Casualty Insurance Test Prep

A class is a group of businesses who have similar exposures, so they get grouped together for rating purposes. Classification is the creation of general categories of businesses for rating purposes.

Casualty insurance does not cover an insured’s own property damage. Casualty insurance is non-property coverage. The insured’s own property is insured under a separate Property policy. Casualty covers an insured’s legal liability for damage to another (e.g. personal injury caused by the insured’s negligence) or damage to another’s property and also includes worker’s compensation, crime, fidelity and surety.

Supplementary costs are the insured’s costs that are covered by liability insurance, aside from costs paid for any injuries or damages (those are covered under the primary coverage). Supplementary costs are paid to the insured in addition to the policy’s liability limits. Examples of supplemental costs are:

-Costs for a legal defense (e.g., an attorney)
-First aid provided during and immediately after an accident
-Claim investigation costs
-Premium payments for bonds, such as bail bonds or bond required in the event of an appeal from a court decision
-Lost earnings as the result of missed work related to the claim (e.g., lost time from work due to appearing in court)
-Pre and post judgment interest, in the event that it is not a standard damage as defined in the policy

An indirect loss (a/k/a consequential loss) is a financial loss sustained due to a direct loss (e.g. car rental cost if the insured’s vehicle is out of service due to an accident).

An aleatory contract is a contract where an uncertain event determines the parties’ rights and obligations. In an aleatory contract, the exchange of value between the two parties may not be equal. Insurance contracts are aleatory contracts, since a payout only occurs if an uncertain event occurs. The insured does not receive a payout if the event does not occur, so the insured may never receive anything in exchange for their premium payments. On the other hand, when the event does occur, the payout by the insurance company may be more than the amount received in premiums.

A countersignature is the signature of a licensed agent on an insurance policy that is required to validate the policy.

Commercial general liability insurance (CGL) is a commercial insurance liability policy that has a few components: 1) Premises and operations covers bodily injury, property damage, personal and advertising, and other types of liability arising from the business activities caused by the insured; 2) Products/completed operations is a business’ liability that is caused by a business’ defective products or operations; and 3) Indirect or contingent liability, which is a business’ liability resulting from the actions of others (e.g., agents, employees and contractors).

Underlying coverage is the first, basic or primary layer of insurance coverage that pays the covered loss. Once the underlying coverage is exhausted, any other layers of coverage will pay an amount beyond the policy limits of the underlying policy coverage. For example, an insured may have an excess or umbrella policy of liability insurance. If the primary policy has a $100,000 liability coverage limit, and the insured is responsible for paying anything above the $100,000 limit, the excess coverage will pay the remaining amount, up to the coverage amount limit of the excess policy.

The maximum total coverage amount available for Coverages A, B, and C is the general aggregate limit, however, it does not include damages related to the products-completed operations hazard. Products-completed operations covers liability caused by a defective product or due to the business’ operations. The products-completed operations aggregate limit is the maximum amount Coverage A pays out for damages related to the products-completed operations hazard.

For commercial general liability insurance, Coverage A covers bodily injury and property damage liability. It provides reimbursement of the insured’s expenses, such as legal defense costs, and for damages resulting from any findings of liability for bodily injury or property damage caused by an event, such as an accident, by the insured.

Coverage B covers an insured for personal injury and advertising injury liability (e.g., defamation). It covers the insured’s expenses, such as legal defense costs, as well as damages if the insured is found liable for libel (written defamation) or slander (verbal defamation). Advertising injury includes oral or written statements that libel or slander a person or an organization or their products or services. Also covered are copyright or trademark infringement, oral and written statements infringing upon a person’s right to privacy and advertising someone else’s misappropriated ideas or business methods.

Coverage C covers medical payments resulting from bodily injury, regardless of who was at fault, for an injury occurring on or next to the insured’s premises or is related to the insured’s business activities.

An aleatory contract is a contract where an uncertain event determines the parties’ rights and obligations. In an aleatory contract, the exchange of value between the two parties may not equal. Insurance contracts are aleatory contracts, since a payout only occurs if an uncertain event occurs. The insured does not receive a payout if the event does not occur, so the insured may never receive anything in exchange for their premium payments. On the other hand, when the event does occur, the payout by the insurance company may be more than the amount received in premiums.

The insuring agreement states the insurance company will make payment if a covered loss occurs, subject to any conditions or exclusions contained in the policy.

This declarations page states the policy owner’s name and also who is responsible for making premium payments and entitled to the return of any premiums for a cancelled policy.

Exclusions exclude coverage for losses resulting from certain events.

Compensatory (a/k/a/ Actual) damages reimburse a party for a loss sustained in order to make the party whole, such as paying for a party’s automobile damage sustained in an accident with a negligent party.

The conditions section of an insurance policy explains the rights and obligations of the insured and the insurance company.

