INS 22 Reference Guide PDF

INS 22 Reference Guide
INS 22 – Reference Guide
Chapter 1 -Overview of Personal Insurance ....................................................................... 8

1.1 Property Loss Exposures........................................................................................... 8
1.1.1. Elements of Property loss exposures .............................................................. 8
1.1.2 Classification of personal property .................................................................... 8
1.2 Property Loss Exposures........................................................................................... 9
1.2.1 Elements of Liability loss exposures ................................................................. 9
1.2.2 Types of claims .................................................................................................. 9
1.3 Liability Loss Exposures......................................................................................... 10
1.3.1 Basics of Personal Risk Management (risk management applied to loss
exposures of individuals and families) ..................................................................... 10
1.3.2 Techniques to treat loss exposures ................................................................... 10
1.3.3 Types of Personal Insurance Policies .............................................................. 10
Chapter 2 – Automobile Insurance and Society ............................................................... 11
2.1 Problems associated with automobile insurance..................................................... 11
2.1.1 High Frequency of Auto Accidents ................................................................. 11
2.1.2 High Costs of Automobile Accidents .............................................................. 11
2.1.3 Underwriting Losses ........................................................................................ 11
2.1.4 Irresponsible Drivers ........................................................................................ 11
2.1.5 Availability & Affordability of Automobile Insurance ................................... 11
2.2 Compensation of Auto Accident Victims ............................................................... 12
2.2.1 The Tort Liability System .................................................................................... 12
2.2.2 Financial Responsibility Laws ............................................................................. 12
2.2.3 Compulsory Insurance Laws................................................................................ 12
2.2.4 Unsatisfied Judgment Funds ............................................................................ 13
2.2.5 Uninsured Motorists Coverage ........................................................................ 13
2.2.6 Underinsured Motorists Coverage ................................................................... 13
2.2.7 Low Cost Auto Insurance ................................................................................ 13
2.3 No Fault Automobile Insurance .............................................................................. 13
2.3.1 Characteristics of No-Fault Laws .................................................................... 14
2.3.2 Types of No Fault Laws ................................................................................... 14
2.3.3 Evaluation of No-Fault Laws ........................................................................... 15
2.4 Automobile Insurance for High Risk Drivers ......................................................... 15
2.4.1 Automobile Insurance Plans ............................................................................ 15
2.4.2 Joint Underwriting Associations ...................................................................... 15
2.4.3 Reinsurance Facilities ...................................................................................... 16
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2.4.4 Specialty Insurers ............................................................................................. 16

2.5 Regulation & Rating of Personal Auto Insurance................................................... 16
2.5.1 Restrictions on Cancellation or Renewal ......................................................... 16
Restrictions on Cancellation ..................................................................................... 16
Restrictions on Renewal ........................................................................................... 16
2.5.2 Rate Regulation ................................................................................................ 17
Chapter 3 – Personal Auto Policy (PAP) Part - I .............................................................. 18
3.1 Overview of PAP .................................................................................................... 18
3.1.1 Summary of Coverages .................................................................................... 18
3.1.2 Declarations ..................................................................................................... 18
3.1.3 Agreement & Definitions................................................................................. 18
3.2 Part A – Liability Coverage .................................................................................... 19
3.2.1 Insuring Agreement ............................................................................................. 19
3.2.2 Insured Persons .................................................................................................... 19
3.2.3 Supplementary Payments ..................................................................................... 20
3.2.4 Liability Coverage Exclusions ......................................................................... 20
3.2.5 Limit of Liability.............................................................................................. 20
3.2.6 out-Of-The-State Coverage .............................................................................. 21
3.2.7 Compliance with Financial Responsibility Laws ............................................ 21
3.2.8 Other Insurance ................................................................................................ 21
3.3 Part B – Medical Payments Coverage .................................................................... 21
3.3.1 Insuring Agreement ......................................................................................... 21
3.3.2 Insured Persons ................................................................................................ 21
3.3.3 Medical Payments Exclusion ........................................................................... 21
3.3.5 Other Insurance ................................................................................................ 22
3.4 Part C - Uninsured Motorists Coverage .................................................................. 22
3.4.2 Insured Persons ................................................................................................ 22
3.4.3 Uninsured Motor Vehicles – Coverage Eligibility .......................................... 22
3.4.4 Exclusions ........................................................................................................ 23
3.4.5 Limit of liability ............................................................................................... 23
3.4.6 Other Insurance ................................................................................................ 23
3.4.7 Arbitration ........................................................................................................ 23
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Chapter 4 – Personal Auto Policy (PAP) Part- II ............................................................. 24

4.1 Part D – Physical Damage Coverage ...................................................................... 24
4.1.2 Transportation Expenses .................................................................................. 25
4.1.3 Exclusions ........................................................................................................ 25
4.2 Duties After Accident or Loss ................................................................................ 26
4.2.1 General Duties ..................................................................................................... 26
4.2.2 Additional Duties for uninsured motorists coverage ........................................... 26
4.2.3 Additional Duties for Physical Damage Coverage .............................................. 27
4.3 Part – F General Provisions .................................................................................... 27
4.3.1 Bankruptcy of the insured ................................................................................ 27
4.3.2 Changes in Policy ............................................................................................ 27
4.3.3 Fraud ................................................................................................................ 27
4.3.4 Legal Action against Insurer ............................................................................ 27
4.3.5 Insurer’s right to recover payment ................................................................... 27
4.3.6 Policy Period & Territory ................................................................................ 27
4.3.7 Termination ...................................................................................................... 27
4.3.8 Transfer of Insured’s interest in the policy ...................................................... 28
4.3.9 Two or More Auto policies .............................................................................. 28
4.4 Endorsements of PAP ............................................................................................. 28
4.4.1 Endorsement covering motorcycles, recreational vehicles & customizing
equipment .................................................................................................................. 28
4.4.2 Other Endorsements affecting Multiple Coverages ......................................... 29
4.4.3 Underinsured Motorists Coverage Endorsement ............................................. 30
4.4.4 Endorsements Affecting Physical Damage Coverage ..................................... 30
Chapter 5 - Homeowners Insurance: Section I ................................................................. 31
5.1 Homeowners 3 Special Form: HO3 (HO2000) Policy....................................... 31
5.2 Structure of the HO-3 Policy.............................................................................. 31
5.2.1 Declarations Page........................................................................................ 31
5.2.2 Agreement ................................................................................................... 31
5.2.3 Definition .................................................................................................... 32
5.2.3.1 Named Insureds’ and other ‘Insureds’ .......................................................... 32
5.2.3.2 ‘Residence Premises’ and ‘Insured Location’ .............................................. 32
5.2.3.3 Deductible ..................................................................................................... 32
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5.2.3.4 Section I: Property Coverages ...................................................................... 32

5.2.3.5 Coverage A: Dwelling .................................................................................. 32
Chapter 6 – Homeowners Insurance ................................................................................. 33
6.1 Section II – Conditions ........................................................................................... 33
6.2 Section I and II – Conditions .................................................................................. 34
Chapter 7 – Other Residential Insurance .......................................................................... 35
7.1 Dwelling Policies .................................................................................................... 35
7.1.1 Structures eligible for Dwelling Policy............................................................ 35
7.1.2 Dwelling Policy Programs ............................................................................... 35
7.1.3 ISO Dwelling Policies...................................................................................... 35
7.1.4 Coverages ......................................................................................................... 35
7.1.5 Perils Insured Against ...................................................................................... 37
7.1.6 Coverage for Liability & Theft Losses ............................................................ 37
7.2.1 Exposures ............................................................................................................. 37
7.2.2 Mobile Home Coverages ..................................................................................... 38
7.2.3 AAIS MH Owners Program................................................................................. 39
7.3 Personal Insurance for Farms and Ranches ............................................................ 39
7.3.1 AAIS Farmowners Program ............................................................................ 39
7.3.2 Policy Overview (AAIS Program) ................................................................... 39
7.3.3 Property Coverages .......................................................................................... 39
7.3.4 Farm Personal Liability Coverage ................................................................... 40
7.3.5 ISO HO Endorsements for FARMS ................................................................ 40
7.3.6 Livestock Collision Coverage .......................................................................... 40
7.4 Flood Insurance ....................................................................................................... 40
7.4.1 Community Eligibility ..................................................................................... 41
7.4.2 Amount of Insurance........................................................................................ 41
7.4.3 Waiting Period ................................................................................................. 41
7.4.4 Write-Your-Own Program ............................................................................... 41
7.5 Insurance for Hard-To-Insure Residences .............................................................. 41
7.5.1 FAIR Plans ....................................................................................................... 41
7.5.2 Beachfront and Windstorm plans..................................................................... 42
Chapter 8 ........................................................................................................................... 43
8.1 Inland Marine Floaters ............................................................................................ 43
8.1.1 Characteristics of Inland Marine Floaters ........................................................ 43
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8.1.2 Inland Marine Floater Policy Provisions ......................................................... 43

8.1.3 Types of Personal IMF..................................................................................... 43
8.2 Personal Watercraft Insurance ................................................................................ 44
8.2.1 Property Loss Exposures.................................................................................. 44
8.2.2 Liability, Medical Payments and Uninsured Boaters Exposures ..................... 44
8.2.3 Limited Watercraft Coverage Under HO and PA policies. ............................. 44
8.2.4 Personal Watercraft Policies ............................................................................ 45
8.3 Personal Umbrella Liability Insurance ................................................................... 46
8.3.1 Nature of Personal Umbrella Coverages.......................................................... 46
8.3.2 Personal Umbrella Coverage ........................................................................... 47
Chapter 9 – Personal Loss Exposure & Financial Planning ............................................. 48
9.1 Personal Loss Exposures......................................................................................... 48
9.2 Planning For Future ................................................................................................ 48
9.2.1 Developing a Financial Plan ............................................................................ 48
9.2.2 Common Financial Goals ................................................................................ 49
9.3 Investing to Attain financial goals .......................................................................... 49
9.3.1 Investment Objectives ...................................................................................... 49
9.3.2 Investment Risks .............................................................................................. 49
9.3.3 Types of Investments ....................................................................................... 49
9.4 Retirement Planning................................................................................................ 50
9.4.1 Importance of Retirement Planning ................................................................. 50
9.4.2 Investing for retirement.................................................................................... 50
9.5 Tax Deferred Retirement Plans ............................................................................... 51
9.5.1 Private Pension Plans ....................................................................................... 51
9.5.2 Traditional Individual Retirement Account (IRA) .......................................... 51
9.6 Individual Annuities................................................................................................ 53
9.7 Social Security ........................................................................................................ 53
9.7.1 Basic Characteristics of OASDI ...................................................................... 53
9.7.2 Covered Occupations ....................................................................................... 53
9.7.3 Insured Status ................................................................................................... 54
9.7.4 Types Of Benefits ............................................................................................ 54
Chapter 10 - Life Insurance .............................................................................................. 55
10.1 Premature Death.................................................................................................... 55
10.2 Need for Life Insurance ........................................................................................ 55
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10.2.1 Singles ............................................................................................................ 55

