own field intelligence about health frauds with health
insurance companies in 2000. The federal government further tightens the net by
collecting and sharing vast amounts of data covering convictions and other
actions against health providers under a landmark 1996 federal law.

All Lines - Adjuster - Manual - PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

All Lines - Adjuster - Manual - PDF

Uploaded by

Copyright:

Available Formats

All-Lines

Insurance essentially allows individuals and organizations to pay a scheduled and

An insurance company operates by spreading the risk of experiencing a large

Since only a small fraction of an insurance company's policyholders will

Consideration- each party must contribute something of value to the contract

Parts of the Contract:

• The named insurer and insured party.

Although not technically one of the "essential" elements of an Insurance Policy,

For example, if a jewelry store wants to purchase an insurance policy, the

The insuring agreement summarizes the major promises of the insurance

The insuring agreement contains a general description of the coverage provided,

Because premiums cannot be increased mid-policy period, endorsements are also

Endorsements are also sometimes called riders, addendums, or attachments.

Endorsements can be added to an insurance contract at any time during a policy

1. Domestic Insurer - is an insurance company that adheres to the laws of a

Private insurance generally refers to stock or mutual insurance providers who

Government insurance, commonly referred to as social insurance, is a program

Social insurance programs are characterized by:

Some examples of government insurance include Social Security, Medicare,

Private Commercial Insurers

Private commercial insurers are insurance companies that operate in order to

Private commercial insurers are required to keep a defined amount of the

Examples include Aetna Insurance, Allstate Insurance, and Nationwide

Private Non-Commercial Insurers

Private Non-Commercial Insurers operate on a non-profit basis, and return

Examples include Blue Cross and Blue Shield.

The Federal Government is considered a special non-profit provider, and

As we stated earlier, government insurance programs are always non-profit

Insurance companies can act as stock insurance companies or mutual insurance

Stock insurance companies are sometimes referred to as non-participating

Many private commercial insurers are stock insurance companies.

Mutual insurance companies are owned by the policyholders of the

Because the policyholders get the benefits of dividends, mutual insurance

A risk-purchasing group refers to a number of parties with similar insurance

A purchasing group simply consists of a number of parties interested in

For example, a group of independent grocers may elect to establish an

The Federal Liability Risk Retention Act of 1986 authorizes risk-purchasing

Fraternal Benefit Societies or Fraternal Associations are non-profit, mutual

They primarily exist as social organizations that engage in charitable or

Fraternal benefit society insurance benefits are required by law to be assessable.

A reciprocal insurer is an unincorporated group of subscribers operating

Essentially, each member of a reciprocal insurer pays their premium into an

Each reciprocal insurer generally maintains an advisory group composed of

The most famous example of a risk retention group is Lloyd's of London.

Essentially, a number of wealthy individuals and/ or organizations will come

Insurance contracts are contracts where an insurance company promises to pay

In this section, we will examine some of the unique characteristics of insurance

An insurance contract is considered a personal contract.

While we often describe insurance in terms of "insuring our car" or "insuring

It follows you as a person. Hence, an insurance contract is considered a personal

An insurance contract is classified as a contract of adhesion.

A contract of adhesion implies an unequal balance of power in the creation of the

Utmost Good Faith Contracts

An insurance contract is considered a contract of utmost good faith.

An insurance contract is considered an aleatory contract.

Insurance contracts are considered aleatory contracts because the amounts

An insurance contract is considered a unilateral contract.

A unilateral contract is a contract where only one of the participating parties

An insurance contract essentially exchanges an act from the policyholder (paying

Insurance contracts are considered conditional contracts because certain

In order to understand how risk management works, we first need to understand

When you purchase professional liability insurance, the insurance company

Remember, the insurance company views a risk as the potential for a