Risk is the likelihood or chance of injury, damage or loss to a person or thing. A peril is the specific event that causes a loss (e.g., weather-related disaster, fire, accident, theft).

Hazards are things that increase the chance of loss. The tree types of hazards are:
-Physical hazard – Relates to the actual use or occupancy of property (e.g. Improper electrical wiring)
-Moral hazard – Concerns someone’s chance of engaging in dishonest, immoral or illegal conduct (e.g. A person burns their own property in an attempt to claim a loss and obtain money from an insurance company)
-Morale hazard – Involves losses caused by someone’s negligent or careless conduct

The notice of claim provision in an insurance policy requires the insured to inform the insurance company about any claim that the insured seeks to file. It is the first step in filing a claim and is often accomplished by telephone or an online claims submission. It is an important aspect of a policy, since failure to provide timely notice could result in delays or the complete denial of a claim.

An insured must provide the insurance company with a proof of loss statement in order for a claims investigation to commence. The investigation is required to determine if the insurance company will approve or deny a claim.

Clarity is not a requirement to enter into an insurance contract. In fact, insurance contracts are typically written by one party– the insurance company– so they are unilateral contracts that may sometimes contain provisions that are not entirely clear. Because the insurance company writes the insurance contract, ambiguous provisions are typically applied in favor of the insured by the courts.

A contract of insurance is only legally valid if it meets certain criteria:

-Competent Parties: Both parties must be legally competent. Minors are not legally competent. Additionally, someone that is insane or under the influence of a chemical substance is not legally competent
-Offer and acceptance: There must be an agreement. An offer must be made by one party and accepted by the other party
-Legality: The contract must conform with all laws
-Consideration: All parties must agree on compensation in exchange for the required services to be provided (e.g., the insurance company agrees to pay any claims, in the event that a covered loss occurs)

There are various types of damages that a party found liable may be required to pay:

Punitive damages are intended to punish improper conduct. For example, when an oil company recklessly causes a spill, punitive damages could be awarded to punish the company and to deter future similar conduct.

Compensatory (a/k/a/ Actual) damages reimburse a party for a loss sustained in order to make the party whole, such as paying for a party’s automobile damage sustained in an accident with a negligent party. Other types of compensatory damages include:

1) Special damages are compensatory in nature, since they cover the injured party’s expenses, such as medical bills.

2) General damages compensate an injured party for non-economic expenses. For example, a party may recover damages due to pain and suffering resulting from an accident.

In the event that an insurance company orders an investigative consumer report, it is required to send the applicant an initial written notice within three days of the order. The applicant can then request additional information, which must be provided by the insurance company within five days. The applicant also has the right to challenge any of the information contained in the report. Moreover, if the insurance company raises rates or denies coverage based upon information in the credit report, the carrier has to specify the specific information from the report that led to the decision.

Credit reports are considered consumer or investigative consumer reports. The consumer report is a standard credit report. Credit reports cannot include any bankruptcy information that is older than ten years or legal actions that are older than seven years. According to the Federal Fair Credit Reporting Act (FCRA), the term “investigative consumer report” means a consumer report or portion thereof in which information on a consumer’s character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer reported on or with others with whom he is acquainted or who may have knowledge concerning any such items of information.

The FCRA also requires that insurance companies notify applicants in writing, in the event that the carrier takes any adverse action against the applicant, based upon the information obtained from an applicant’s credit report. For example, the insurance company may analyze the credit history to determine if the applicant can afford the insurance premiums and ascertain that the applicant has a low credit score. If the insurance company determines that the applicant is a credit risk and decides to issue the policy, but with a premium surcharge because of the poor credit, that adverse action must be disclosed to the applicant in writing. Additionally, if the insurance company locates a prior adverse action taken against the applicant, the carrier must provide the FCRA notice to the applicant for that as well, even though the prior action was taken by a different insurance company. Rejecting and returning an application to an applicant to provide missing information is not an adverse credit decision, nor is it an outright denial of the application, since the information could be provided and the application can be processed again.

Advertising injury liability (e.g., defamation) under Coverage B provides coverage for the insured’s expenses, such as legal defense costs, as well as damages if the insured is found liable for libel or slander. Advertising injury includes oral or written statements that libel (written) or slander (verbal) a person or an organization or their products or services. Also covered are copyright or trademark infringement, oral and written statements infringing upon a person’s right to privacy and advertising someone else’s misappropriated ideas or business methods.

A business liability policy covers business conduct. While advertising coverage is part of a business policy, advertising coverage is the more specific and best answer.

A professional liability insurance policy (also known as errors and omissions insurance) provides coverage for liabilities related to a profession where professional advice or services are provided. The coverage protects against damages caused by an error or omission in the service or product sold by the policyholder. For example, a doctor or attorney requires malpractice insurance, which is a type of professional liability insurance.