10.2.2 Single-Parent families .................................................................................... 55
10.2.3 Two-Income Families .................................................................................... 55
10.2.4 Traditional families ........................................................................................ 55
10.2.5 Blended Families ........................................................................................... 55
10.2.6 Sandwiched Families ..................................................................................... 56
10.3 Determining the Amounts of Life Insurance to Own ........................................... 56
10.3.1 Needs Approach ............................................................................................. 56
10.4 Types of Life Insurance ........................................................................................ 56
10.4.1 Term Insurance .............................................................................................. 56
10.4.1.1. Types of Term Insurance ........................................................................... 57
10.4.1.2. Uses of Term Insurance ............................................................................. 57
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Chapter 1 -Overview of Personal Insurance
Personal Insurance covers losses to individuals and families due to death, illness, injury, disability
and unemployment.
Loss exposure presents the possibility of financial loss, whether or not loss occurs.
1.1 Property Loss Exposures
Property loss can occur because of it being destroyed, damaged, stolen, lost or reduced in value
by a cause of loss (peril).
1.1.1. Elements of Property loss exposures
 Property exposed to loss

o Real property – Land, building and other structures embedded in it or attached to
it. E.g.: Underground pipes, foundations, storage shed, and detached garage.
o Personal Property – tangible / intangible property that is not real property. E.g.
Patent, Copyright, Coins
 Possible causes of loss – means by which property is damaged/destroyed (perils)
 Financial consequences of loss
o Reduction in value of property: pre- loss value – post-loss value
o Increased expenses – in addition to normal living expenses
o Lost income
1.1.2 Classification of personal property
 Dwelling contents:
o Broadest category of personal property
o Common to the use of dwelling as a home
o Items generally insured as a group
 High-value personal property:

o Silverware, jewellery, furs and firearms
o Can be partially covered under dwelling contents, however might require
separate category because of limitations on coverage amount.
o To keep premium reasonable for the average customer, might have to pay
additional premium to insure such property
 Property with unusual or intrinsic value:

o Value comes from its unique characteristics
o Antiques, work of art, coin or stamp collections
o Value is established by appraisal at the time of purchase of insurance
 Business personal property

o Office furniture, computer equipment for business purpose
o Additional coverage might be necessary for this exposure
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 Motor vehicles, trailers, watercraft and aircraft

o Present unique loss exposures – should be separately insured
1.2 Property Loss Exposures
1.2.1 Elements of Liability loss exposures
Liability loss is a claim for money damages because of injury to another party or its property.
 Possibility of a claim for money damages: Claims are governed by civil law – the legal
foundation of insurance
 Financial consequences that might occur

o Cost of investigation and defense
o Money damages awarded if defense is unsuccessful
Civil law deals with rights and duties of citizens regarding one another
1.2.2 Types of claims
 Tort Liability: Tort – a wrongful act other than a crime or breach of contract
o Negligence – failure to act in a reasonably prudent manner

 A duty to act
 Breach of duty
 Injury or damage
 Breach of duty – the direct cause of injury/damage
o Intentional torts – regardless of whether harm is intended – deliberate act

 Libel – written or printed untrue statement
 Slander – oral untrue statement
 Assault – intentional and unlawful threat of bodily harm
 Battery – unlawful physical contact
 Trespass – unauthorized possession or use of land.
 Nuisance – violation of a person’s right to enjoy use of property without
disruption from outside sources
o Absolute liability- dangerous activities/defective products, regardless of degree

of care, it does not require proof of negligence
 Contractual Liability
o Liability assumed under any contract
o Breach of warranty
 Statutory Liability
o No- fault auto laws
o Workers compensation laws
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1.3 Liability Loss Exposures
Carrying out decisions that will decrease the adverse effects of potential losses is risk
management.
1.3.1 Basics of Personal Risk Management (risk management applied to loss exposures of
individuals and families)
It involves the following steps:

 Identifying loss exposures
 Analyzing loss exposures
 Examining various techniques
 Choosing the appropriate technique
 Implementing the chosen technique
 Monitoring and revising the plan
Errors and omissions: Negligent act (error) or failure to act (omission) while conducting
insurance business. – Can lead to legal liability of damages
1.3.2 Techniques to treat loss exposures
 Loss Control
 Loss prevention: control frequency of loss
 Loss reduction: controls severity of loss
 Avoidance: by choosing not to own a particular property or engage in particular

activity
 Noninsurance Transfer: transfers loss from one party to another party that is not an
insurer.
 Retention: no transfer of loss exposures to insurance company or anyone else.

 Intentional
 Unintentional
1.3.3 Types of Personal Insurance Policies

Package policy includes two or more lines of insurance: E.g.: Homeowners and Personal
Auto Policy
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Chapter 2 – Automobile Insurance and Society
2.1 Problems associated with automobile insurance

Following are the problems in obtaining automobile insurance -
2.1.1 High Frequency of Auto Accidents
The accident frequency has increased due to -

 Drunk Driving
 Tailgating
 Falling asleep at wheel, using cell phones
 Driver aggression
2.1.2 High Costs of Automobile Accidents
 Costs over $50bn in a year.

 Losses include property loss, medical expenses, legal expenses, lost income & emergency
services
 Medical & legal costs are steadily rising
2.1.3 Underwriting Losses
 Insurers have experienced underwriting losses in many states when premiums are less
than the costs of losses and expenses in meeting losses
 Insurers increase premiums and tighten eligibility requirements so many motorists are not
able to obtain insurance in the standard market
2.1.4 Irresponsible Drivers

There are 3 categories of drivers who fall into this group –
 Drivers with no automobile insurance

o Cannot pay for the damages caused and are bad drivers
 Drivers under influence of alcohol & drugs

o States have tightened laws for drunk driving and drug abuse
 Other high-risk drivers
o Habitually violate traffic laws

o Involved in a large number of accidents
o Driving with a suspended license
o Individuals have high probability of a high-risk accident
2.1.5 Availability & Affordability of Automobile Insurance

 Coverage is available to certain drivers at higher premiums than to others at standard
premiums
 Drivers with bad traffic records are not able to obtain insurance
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2.2 Compensation of Auto Accident Victims

People injured or incurring losses from auto accidents due to negligence of owners or auto
operation. The insurers and state governments have designed following approaches for
compensating auto accident victims -
2.2.1 The Tort Liability System

 This method is based on Fault
 Most common form of tort liability is ‘negligence’
 Auto operators and owners are generally at fault should exercise ‘reasonable care’ to
prevent others from coming to harm
 The injured party must prove that the loss was incurred from the negligence of another
party
 Contributory Negligence Law – If the injured party is also responsible in some way for
injury, then he loses the right to collect damages. Applicable in some states
 Comparative Negligence Law – If the injured party is less responsible in some way for
injury, then he has the right to collect proportionate damages
 Tort Reforms – Proposed legislation to reduce legal costs arising out of negligence
lawsuits
2.2.2 Financial Responsibility Laws

Require motorists to provide proof of financial responsibility (like liability insurance) in
following conditions (failure means suspension of license and vehicle registration) –
 After occurrence of an auto accident involving bodily injury or property damage
exceeding a dollar amount.
 After conviction of a serious offence such as rash driving, reckless driving or losing a
driver’s license due to repeated violations
 Upon failure to pay a judgment that results from an auto accident
Following are the defects in the laws –
 Becomes effective after an accident or judgment but do not guarantee that a negligent
driver will pay for the loss
 Financial responsibility laws do not guarantee payment to all accident claims
 Delay in legal system causes considerable delay in compensating accident victims
 Inured persons might not be fully indemnified for their injuries
2.2.3 Compulsory Insurance Laws

 Require auto liability insurance for all motorists that drive the state
 Minimum limit should be carried before vehicle is registered.
 The following are the defects in compulsory insurance laws -
o Compulsory insurance laws do not guarantee compensation to all accident
victims
o Compulsory insurance laws provide incomplete protection
o There can be considerable delay in the legal system until the victims are
compensated
o Compulsory insurance laws might not reduce the number of uninsured motorists
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o Insurers argue that compulsory laws restrict their freedom to select profitable
insureds
o Consumer advocates argue that if insurers are allowed to increase rates they may
become high for good drivers
o Compulsory insurance laws do nothing to prevent or reduce the number of
automobile accidents
2.2.4 Unsatisfied Judgment Funds

Unsatisfied judgment funds are established by states to compensate victims who have obtained
court judgment but the negligent party cannot pay.
 Maximum amount paid is limited to state’s minimum compulsory amount
 Negligent driver must repay the fund or driver’s license is revoked until he reimburses
the fund
 States obtain funds by assessing insurers, by charging motorists a fee, by assessing
uninsured driver & surcharging motorists for moving violations
Those opposed to these point out the following flaws –

 Financing is inequitable because insured motorists within a state are charged a fee
 Administration of funds is cumbersome and slow
 Uninsured motorists are not able to pay full amounts
 Financial problems due to inadequate funding
2.2.5 Uninsured Motorists Coverage

 Financial protection against an uninsured driver
 Drawbacks are –
o Person might not be fully compensated
o Legal responsibility of the uninsured motorists must be established
o Property Damage is excluded in most states
o The victim is paying for insurance of some other negligent person
2.2.6 Underinsured Motorists Coverage

 Financial protection when the negligent driver who cannot pay for all damages
 Applies only when a liability is not met fully. Uninsured coverage does not apply along
with this
 Can be underwritten if the following conditions are met –
o It must be included in the policy
o Limit of this coverage is more than state’s minimum financial liability limit
o Limit for underinsured and uninsured coverages must be the same
o Policy must apply to all automobiles
2.2.7 Low Cost Auto Insurance

 Decreasing the number of uninsured drivers by providing minimum liability coverage at
available at reduced cost
 Not a success so far
2.3 No Fault Automobile Insurance

 Insured can collect damages from insurers regardless who was at fault
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 Monetary Threshold – Claim has to be below a monetary threshold to avail this

coverage. If higher, damages to be sought from the negligent party
 Verbal Threshold – Mentioned specifically the injuries that are covered under this
insurance and what are to be paid by the negligent driver. Damages have to be collected
from the insurer if specified
2.3.1 Characteristics of No-Fault Laws

 Remove the need to prove negligence
o Quick payments of benefits
o Define the additional benefits that need to be taken from the party at fault
Typical No Fault Benefits

 PIP (Personal Injury Protection) benefit is added to the policy by insurers for providing
no fault benefits
 Benefits given by endorsement are limited to economic loss of the insured – medical
expenses, loss of wage, other expenses, etc
 Non-economic losses (pain, suffering, anguish, etc.) to be recovered from the negligent
party
 Typical No-Fault Benefits are –
o Medical Expenses – paid upto some maximum limit
o Rehabilitation Expenses - paid in addition to medical expenses
o Loss of earnings
o Expenses for essential services
o Funeral Expenses
o Survivor’s loss benefits
Right to seek compensation from party at fault

 Depends on the state no-fault laws
 Usually insured has the option to receive no fault benefits, instead of seeking
compensation
 No-fault insurer can collect benefits from the negligent party
Exclusion of Property Damage

 No-fault laws generally apply to injuries and not to property damage.
 Property damage compensation is sought from the party at fault. Reasons -
o Property damage is small and applies to vehicles
o Amount of damage to property is easier to determine
o Auto insurers can generally settle for damage from insured’s property quickly
2.3.2 Types of No Fault Laws
Pure No-Fault System

 Would have abolished tort liability insurance systems for collecting damages from the
negligent party
 Generally a modified system is used in states
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Add-On Plans
 Injured person retains the right to seek compensation and damages from the negligent
party
 Under this law, policyholder has the right to decline to purchase no-fault insurance
whereas the insurer has to offer it
Modified No-Fault Plans

 The right to seek compensation and damages from the negligent party is limited but the
injured person can still seek them
 The claim has to be above modified threshold or verbal threshold to seek these damages
Choice No-Fault Plans

 Insured has the choice whether to be covered by no-fault plan or not
 Insured pays a higher premium if the no-fault plan is selected
 Lower premium is for limitations on tort recovery
2.3.3 Evaluation of No-Fault Laws
Arguments in Favor of No-Fault Laws

 Eliminate the need to determine fault - difficult task in accidents
 Eliminate in-equities in claim payments – small claims overpaid & serious claims
underpaid
 Correcting the limited scope of the present system. Beneficiaries collect less under the
system
 Decreasing the proportion of premium dollar used for claim investigation and legal costs.
 Avoiding delay in payments
Arguments Against No-Fault Laws

 Defects of present tort liability system are exaggerated – most claims settled out of court.
 No fault might penalize safe drivers
 Claims of premium savings and greater efficiency are overstated and unreliable
 No-fault benefits do not include payment for pain and suffering
 The present tort system needs to be reformed and not replaced
2.4 Automobile Insurance for High Risk Drivers

 Obtain insurance from the residual market
2.4.1 Automobile Insurance Plans

 Eliminate the need to determine fault - difficult task in accidents
 Each insurer writes a proportionate amount of high-risk drivers insurance commensurate
with the percentage of the total number of drivers it underwrites insurance for
 Certain persons may be ineligible for coverage due to their past felony records
 Premiums are generally higher than the premiums in the standard market
2.4.2 Joint Underwriting Associations

 JUA sets rates and approves policy forms for high-risk drivers
 A limited number of insurance companies act as servicing insurers
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 Servicing insurers runs all the underwriting and claims operations

 All companies pay the proportionate share of joint underwriting losses according to the
insurance underwritten in the state
2.4.3 Reinsurance Facilities

 Insurers accept all auto applications and classify certain drivers as high-risk drivers &
assign their risk for reinsurance
 All insurers doing business in the state share underwriting losses in proportion of the
business they do in the state. State-wide reinsurance pool is created by the insurers in
which, premiums and losses for high-risk drivers are assigned
2.4.4 Specialty Insurers

 Specialize in insuring drivers with poor-driving records.
 Following are the characteristics –
o Premiums are substantially higher than premiums in standard market
o The amount of insurance is at least equal to state’s financial responsibility or
compulsory insurance
o Medical payments coverage may be limited
o Medical coverage is limited
o Collision coverage comes with a high deductible
2.5 Regulation & Rating of Personal Auto Insurance

 Auto insurance is required for -
o States require insurance for vehicles to legally operate in the state
o Protect the insured from financial liability or hardship
2.5.1 Restrictions on Cancellation or Renewal

 Protect policyholders from the following unfair actions of the insurer –
o An insurer’s decision to stop coverage in a geographic area
o An insurer’s decision to stop coverage for a particular group as young drivers
o An insurer’s decision to eliminate authority of a particular agent to stop selling
insurance policies
o Cancellation of a policy of the insurer after a single loss
Restrictions on Cancellation
 Coverage is terminated before the policy expiry date
 Do not apply to policies that are not in force for less than a certain period (60 days).
 A certain number of days notice is required. Also required to indicate that insurance is
available under residual plan
 Following reasons are allowed for cancellations –
o Non- payment of premium
o Suspension or revocation of driver’s license
o Submission of false or fraudulent claim
o Material Misrepresentation of underwriting information
o Violation of policy terms or conditions
Restrictions on Renewal
 Usually insurers can non-renew the policy subject to following -
o Written notice that policy will not be renewed
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o A certain number of days advance notice

o Many states require to give reason for non-renewal
2.5.2 Rate Regulation

 State ensure that rating laws should not be unfairly discriminatory
 Rating should be adequate and discriminatory
Primary Rating Factors

The following are the major factors for determining insurance premium –
 Age
 Gender
 Marital Status – younger married males have lower rates of insurance.
 Territory – Location of insured’s residence
 Uses of an auto – Rates are lowest for farm and highest for business use
 Good Student Discount
 Driver Education Credit – 10% discount on completing course
Other Rating Factors

The following are the secondary factors for determining insurance premium –
 Driving Record – most important factor
 Type Of Vehicle - performance, age, brand
 Number of Vehicles – More vehicles imply discount
 Deductibles – higher deductibles – significant credit
 Liability Limits – Rates are based on minimum insurance rates in the state.
Other Discounts & Credits

Some insurers give credit for the following -
 Anti-theft devices
 Passive restraints
 Defensive driving courses
 Senior citizens
 Farmers
 Nonsmokers
 Number of years of continuous coverage with an insurer (anniversary discount).
 Multi-Policy Discount
 Reduced vehicle use by students
Matching Price to Exposure

Insureds are classified into –
 Preferred
 Standard
 Nonstandard
Prices are charged commensurate with their classification. Different rates for different levels of
loss exposures are provided to the applicants
Competition among Insurers

 When losses are low and profits favorable, price war among insurers
 In reverse case, the rates are increased and applicants are screened with more selectivity
 Must always meet state’s requirements for rates
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Chapter 3 – Personal Auto Policy (PAP) Part - I
3.1 Overview of PAP

 Designed for private passenger autos
 Can also be used to cover mobile homes, golf carts, snowmobiles, motor cycles etc
3.1.1 Summary of Coverages
Part A–Liability Coverage – Protects the insured from a suit or claim for bodily injury or
property damage arising out of operation of an auto
Part B– Medical Payments Coverage – For reasonable & necessary medical payments arising
out of bodily injury to the insured in an auto accident
Part C– Uninsured Motorists Coverage – Provides protection if the insured has suffered losses
from an uninsured motorist, a hit-and-run driver or insolvent insurer motorist.
Part D– Coverage for damage to your auto – Protection for damage to auto & certain non-
owned auto (Physical Damage Coverage).
Part E– Duties After an accident or Loss – Duties of an insured after an accident or loss.
Part F– General Provisions – information about cancellation or termination of policy, terms &
conditions, etc. are included.
3.1.2 Declarations
It contains parties, vehicles involved and coverages provided by the insurer. Following
information is given –
 Insurance Company – Name
 Named Insured – can be an individual, married couple or other parties
 Policy Period – Date & time of start and end of coverage
 Description Of Insured Auto Insured – vehicles & trailers
 Schedule of Coverages – Coverages, limits and deductibles to all listed vehicles
 Applicable Endorsements – Contains all endorsements like snowmobiles
 Lienholder – Name of financing bank or owner or institution if the vehicle is leased or
owned & financed by a bank
 Garaged Location – Place where the vehicle is primarily garaged
 Rating Information – Rating class of vehicle and any discounts if applicable
 Signature of signing parties in the agreement
3.1.3 Agreement & Definitions
Agreement
 A brief general agreement serves as an introduction to policy outlining
o Insured’s premium payments
o Insurer’s obligation
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Definitions
 You & Your – refer to named insureds (applies to spouse living in same house).
o If couple divorces, then you do not apply to both
o If the one spouse moves out but still remains married coverage applies to both for
90 days
 We, Us & Our - Refers to the insurance company
 Owned includes Leased - A vehicle leased for more than 6 months is considered owned
under PAP
 Bodily Injury – Bodily harm includes sickness, death & disease
 Business – Trade, profession, Occupation
 Family Member – Related to insured by blood, marriage or adoption and resides in his
household
 Occupying – In, Upon, Getting In, Getting Out, On, Out, or Off. (B & C coverage)
 Property Damage – physical injury or destruction to tangible property
 Trailer – Vehicle pulled by a private passenger auto or van or pick-up
 Your Covered Auto – includes 4 types of vehicles -
o Any vehicle listed in declarations
o A trailer owned by insured
o A temporary substitute auto – Used in short term substitute for an out-of-service
covered auto
o New Acquired Auto
 Newly Acquired Auto – Any auto of which the insured becomes the owner during the
policy period. It can be an additional auto or a substitute auto
o An additional auto is covered for 14 days
o Replacement auto for remainder of policy
o Does not apply to physical damage coverage – must be redone
 $500 deductible is charged on physical damage coverage for 4 days if
insured does not carry collision coverage
 If there is collision coverage then it is provided for 14 days
3.2 Part A – Liability Coverage

Covers insured’s legal liability from ownership or operation of an auto -
3.2.1 Insuring Agreement

 Pays damages for bodily injury
o Compensatory damages
 General Damages
 Special Damages
o Punitive Damages
o Damages paid up to 2 kinds of limits – (both per accident)
 Split Limits – Different limits for bodily injury & property damage
 Single Limit – For the entire damages per accident
o Include Pre-judgment interest
o Damages are paid in lump or structured settlement (paid periodically for large
bodily injuries)
 Legal defense costs paid in addition – can exceed beyond policy limit
3.2.2 Insured Persons

4 categories of people are covered under PAP -
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 Named insured and any family member

 Any person using a covered auto – has reasonable that he has permission to use the auto
 Any person or organization legally responsible for acts of a covered person while using a
covered auto is covered
 Any person or organization legally responsible for the named insured’s or family
member’s use of any auto or trailer (other than a covered or owned or hired auto)
3.2.3 Supplementary Payments

 Must be paid in addition to liability limits and legal defense costs
 Includes -
o Cost of bail bonds upto $250 (only on bodily injury)
o Premiums on appeal bonds and bonds to release attachments
 Insured will pay for original judgment
 Insured will pay any judgment releasing the lien on property
o Interest accruing after judgment (post-judgment interest)
o Loss of earnings because of attendance at trials. (Upto $200 per day)
o Other reasonable expenses at insurer’s request are also paid. Like travel &
transportation costs or lodging costs at trial
3.2.4 Liability Coverage Exclusions

 Broad coverage is narrowed down by exclusions
 Major exclusions are -
o Intentional Injury
o Property Owned and Transported – Homeowners policy covers it
o Property rented to, used by or in care of insured - Does not apply to a residence
or a private garage
o Bodily injury to employee of the insured. (Worker’s compensation policy).
o Public or Livery Conveyance -
 Excludes car pools or if groups go for vacation.
 Excludes ordinary business use like pizza delivery or sales use.
 Includes using vehicle to transport public for a fee
o Garage Business – (covered by commercial policy)
 Includes selling, repairing, storing or parking vehicles meant for
highways in garage
 Does not apply to road testing & delivery of vehicles.
o Other Business Use
 Includes all uses besides farming & ranching
 If insured drives a bus, then PAP does not apply
o Using vehicle without reasonable belief of being entitled to do so
o Nuclear Energy liability losses
o Vehicles with < 4 wheels & designed for off-road use
o Other vehicles owned by the named insured or available for the named insured’s
regular use
o Vehicles owned by the named insured or available for regular use by family
members
o Racing
3.2.5 Limit of Liability

 Coverages are provided on split limit basis
 The limits are -
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o Bodily injury to a person

o Bodily injury to all persons in the accident
o All property damage in each accident
3.2.6 out-Of-The-State Coverage

 Applies when accident occurs in another state in which the auto is principally garaged
 In case of financial responsibility laws, the PAP provides minimum coverage
 PAP provides minimum amounts and types of coverage in case of compulsory insurance
law
3.2.7 Compliance with Financial Responsibility Laws

 PAP automatically complies with new laws to reflect the changes in financial
responsibility laws
 Can be used as a proof of financial responsibility by the insured
3.2.8 Other Insurance

 Situation in which one claim is covered by more than one policy
 Insurer pays its only pro-rata share of the loss in proportion to limit of liability on all
applicable limits
 If other insurance is available on a non-owned vehicle, then PAP insurance pays the
excess over a collectible amount
3.3 Part B – Medical Payments Coverage

 Insurer pays medical expenses of some people upto a certain limit within 3 years of the
accident
 Limit is between $1000 to $10000 per person

 Insurer provides reasonable & necessary medical & funeral expenses arising out of bodily
injury in an accident
o Pays for services rendered between 3 years of the accident
 Medical benefits are paid for both insured and other occupants of the auto

 2 groups of people are insured -
o Named insured & family members
o Any other person while occupying the covered auto – includes other passengers
& pedestrians
 Does not apply if the insured is struck by a tractor – not for use on public roads
 Passengers in non-owned vehicles would seek protection under their own policies or
under the medical payments coverage that applies to that vehicle
3.3.3 Medical Payments Exclusion

 Motorized Vehicles with fewer than 4 wheels
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 Public or Livery Conveyance

 Vehicle used as a resident or premises (does not apply for mobile homes)
 Injury during course of employment
 Other vehicles owned by named insured or available for the named insured’s regular use.
 Vehicles owned by or Available for Regular Use of Any Family Member
 Occupying the vehicle without reasonable belief of being entitled to do so
 Vehicles used in business of the insured
 Bodily injury from nuclear weapons or war
 Racing

 Ranges from $1000 to $10000 per injured person in a single accident
 No duplicate payments from same elements of loss. (E.g. Coverage B & Coverage C
cannot apply together)

 Pro-rata share if one liability
3.4 Part C - Uninsured Motorists Coverage

 Insurer pays compensatory damages arising out of bodily injury in an accident with an
uninsured motorist
o Coverage applies if motorist is found responsible for an accident.
o Punitive damages not paid
 Subject to a deductible of $200 or $300 in some states

 2 groups of people are insured -
o Named insured & family members
o Any other person while occupying the covered auto – includes others
o Any person legally entitled to recover damages because of bodily injury to a
person in 1 or 2
3.4.3 Uninsured Motor Vehicles – Coverage Eligibility

 No bodily injury liability insurance or bond applies to vehicle at the time of accident
 Limit of insurance < min. amount of financial responsibility in the state
 The vehicle is a hit-and-run vehicle whose driver or owner cannot be identified
 Bond or liability insurance exists but insurance company denies coverage or is insolvent.
Does not include ->
 Vehicle owned or furnished or available for regular use of named insured or family
members
 Vehicle owned / operated by a self-insurer
 Vehicle owned by a government unit or agency
 Operated on rail or crawler threads
 Located for use as a residence
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3.4.4 Exclusions
 No uninsured motorists coverage on vehicle.
 Primary coverage in another policy
 Claims settled w/o insurer’s consent
 Vehicle being used as public conveyance
 No workers compensation
 Only compensatory damages are being paid
3.4.5 Limit of liability

 Minimum liability = financial responsibility / compulsory law
 Higher can be purchased.
 Prevents stacking
 No duplicate payments (if C is paid, A is not paid)

 Total paid <= highest limit of policy
 For a non-owned vehicle, coverage provided on an excess basis over any collectible
insurance on primary basis
 Multiple policies – Reach policy in ratio of UM coverage limit [on primary basis]
 If on excess basis then, in ratio of excess limits
3.4.7 Arbitration
 Process for settling disputes, if coverage applies
 Arbitrators decides –
o Whether coverage exists & whether to pay damages
o How much damages to pay
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Chapter 4 – Personal Auto Policy (PAP) Part- II
4.1 Part D – Physical Damage Coverage

 Insurer pays for direct loss to any covered or non-owned auto less deductible
 3 coverages are available -
o No physical damage coverage. [Collision]
o Other-than-collision coverage
o Both collision & other-than-collision coverage
 Motorists purchase non-collision insurance as collision insurance comes with a higher
deductible
Collision Loss
 Auto collides with another vehicle
 Auto collides with telephone pole
 Overturning of auto.
 Stationary Collision –
o Hit by a car parked next to you
o Hit by a car in parking
 Paid regardless of fault
 If there are more than one autos insured and the owner has gets collision damages, then
the higher damage and higher deductible applies
Other-than-collision loss (comprehensive coverage)

 Physical damage not caused by collision & is not specifically excluded in this policy
 Included cause of losses are –
o Missile or falling objects
o Fire
o Theft or larceny
o Explosion or earthquake
o Hail, Water & flood
o Malicious mischief & vandalism
o Breakage of glass
o Contact with bird or animal
Physical damage coverage for non-owned autos

 Non-owned auto – Substitute used as covered auto or trailer is out of normal use due to
repair, breakdown, servicing, loss or destruction
 Covers a borrowed or a rented auto
o Does not apply if borrowed vehicle is being used regularly
 Non-owned auto should not be made available for regular use
 Always the broadest coverage is applied if the insured has 2 auto policies for covered
autos and is driving a non-owned auto
Deductible
 Of $100, 250, 500 or more apply to each collision loss
 Separate for other-than collision loss. (less than collision loss)
 Used to
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o Reduce small claims

o Encourage prudence
o Hold down premiums
4.1.2 Transportation Expenses

 Reimburse expenses upto $20 per day (max. $600) for temporary travel expenses for each
covered and physical damage loss
 For non-owned auto the owner is paid $20 per day(including if the car was rental)
Theft
 Coverage starts 48 hours after the theft has been reported and continues till the auto is
repaired and fit for use or has been replaced
 Reimbursement provided = (time till car was found + time till car was repaired –2)*20
[or (time till car was replaced –2 ) * 20]
 Max limit is $600
Other than Theft

 24 hours after auto was withdrawn from use
 Car has to be taken away for a covered loss
4.1.3 Exclusions
 Public or livery conveyance (does not include carpool system)
 Wear and tear, freezing, breakdown, repairs, etc
 Radioactive contamination or War
 Electronic equipment designed for reproduction of sound unless permanently installed to
the car (limit $1000)
 Equipment designed for visual and data signals transmission and reception
 Media and Accessories
 Camper body or trailer not shown in declarations
 Another person under coverage takes away the auto W/O reasonable belief of entitlement
 Radar / Laser equipment
 Racing
 Customizing equipment
o Carpeting / Insulation
o Furniture
o Height extending roofs
o Custom murals, paintings etc
 Non owned auto used in business
 Rental vehicle – if collision damage is waivered

2 methods of replacement
 ACV = Cost – (Depreciation and obsolescence)
 Repair / Replacement cost to reasonably similar condition prior to loss.
o ACV less Deductible is generally paid
 Non owned trailers – limit = $500
 Betterment -
o Insurer does not pay for the betterment of the auto post-loss
 Diminution Value –
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o Damaged vehicle though repaired has a low market value than undamaged
vehicle
o Insurer pays for this difference called diminution value
 Payment of Loss
o Loss may be paid in money, repair or replacement
o Money is paid in arranged appraisal value
o Pay for loss => applicable sales tax when the vehicle is replaced or repaired
 No benefit to Bailees
o Policy does not benefit the bailees.
o If custodian damages the car, the owner receives the coverage money
 Other Sources Of Recovery
o If the damage is covered by more than one policy, then the insurer will pay his
share
 E.g.
PAP = 3000
HO = 1000
Value of Car = 3000
Fire Destroys car
PAP insurer pays = 3000/4000*3000 = 2250
HO insurer pays = 1000/4000*2000 = 750
o For non-owned auto - owner first, user’s excess.
 E.g.
Damage = 1000
Owner’s ded. = 200
User’s ded. = 100
Owner’s PAP pays = 800
User’s PAP pays = 100.
The rest 100 is collectible from the user.
Appraisal
 Each party appoints 1 appraiser. The 2 appraisers select an umpire whose decision is
binding
 Each party pays its appraiser and both parties pay their umpire
4.2 Duties After Accident or Loss

Insured must comply with all duties so that the insurer can provide coverage
4.2.1 General Duties

 Prompt notice of loss – 5 W and 1 H and also information on witnesses
 Cooperation with insurer on settlement, investigation and defense
 Submission of legal papers
 Physical exam at insurer’s expense.
 Examination under oath
 Authorization of medical records
 Proof Of Loss
4.2.2 Additional Duties for uninsured motorists coverage

 Inform the police (to prevent fraudulent claims)
 Submit legal papers
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4.2.3 Additional Duties for Physical Damage Coverage

 To prevent further loss – ensure safekeeping of the vehicle
 Notify the police
 Permit inspection & appraisal
4.3 Part – F General Provisions
4.3.1 Bankruptcy of the insured

 Insurer is not relieved of his obligations if the insured is bankrupt or insolvent.
4.3.2 Changes in Policy

 Terms of the policy cannot be changed except by an endorsement from the insurer
 Changes in premium have to be in accordance with the rules of insurer
 Change in premium comes from changes in the following –
o Number, type and use of insured vehicles
o Operators of the insured vehicles
o Place of principal garaging of insured vehicles
o The coverages, deductibles and limits of liability.
 Liberalization clause is used whenever insurer modifies the policy.
o Does not apply when the new editions of policy come out
4.3.3 Fraud
 No coverage for fraudulent conduct or false statements
4.3.4 Legal Action against Insurer

 No legal action against insurer until insured has complied with all policy terms
 Insurer and insured have to agree that the insurer has the right to pay damages in case of
coverage A
 Insurer is not to be called on to determine the liability of the insured
4.3.5 Insurer’s right to recover payment

 Subrogation
o Insured must help insurer to exercise subrogation rights
o Does not apply if the person is using the auto with reasonable belief of
entitlement
 If the insured recovers payment from insurer and another party, he should reimburse the
insurer
4.3.6 Policy Period & Territory

 Covers accidents occurring in accident territory within the policy period
 Policy period is usually six months to 12 months
 PAP does not provide coverage in Mexico
4.3.7 Termination
Cancellation
 Named insured can cancel a policy a by giving notice to the insurer to make cancellation
effective
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 Insurer has limited cancellation rights -

o If policy has been issued less than 60 days ago, then the insurer can cancel the
policy if it does not meet the standards.
o Policy can be canceled for non-payment of premium – given 10 days notice.
o For other grounds of cancellation, insurer has to give a 20 days notice
 The reasons allowed for cancellation are –
o Non-payment of premium
o Driver’s License suspended or revoked
o Material misrepresentation
Non-renewal
 Insured must be given 30 days notice for non-renewal
 Time period of policy is used to determine the non-renewal time -
o If policy period is < 6 months, insurer can non-renew every 6 months
o If policy period < 6 months and greater than 1 year, then insurer has the right to
non-renew at the end of policy period
o If policy period > 1 year, then insurer can non-renew at the anniversary of policy
effective date
Automatic termination
 Insurer offers to renew, named insured does not accept, policy automatically terminates.
 If insured obtains other insurance, PAP terminates this policy.
Other termination provisions
 Insurer delivers cancellation notice through mail or in person
o Proof of mail sent is necessary
 In the event of policy cancellation insured is assigned a premium refund
 The effective date of cancellation is the end of policy period
4.3.8 Transfer of Insured’s interest in the policy

 Limits assignment of policy by the insured.
 Cannot be assigned by insured’s written consent.
 If the named insured dies, then legal representatives / spouse has the coverage
4.3.9 Two or More Auto policies

 Maximum limit of liability = highest applicable limit of the policy
 Intent is to avoid stacking
4.4 Endorsements of PAP

 Endorsements are used to add coverage and modifications
4.4.1 Endorsement covering motorcycles, recreational vehicles & customizing equipment

 Following coverages are used -
Miscellaneous Type vehicle endorsement

 Motor home, golf carts, motorcycles, dune buggies and snowmobiles are covered.
 Passenger hazards are excluded and are an optional coverage -
 Amount paid for physical damage is minimum of -
o Stated amount in policy
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o ACV of vehicle
o Replacement cost or repair cost
Trailer / Body Coverage Endorsement

 Insurer pays for the direct and accidental damage to trailer or camper body
 Related facilities like kitchen appliances, plumbing are also covered
 Exclusions for electronic equipment, media equipment still apply
Customizing equipment Coverage Endorsement

 Deletes the exclusion for customizing equipment
 Includes
o Carpet
o Furnishings
o Height extending roofs
o Custom murals, paintings, etc
Snowmobile Endorsement
 Vehicle should be used off-public road in snow or ice
 Propelled by wheels, crawler threads, belts of similar mechanical devices
 Has all the available coverages
 Other persons covered only while using insured’s snowmobile
 Exclusions are –
o Does not apply if snowmobile is used in business
o Excludes any person or org. other than named insured while renting or leasing
snowmobile
o Exclusion if a person is being towed by snowmobile
o Racing and Speeding contests
4.4.2 Other Endorsements affecting Multiple Coverages

Named non-owner coverage endorsement
 Excludes physical damage coverage
 Spouse and other family members are not automatically covered
 This coverage is excess over any other liability coverage
 If non-owner buys a car, then he has insurance coverages A, B & C for 14 days
Extended Non-owned coverage for Named and Individual Endorsement

 Applies only to individuals named in the endorsement
 Allows vehicle to be covered while being used for business use
 Liability coverage is excess over any other coverage
 Exclusions provided are –
o Non-owned vehicle made available for regular use
o Vehicle used in business
o Vehicle used as public or livery conveyance
o Protection against fellow employee suit arising out of a work related accident
Limited Mexico Coverage Endorsement

 Coverage in Mexico -> within 25 miles of US border
 Trip < 10 days
 Effective if primary insurance is purchased from a Mexican insurer. Its excess over
Mexican policy
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4.4.3 Underinsured Motorists Coverage Endorsement

 Added to PAP to supplement UM Coverage
 Distinguished from UM Coverage
 Vary by state -> limits, coverages, etc
4.4.4 Endorsements Affecting Physical Damage Coverage

 Widely added endorsements are -
o Towing & labor costs
 Upto some stated amount are paid
 Non-owned auto->broadest possible coverage applies
 Requires other physical damage to be effective.
o Coverage for excess sound producing equipment, audio and visual data electronic
equipment
 Excess sound producing equipment upto $1000.
 Equipment should be permanently installed
 Powered by auto’s electrical system
 Tape records and discs – max. 200
o Coverage for damage to your auto. [stated amount]
 Determine maximum limit of liability
 Insurer’s maximum limit of liability is determined by min. of -
 ACV
 Stated amount
 Repair cost
 Replacement Cost
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Chapter 5 - Homeowners Insurance: Section I
5.1 Homeowners 3 Special Form: HO3 (HO2000) Policy
The homeowners policy includes coverages for a house, its contents and the occupant’s liability.
It’s a self-contained policy – single document that forms a complete contract.
Insurers use forms developed by ISO, AAIS or be themselves.
Most widely used homeowners policy: ISO’s Homeowners 3 Special Form (HO 00 03)
commonly known as HO-3.
 Designed for owner-occupants of a 1-4 family dwelling used as the residence of the
named insured.
 Dwelling under construction also insured
 Purchased under a long-term installment contract, without legal title to the property.
 Occupants with a life estate arrangement – allows them to stay for the rest of their lives –
are eligible.
 Can be issued in the name of a trust.
5.2 Structure of the HO-3 Policy
Section I: Property Coverage – specifies property covered the perils for which it is covered, and
the conditions and exclusions that affect property coverages and losses.
Section II: Liability Coverages – provides information regarding liability coverages, exclusions
and conditions.
5.2.1 Declarations Page
 Policyholder
 Policyholder’s residence
 Coverage limits
 Premium
 Section I deductible
 Effective date of the policy
 Forms and endorsements that apply
 Mortgage holder
5.2.2 Agreement
Establishes the basis for the contract and what the insurer and the policyholder will do for
each other.
Insurer agrees to provide coverage in lieu f premium and compliance with conditions.
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5.2.3 Definition
Any ambiguity is interpreted in favor of the insured.
5.2.3.1 Named Insureds’ and other ‘Insureds’

The name ‘you’ and ‘your’ refers to the named insured shown in policy declaration and
his/her resident spouse, even if the spouse is not named.
The definition of named insured includes:

 Relatives who are residents of the household
 Other persons under 21 under the care of named insured or relative
 Full time student who stays away but resided in the household prior to leaving for
school – age under 24 if under the care of named insured/ under 21 if living under the
care of resident relative
When policy refers to insured, it means ‘one or more insureds’.
5.2.3.2 ‘Residence Premises’ and ‘Insured Location’

Means
 1 to-4 family dwelling where the named insured resides in at least one of the units.
 That part of any other building where the named insured resides.
 Other structures and grounds at that location.
Insured location includes ‘residence premises’ and also includes
 An unlisted residence acquired by the named insured during the policy period
 A nonowned premises where any insured is temporarily residing (hotel)
 Vacant land (other than farm land) owned by or rented to an insured
 An insured’s land where 1 to 4 dwelling is being constructed
 Individual or family cemetery plots
 Any part of a premise occasionally rented to an insured for nonbusiness use (such as
hall rented for a wedding reception)
5.2.3.3 Deductible
Standard deductible is $250.
5.2.3.4 Section I: Property Coverages
Consists of the following coverages:

Coverage A: Dwelling
Coverage B: Other Structures
Coverage C: Personal Property
Coverage D: Loss of use
Additional coverages
5.2.3.5 Coverage A: Dwelling

Applies to the dwelling on the ‘residence premises’
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Chapter 6 – Homeowners Insurance
6.1 Section II – Conditions

Establishes the duties and responsibilities of the insurer and the policyholder.
Limit of Liability: The limit of Coverage E – Personal Liability appearing on the

declarations page is the total limit of coverage for any one occurrence. Defense costs will
be paid in excess of the Coverage E liability limit.
The total liability under Coverage F – Medical Payments to others for all medical
expenses for bodily injury to one person as the result of an accident will not be more than
the Coverage F limit shown on the declarations page.
Severability of Insurance: Policy condition that applies insurance separately to each

insured; does not increase the insurer’s limit of liability for any one occurrence.
Duties After Loss:
 Give written notice: time, place, circumstances, name and addresses of the
claimants and witnesses, identify policy and the named insured
 Cooperate with the insurer: investigation, settlement and defense activities.
 Forward Legal documents
 Provide claims assistance
 Submit evidence of damage of property of others: within 60 days a sworn
statement of loss and show damaged property to insurer
 Not make voluntary payments: cannot make commitments on the behalf of the
insurer
Duties of an Injured person – Coverage F

 Injured person must give the insurer written proof of the claim as soon as
possible; the proof must be given under oath if required.
 Authorize the insurer to obtain copies of medical reports and records.
 Must submit to a physical exam by a doctor chosen by the insurer as often as the
insurer requires such examinations.
Payment of Claim – Coverage F

Not an admission of liability by the insured or the insurer.
Suit against Insurer:

 No legal action can be brought against the insurer unless the insured has met all
its obligations under Section II
 No one has the right to join the insurer as a party to any action against an insured.
 No action with respect to Coverage E can be brought against the insurer until the
obligation of the insured has been determined by a final judgment or agreement
signed by the insurer
Bankruptcy of an Insured: The insurer still obligated to handle the loss as it normally
would.
Other Insurance – Coverage E: Coverage E limits are paid as excess over any other
collectible insurance unless the other insurance is written specifically to provide excess
coverage.
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Policy Period: BI and PD to occur only during the policy period. The claim can be filed
at any time even after the policy has expired.
Concealment or Fraud:
Innocent insureds are not precluded from liability coverage.
6.2 Section I and II – Conditions

Liberalization Clause:
If the insurer, during the policy period or 60 days before the policy period adopts a
revision that broadens the coverage without an additional premium charge, the increased
coverage will automatically apply to all existing policies on the date it is implemented in
the state. It does not apply to general homeowners program revision that both broadens
and restricts coverage.
Waiver or change of policy provisions:

Valid only if insurer makes it in writing. Agents with binding authority can make policy
changes through an oral binder that is effective until a written policy change endorsement
is produced.
Cancellation:
Insured can cancel by returning the policy or contacting the insurer in writing and
advising the date the cancellation is to take effect.
Additional interests- residence premises endorsement (HO 04 10) is used if other persons
or organizations with an interest in the property are to be notified if the insurer renews or
cancels the policy.
Insurer can cancel with written notice to policyholder at his mailing address for
1. Nonpayment of premium if policyholder is given at least 10 days notice before
effective date of cancellation.
2. New policy in effect < 60 days if policyholder is given at least 10 days notice
before effective date of cancellation.
3. new/renewal policy in effect > 60 days if policyholder is given at least 30 days
notice before effective date of cancellation if there has been material
misrepresentation of facts, or the risk has changed substantially since the policy
was issued.
State laws take precedence over policy language w.r.t cancellation/renewal. When policy
is cancelled pro rata refund is established. In some cases short-rate penalty is used.
Nonrenewal:
Accomplished by mailing a notice to the policyholder at least 30 days before policy
expiration date.
Assignment
Cannot be assigned (transferred to another party) without insurer’s written consent.
Subrogation
Right to recover its claim payment to an insured from the party responsible for the loss
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Chapter 7 – Other Residential Insurance
7.1 Dwelling Policies

Some residences are not eligible for eligible for HO coverage, so insurers decline it –
 Residence is not owner occupied
 Value of dwelling is less than minimum limit for HO policy
 More separate living units than allowed in an HO policy. E.g. a large home with 5
apartments in it
 Does not match some of the underwriting guidelines. E.g. 50 years old house.
Insured may also choose not to obtain coverage due to following reasons –
 Insured might not need full range of HO coverage
 Policy is more expensive than insured is willing to pay
Dwelling policy is an alternative policy to HO policies
7.1.1 Structures eligible for Dwelling Policy

 Principally designed for 1-4 dwellings
 It can also be used for –
o Mobile homes at permanent locations
o Houseboats in some states
o Certain incidental occupancies – operated by owner or a tenant at the insured
location
7.1.2 Dwelling Policy Programs

 Developed by ISO & AAIS
 ISO does not provide coverage for theft & liability coverages but other insurers who do
not follow ISO forms provide them
 Some states require insurers to modify policies to include special state endorsements
7.1.3 ISO Dwelling Policies

 It has 3 forms -
o Dwelling Property – 1 – Basic Form (DP – 1)
o Dwelling Property – 2 – Broad Form (DP – 2)
o Dwelling Property – 3 – Special Form (DP – 3)\
 Coverages offered are similar to HO.
Insuring Agreement & Definitions (Comparison with HO)

 Agreements are identical
 Definitions section is not same as most definitions become irrelevant
7.1.4 Coverages
 All coverages are not included automatically
 DP-1 includes fair rental value but not additional expense coverages. DP-2 & DP-3 have
both coverages
Coverage A – Dwelling
 Dwelling – Is used primarily for dwelling purposes

 Building equipment & outdoor equipment is also included in coverage A if coverage C is
not bought
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Coverage B – Other Structures

 Coverage provided for detached structures like garage & storage sheds
Coverage C – Personal Property

 This coverage is optional for the insured
 Property is in the desired location and is being used by insured or his family members.
 No special limits to personal property unlike HO. No theft coverage is provided
 Money & securities are excluded
 Sub limit on watercrafts including their equipment & furnishings but not on boats
excluding rowboats and canoes
Coverage D – Fair Rental Value & Coverage E – Additional Living Expense

 Coverage D is provided in all. Corresponds to Loss Of Use in HO
 Coverage E- included in DP-2 and DP-3. Coverage for additional living expense
Other Coverages
 Loss assessment coverage added to dwelling policy for additional premium
 Additional coverages for landlord’s credit cards, furnishings, etc. not included.
 Comparison of other coverages with HO –
Coverage Home Owners Dwelling Policy

Other Structures Same applies to HO-1, 2 & 3. 10% of Coverage A. DP-2 & DP-3 have it as
additional insurance, DP-1 – coverage A limit is
reduced by 10%
Debris Removal Additional 5% of coverage limit Included in damaged property limit.
Improvements, 10% of coverage C in HO 4 10% Coverage C to covers renter improvements
Additions
Worldwide No limitation. 10% limit on 10% of coverage C except rowboats and canoes as
Coverage property on secondary residence. an additional insurance
Rental Value & HO-2 & HO-3 have coverage upto DP-2 & Dp-3 provide upto 10% of Coverage A as
Additional Living 30% of coverage A limit. additional. DP-1 – 10% of A as included on rental
Expense. value.
Reasonable Covers cost of repairs done to prevent further loss.
Repairs
Property Removed Limit is same as limit for property being removed. Covered property is protected if it is
removed under an insured peril.
Trees & Plants Same 5% of coverage A limit. 500 for one plant. DP-1 –
requires endorsement.
Fire Department $500 service charge. Additional $500 charge. Provided if property is not in city
Service Charge insurance with no deductible. limits or close to fire station.
Collapse HO-2 & HO – 3 Available in DP-2 & DP-3 Not in DP – 1.
Glass or Safety Included in HO policy where glass Provided in DP-2 & DP-3 for damage to covered
Glazing Material is a part of building. property (also in HO)
Ordinance or Law 10% of Coverage A or 10% of Coverage B in DP-2 & Dp-3. If tenant is the insured, then
10% of improvements, alterations & additions limit.
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7.1.5 Perils Insured Against

Coverage A – Dwelling & Coverage B – Other Structures
 DP-3 -> similar to HO-3 – covers risk of direct loss to property
 Coverage is determined by causes of losses that are excluded
 DP-2 & HO-2 are same
 Exclusions in DP-3 – same as HO-3
Coverage C – personal property

 Similar to perils covered in HO-3
 Theft not covered but damage by theft, burglary, larceny, etc. is covered
 Windstorm or Hail coverage not available for damage to canoes or rowboats. Available in
HO-3 is equipment is inside an enclosed building
General Exclusions
 Similar to HO-3, include loss caused directly or indirectly by any of the following
o Ordinance Law (except if it is included in coverages)
o Earthquake
o Water Damage
o Power Failure
o Neglect
o Nuclear Hazard
o Intentional Loss
o Weather conditions leading to loss
o Acts or decisions by groups of persons, government or organizations
Dwelling Policy Conditions

 Single set of conditions for DP-3 applying to policy coverage.
7.1.6 Coverage for Liability & Theft Losses

 Personal Liability Supplement
o Written as addendum / separate policy
 Coverage L for personal liability
 Coverage M for medical payment
o Loss assessment coverage not provided.
 Residential Theft Coverage
o Broad Theft Coverage
 Owner Occupied
 Theft, larceny, burglary, malicious intent is covered.
 Off-premises coverage is available if on-premises coverage is bought.
o Limited Theft Coverage
 Available if dwelling is non-owner occupied.
 Eliminates money and jewelry from coverage..2 Mobile Home Coverage
MH are less expensive homes that are built but not affixed on permanent foundations
7.2.1 Exposures
 Damage or destruction of the MH
 Damage or destruction of the other structures in residential premises
 Damage or destruction of personal property in MH
 Loss of the use of MH.
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 Liability Loss
The Mobile Home (MH)

 Not permanently affixed to where it is located
 Exposure to extra perils because
o Not fixed to a foundation
o Transportation exposure
 Susceptible to windstorm. tornadoes and earthquake
 Needs to be tied down to be covered for wind exposures
 Other Property and Liability Exposures
o Content / Fixtures / Personal Property subject to same exposures as HO
o Similar liability exposures as HO
7.2.2 Mobile Home Coverages

 Prefabricated, manufactured & modular mobile homes can also be insured. Come under
HO policies if the same is permanently affixed to a foundation
ISO MH Endorsement
 MH is designated for coverage if it is portable and fit for round the year living
 At least 10 feet wide and minimum 400sq. ft in area
 Endorsements in HO-2 & HO-3 policy. Tenants -> HO-4 policy
MH Endorsement
 MH is designated for coverage if it is portable and fit for round the year living
 Policy is created by adding a MH endorsement form to a HO policy
 Major differences between MH and HO policy are –
o Definitions – “residence premises” changes to mean MH & other structures
including the location of the land
o Coverage A – Dwelling
 MH used as private residence
 Structures and utility tanks are included
 Applies to equipments & fixtures like floor covering etc
o Coverage B – Other Structures
 10% of coverage A limit to a max. of $2000.
o Additional Coverages
 $500 for property removed (no deductible)
 Ordinance or law coverage
o Section 1 Conditions
 Carpeting and appliances, not included in property to be valued on ACV
basis will be valued on replacement cost basis
Other MH Endorsement
 ACV – Changes loss settlement terms on MH from replacement cost basis to ACV basis
 Transportation / Permission to move – coverage for perils of transportation for 30 days
from the effective date
 MH lien holder’s single interest –
o Provides coverage only to lien holder for transportation perils
o Coverage for loss due to conversion, embezzlement or secretion of MH
 Property removed increased limit –
- 38 -
o Increases the basic limit of removal expenses from $500 for an endangered MH
against an insured peril
 Ordinance or Law
o Add coverage for an amount equal to a % of coverage A
7.2.3 AAIS MH Owners Program

 Covered property includes MH, Other Structures & personal property
 Coverage for medical payments, personal liability and additional living expense
 Separate Renters Form
 Insurance against other perils included
 Covers by ACV basis
7.3 Personal Insurance for Farms and Ranches

 Loss exposures need a combination of commercial and personal insurance
 Personal exposures are similar to HO
 Private insurers generally provide insurance for farmowners
 Insurers also provide HO policies have endorsements for livestock, animal collision and
other farm exposures
 Liability insurance can be provided by either personal liability or farm operations liability
policies or commercial liability policies
7.3.1 AAIS Farmowners Program

 Diversified to meet personal, commercial & special exposures
 AgOP – to insure property of “agribusiness” operations
 Medical benefits are paid for both insured and other occupants of the auto
 Dwelling coverage a major component of FO coverage but minor component of
agribusiness operations
7.3.2 Policy Overview (AAIS Program)

 Can be used issue both property & liability or property only policy
 Farms with MH as primary dwelling are also eligible
 Farm liability form for coverage of liability exposures
 Personal liability exposures covered by farm commercial liability coverage
7.3.3 Property Coverages

 3 forms are similar to HO / Dwelling Forms
o Dwelling Coverage – Basic Form FO - 1
o Dwelling Coverage – Broad Form FO - 2
o Dwelling Coverage – Special Form FO - 3
 Primary Coverage includes –
o Farm Dwelling
o Related Private Structures
o Household personal property
o Additional Living expense and loss of rent
 Dwelling Coverage Special Buildings and Contents Form
o FO0005 – broadest level of dwelling coverage
- 39 -
o Coverages A, B, and C on special form – replacement cost basis

o Has higher coverage limits.
 Dwelling Coverage – Renters form (FO-4)
o Used to cover household personal property & additional living expense of renter.
o Offers loss of income coverage for farming operations and farm rentals
 FO-6 covers farm buildings, scheduled farm personal property and unscheduled farm
personal property
 Optional Coverages
o Ordinances and Law coverage
o Replacement cost & special form coverage for farm structures
o Special coverages for certain animals
o Additional perils for livestock
o Animal boarding
7.3.4 Farm Personal Liability Coverage

 Personal liability coverage form GL-2 offers the same coverage as HO
 Coverage for most business activities other than farming is excluded
 Liability coverage for customer farming is provided if when the income does not exceed
$5000 annually
 Following liability exposures are covered –
o Personal Injury
o Expand Custom Farming
o Additional Business activities
o Farm Chemicals limited liability
o Fruit and Vegetable picking by the public
7.3.5 ISO HO Endorsements for FARMS

 Requires that farming should not be the primary occupation of the insured.
 Incidental Farming Personal Liability
o Section II of HO policy is extended to include incidental farming operations at
the dwelling location or separate location [must be mentioned]
o Permissible farming activities include boarding and grazing of animals and use of
land as garden space
 Farmers Personal Liability
o Covers liability exposure arising out of commercial operations of the farm
o Coverage E – personal liability
o Coverage F – medical payments
o Each farm premises must be listed and each location mentioned
o All business conducted are mentioned in policy
7.3.6 Livestock Collision Coverage

 Coverage for specified amount for death of animals if death is caused by –
o Collision of animals with a vehicle on public road
o Collision or overturning of a vehicle transporting a livestock
7.4 Flood Insurance

 Catastrophic loss potential of floods, the cost to insure against flooding is high
- 40 -
 HO & Dwelling policies exclude loss by flooding

 NFIP program provides subsidized flood insurance to HO & FO
7.4.1 Community Eligibility

 Can only be written in communities designated by FEMA as participating communities.
 Community must establish & enforce flood control & land use restrictions
 When a community first joins, property owners can purchase insurance under emergency
program at subsidized rates
 Community is divided into zones and marked out with probability of flooding. Flood
control & land use restrictions are established, regular program coverage. Higher
amount of insurance purchased by property owners
7.4.2 Amount of Insurance

 Emergency program -
o $35000 on 1-4 dwelling and $10000 on contents
o For other residential structures, its $100,000
 Regular Program
o $250000 on 1-4 dwelling and $100,000 on contents
7.4.3 Waiting Period

 Coverage is not effective 30 days after application – Done to avoid adverse selection
 Exception if the property has been purchased recently or making or increasing mortgage
on a property. Policy is effective at time of transfer or mortgage effective date
7.4.4 Write-Your-Own Program

 Allows private insurers to sell flood insurance
 Insurers receive an expense allowance for policies written and federal government retains
losses. [90% flood insurance written through WYO companies]
 Insurance is sold through a WYO company or NFP
7.5 Insurance for Hard-To-Insure Residences

 Insurers are reluctant to insure some homes due to greater exposures
7.5.1 FAIR Plans

 Coverage in areas where insurance is difficult to obtain in standard market
 Property owners apply through a licensed agent or broker
 Insured must have property inspected to be eligible for FAIR plan coverage
 Following exposures are considered uninsurable under FAIR
o Vacant property
o Property Poorly Maintained
o Unacceptable hazards like storage of inflammable materials
o Property in violation of law or public policy – “condemned building”
o Property not in accordance with building and safety codes
 Provide small number of coverages limited to HO
 Higher coverages can be sought from a specialty insurer using DIC (Difference in
condition) policy for coverages excluding fire
- 41 -
7.5.2 Beachfront and Windstorm plans

 Exposed to heavy windstorm losses during hurricanes and other storms
 Vulnerable to high tides and coastal erosion
 A part of “assigned risk” program like FAIR.
 Losses from tidal water covered by flood insurance
 Plan offers coverage only in designated areas
 Do not offer coverage to uninsurable property listed above
 Coverage to hailstorm also offered
- 42 -
Chapter 8
8.1 Inland Marine Floaters

 Insurance provided to moving goods, goods in cargo, property in transmission and
communication
 Personal umbrella provides liability protection above policy limits of HO, PA & WC
 Floaters – Policy that provides coverages for policies that move or “floats” like jewelry,
fur, cameras, etc
 Generally special form coverages is used
8.1.1 Characteristics of Inland Marine Floaters

 Covered is tailored to type of property being moved
 Insured can select policy limit unlike HO
 Extensive coverage with respect to perils provided anywhere in world
 Usually written without a deductible
8.1.2 Inland Marine Floater Policy Provisions

 Insuring Agreement –
o Insure covered property worldwide on a special form basis subject to exclusions.
 Perils Excluded –
o Wear & tear
o Insects and vermin
o Mechanical or electrical breakdown
o War
o Nuclear hazard
o Fine Arts Floater (excludes breakages to fragile items)
 Persons Insured
o Named insured
o Members of named insured’s family
 General Conditions – The amount paid for recovering damages is the minimum of
o ACV of the property at the time of loss or damage
o Amount insured in the policy
o Replacement cost
o Repair Cost
8.1.3 Types of Personal IMF

 Personal Articles floaters -
o Coverage on 9 optional classes of personal property -
 Jewelry, furs, camera and photographic equipment
 Musical instruments, silverware, fine arts, coins and stamps, etc.
o Specific coverage for each class is defined.
o Reasons for coverage using floaters –
 Retired person in retirement home with no HO policy & jewelry to insure
 Joint owners of valuable photographic equipment not living in same
homes
 HO premium separate from jewelry premium as HO premium is part
with mortgage
- 43 -
 Personal property floaters -

o Coverage on unscheduled personal property
 Unscheduled PP is the property that is normally kept at insured’s
residence and is used by insured
o Provides worldwide coverage on personal property when it is away from home.
o 13 class of items in personal property
Silverware Clothing Rugs and Musical
Draperies instruments and
electronic
equipment
Painting and China and Cameras and Guns and other
other art objects Glassware photographic sports equipment
equipment
Major appliances Bedding and Furniture Professional
linens books and
equipment
Building additions and alterations
o A deductible applies to each class with coverage specific to each class.

o Sum of all coverages is the maximum policy limit
 Personal effects floaters –
o Provides special form coverage on the property used by tourists or travelers
o Coverage is available only when property is away from residence premises
o Sold to people who are not eligible for HO and want broadest protection
8.2 Personal Watercraft Insurance

 Coverage for loss exposures and hazards of operating a personal watercraft.
8.2.1 Property Loss Exposures

 Damage to a boat’s hull as a result of collision with another boat
 Theft of boat’s motor, equipment or boat itself
 Damage to propeller by an underwater object
 Lightning damage to electrical or navigational equipment
 Fire damage to boat trailer
8.2.2 Liability, Medical Payments and Uninsured Boaters Exposures

 Bodily injury liability loss – passengers get injured in boat
 Property Damage liability loss – boat damages property e.g. Dock
 Medical Payments loss – guest gets injured on the boat
 Uninsured boater loss – Uninsured boater runs into the boat
8.2.3 Limited Watercraft Coverage Under HO and PA policies.

 HO Section I – Property Coverages
o Max limit of $1500 applies to Watercraft
o Coverage for a limited number of perils
o Coverage for windstorm and hail if boat is inside enclosed shed ($1500)
o Theft coverage if the boat is stolen from the premises
- 44 -
 HO Section II – Liability Coverages - Liability from following is excluded -

o Ownership, maintenance, loading / unloading of any excluded watercraft.
o The entrustment by the insured of an excluded watercraft to any person
o Negligent supervision or failure to supervise the person to operate watercraft.
o An insured’s vicarious liability of a child or minor using an excluded watercraft.
 Coverage Under Personal Auto Policy
o Physical damage to a boat or trailer is covered if given on the declarations page.
o Boat trailer is covered if it can be towed by a pick-up or van.
8.2.4 Personal Watercraft Policies

 Small boats policies
o Boats must be 26 feet in length.
o Covered property –
 Boat, trailer, equipment, motor
 $100 deductible and ACV basis used
o Covered perils –
 Special form coverage includes liability insurance, medical payments, etc
o Exclusions –
 General risk of direct loss – wear ,tear, vermin, breakdown, etc.
 Repair or Service
 Business Pursuits
 Boat Owners and Yacht policies
o Covers larger boats and yachts.
o Warranties
 Pleasure Use
 Seaworthiness
 Lay-up Period
 Navigational Limits
o Persons Insured
 Named insured, family members, relatives in same household
 Other people with insured’s permission
 Physical Damage Coverage
o Hull insurance
o Exclusions are –
 Wear and Tear
 Mechanical Breakdown
 Freezing and thawing of ice
 Racing and Speeding
 Intentional Loss
 War and nuclear hazard.
 Liability Coverage (protection and Indemnity Insurance) – The exclusions are -
o Intentional Injury
o Business Pursuit
o Liability from dangerous sports – water skiing, parasailing
o Racing
o Losses covered by workers compensation
o Bodily injury or property damage arising out of transportation of boat on land
o Liability assumed under contract
o Injury to an employee if employee’s work involves maintenance of watercraft
o War and nuclear hazard
- 45 -
 Medical Payments coverages

o Covers insured family members under HO.
 Uninsured Boaters Coverage – similar to UM coverage
 Other Coverage
o Liability of injury to maritime workers
o Legal obligation of insured to remove a wrecked or sunken vessel.
o Cost of commercial towing and assistance
o Damage or loss to insured’s personal effects
o Bodily injury from transportation of boat
8.3 Personal Umbrella Liability Insurance

 Liability limit exhausted => insured has to pay from personal assets
 Personal umbrella provides liability protection above policy limits of HO, PA & WC
 Provide broader coverage than most policies
 Umbrella is excess over some primary policy
8.3.1 Nature of Personal Umbrella Coverages

 Designed to provide bodily injury, personal injury and property damage liability coverage
in case of a catastrophic lawsuit or judgment
 Amount of insurance purchased ranges from $1 million to $10 million
 Covers named insured, resident relatives and family members worldwide. Also covers
other people using insured’s vehicles or homes with permission
Provides Excess Liability Coverage

 Provides additional liability limits over underlying insurance like HO
 Insured must maintain certain underlying policies with specified limits to avail umbrella
insurance
 Underlying requirements are –
Personal auto policy

Bodily Injury liability $250000 per person
$500000 per occurrence
Property Damage liability $50000 per occurrence
BI & PD $300000 or $500,000 per
occurrence (single limit)
Homeowners Section II $100000 (or $300000)
Watercraft Liability Insured owns a boat $500,000
 If insured fails to maintain underlying limits, then the umbrella insurance will only pay the
excess
Provides Broad Coverage

 Provides drop down coverage - if underlying coverage not available and loss not
excluded by umbrella, the umbrella coverage covers entire loss less some deductible
(Self-Insured Retention –SIR). [minimum $250]
 Applies when underlying policy does not cover loss
- 46 -
8.3.2 Personal Umbrella Coverage

Personal Injury Liability
 Covers insured’s liability for personal injury
 Includes false arrest, wrongful imprisonment, wrongful entry or eviction, malicious
prosecution or humiliation, libel, slander, defamation or character besides bodily injury.
Property Damage Liability

 Covers insured’s liability for property damage
Defense Costs
 Include payment of attorney fees, premiums on appeal bonds, release of attachment
bonds, court costs and loss of earnings to attend court proceedings
 Defense costs are paid in addition to policy limit
Uninsured and Underinsured Motorists Coverage

 Insurer offers the extend umbrella over UM coverage and underinsured motorists
coverage
 Insured must reject the coverage in writing if he does not want it
Exclusions
Exclusions to personal umbrella coverage are –
 Workers compensation
 Damage to insured’s property – damage to non-owned watercraft or aircraft.
 Nuclear Energy
 Intentional Injury
 Aircraft
 Watercraft – excludes for large watercraft with 50HP engine
 Business property and pursuits
 Professional liability
 Directors and Officers
 Transmission of any communicable diseases
 Advertising and broadcasting
 Recreational Vehicles
Conditions
 The insured must maintain underlying coverages and limits shown in declarations
 The insured must give a notice of loss as soon as practicable
 The umbrella policy is excess over insurance whether collectible or not
- 47 -
Chapter 9 – Personal Loss Exposure & Financial Planning
9.1 Personal Loss Exposures

 Premature Death
o Loss of future earnings
 Poor Health & Disability
o High medical bills
o Low income from labor work.
o Sick person should have group or personal insurance to avoid financial problems
 Unemployment –
o Unemployment compensation - All states run unemployment compensation
programs that pay weekly cash benefits to workers who are unemployed.
Following is the eligibility criterion
 Become involuntarily unemployed
 Earn Qualifying wages during a specified base period
 Actively seek work
 Be free from disqualifying acts such as refusing work
 Meet a specified waiting period
The benefits are paid upto a period of 26 weeks in all states. Weekly benefits are
based on covered earnings.
o Extended Benefits - A federal state program of 13 weeks of additional benefits
to people in states with high unemployment rates. Federal & state governments
share the cost of extended benefits
 Retirement
o Workers have insufficient income after retirement and the problem gets
aggravated in illness
9.2 Planning For Future

 Develop a financial and investment plan
9.2.1 Developing a Financial Plan

Developing a financial plan is a 5-step process -
 Gather financial Information
o Current Income
o Assets – financial assets, retirement plans, value of life insurance policies, real
estate.
o Outstanding liabilities and Debts
o Current Spending
o Number and ages of dependents
 Analyze the financial condition
o Find out the net worth
o Net worth = Assets - Liabilities
 Determine Specific financial goals and objectives
 Design a financial plan to attain these goals
 Periodically review and revise the plan\
Advantages of financial planning are – increase in personal wealth, better quality of life and
proper attainment of goals. Protection against liability and other exposures
- 48 -
Obstacles are high use of credit cards, low savings and less knowledge of financial planning and
delay saving for specific goals like children education.
9.2.2 Common Financial Goals

 Increase in personal wealth
 Higher Standards of living
 Protection of family and property
 Saving for retirement
 Purchase of a home
 College education for children
 Emergency fund
 Getting out of debt
 Minimizing taxes
 Investment goals
9.3 Investing to Attain financial goals
9.3.1 Investment Objectives

 Capital Appreciation
 Preservation of Capital
 Current Income – steady stream of income from investments
 Growth and Income – Growth in investments and steady income – stocks
 Liquidity
 Minimizing Taxes
9.3.2 Investment Risks

 Investment risk is the variability of investment outcomes
 Different types of investment risks are –
o Inflation Risk – risk of an overall increase in price level in the economy.
o Market Risk – risk of price fluctuations of stocks or bonds
o Interest Rate risk – risk of changes in interest rates
o Financial Risk – the risk associated with ownership of securities in a large debt
company and company might go bankrupt
o Business risk – the risk associated with the fluctuation of a company’s earnings
and its ability to pay dividends or interest
o Liquidity Risk – The risk of being unable to liquidate the investment at a
reasonable price
 “Risk tolerance” determines the types of investments the investor makes
9.3.3 Types of Investments

 Savings Accounts and Savings Instruments –
o Savings accounts are free of market risk, interest rate risk and financial risk when
insured by the federal government (FDIC).
o Suffers from inflation risk
o Used for short term planning and emergencies
o Important types of accounts and instruments are –
 Regular Saving accounts – insured upto 100,000 by FDIC
 Certificates of Deposits – work like FDs. Insured by FDIC
- 49 -
 Money market mutual funds – short-term high quality securities of US

treasury, major corporations, large banks and government agencies.
 Money market deposit accounts – offered by commercial banks and
financial institutions insured by FDIC.
 Stocks -
o Common stocks / Preferred stocks
o Riskiest part of investments
o Preferred stocks have features of stocks and bonds
 Bonds –
o Debt obligations issued by corporate or government entities.
o Less risky than stocks.
 Mutual Funds –
o Offers a lot of advantages –
 Diversification
 Professional Management
 Record Keeping
 Marketability
 Liquidity
 Real Estate –
o Homes have a good performance in terms of investments.
o Also include commercial offices, shopping malls, apartment complexes, etc.
o Investors receive rental income and get capital appreciation if the value of
property declines.
 Miscellaneous Investments –
o Gold, Silver, precious metals
o Artwork and collectibles
o Risky and should be pursued as hobbies
9.4 Retirement Planning

 Medical expenses not covered by Medicare program
 Income declines from earnings.
9.4.1 Importance of Retirement Planning

Difficult to attain comfortable retirement due to following reasons -
 Increased proportion of retirees – income from SS program will be inadequate
 Longer Period of retirement – Workers are spending a relatively longer periods not
working due to higher life expectancy and people retire at 65 or before
 Insufficient Money Income – for retirees facing high expenses
 Insufficient financial assets – for people nearing retirement are also very small
 Poor health – current Medicare program does not support long term nursing facility
needed by many old people
 Minimum Floor Income from Social Security – insufficient to cover expenses
9.4.2 Investing for retirement

Retirement planning should be higher priority investment goal -
 Begin Investing early – for compounding the gains over a longer period.
 Make maximum contributions to tax-deferred retirement plans
o Receive favorable income tax treatment – 401(k) plans
 Change of allocation of assets over the life cycle –
- 50 -
o Longer the period of investing, greater the risk to assume

o Reduce risk with increase in age
 Consider dollar averaging –
o Fixed amount is invested at regular intervals regardless of market price
o Most tax deferred plans use it.
 Do not ignore the effect of inflation on retirement
9.5 Tax Deferred Retirement Plans

 Individual or employer sponsored plans provide income post-retirement in addition to
social security benefits
 Employers’ contributions are income tax deductible. Not taxed as current income to
participating employees
 At retirement taxable income is lower, so is tax liability
9.5.1 Private Pension Plans

 Eligibility Requirements –
o Minimum 21age and 1 year service completed
 2 Basic types of pension plans -
o Defined Contribution Plan – Contribution rate is defined and retirement benefit is
variable. Benefits depend on earnings, investment performance and age of
retirement
 In a defined contribution plan, retirement benefit depends on the amount
in employee’s account
 Cannot be withdrawn before the age of 59.5 years
o Defined Benefit Plan – Retirement benefit is specified but the employer’s
contributions vary depending on the amount needed to fund the benefit
 Benefit depends on worker’s earnings, years of services, etc
 Benefits are reduced for earlier retirement as funds have not earned
enough interest
 Retirement Age –
o 65 is the normal retirement age for receiving full unreduced benefits
 Vesting –
o Employee’s ownership of pensions contributions made by the employer
o Used reward long term employees, reduce turnover and to avoid forfeiture for
employees who changed jobs
 Annual Limits on Contributions and benefits
 Early and late distributions –
o No penalty if the employee dies or is permanently disabled
 Substantially equal payments are made over life expectancy
o Retirement distributions start mandatory at the age of 71.5
 If participant still working, he can delay distributions
9.5.2 Traditional Individual Retirement Account (IRA)

 Allows workers with taxable compensation below threshold to make limited annual
contributions and receive favorable tax treatment
 Worker must have taxable compensation during the year and must be less than 71.5 in
age
- 51 -
 Income includes salary, tips, commissions, fees, bonuses, self-employment income,

taxable alimony and separate maintenance investments
o Investment income, rental income and pension does not qualify
Tax Deductible Contributions

 Worker should not be a participant of employer-sponsored-retirement plan
 If worker is a member, then his gross taxable income after certain deductions should be
less than $34000 (54000 for married couples)
 If the worker is not a member, then it the limit is $44000 for individual and $64000 for a
jointly filing married couple
o Max limit is 3000. (If spouse not working, its 6000)
o 7000 if both spouses are 50 or older
 Homemaker spouses with no employer IRA can contribute $3000
Withdrawing IRA Funds

 10% penalty on w/d of funds before age of 59.5
 No penalty on w/d to pay medical payments deductible above 7.5% of gross income
 Individuals with 12 consecutive week unemployment payments, can withdraw without
penalty to pay health insurance premiums
 W/d for higher education expenses and first-time home purchase (upto $10000) are
excluded
 Must withdraw after they reach 71.5 or a tax penalty applies
Roth IRA
 Same limits for annual contribution as traditional IRA
 Annual contributions not income tax deductible
 Investment earnings accumulate free of federal income taxes
 Tax-free w/d after age of 59.5 or later
 Does not make it mandatory to w/d after age of 71.5
 Maximum individual contribution gross income is $95000 (150000 for married couples).
o With adjusted gross limits phased out – between 95000 & 110000
o For married couples – between 150000 and 160000
 A traditional IRA can be converted to a Roth IRA for workers with inc < 100000
Other tax-Deferred Retirement Plans

 Section 401(k) plan - contribute before tax plans in dollars and receive funds in cash.
Max limit 11000. Favorable income tax treatment
 Profit-Sharing Plan – Defined contribution plan that pays part of the firm’s profits to
participating employees.15% of covered compensation is max. limit
 Thrift Plan (or Savings plan) - Defined contribution plan – employees contribute upto a
portion of their salary. Employer contributes some % of employee’s contribution
 Keogh Plan (HR-10 plan) – A qualified plan that allows self-employed individuals to
make tax-deductible contributions to a defined contribution plan or defined benefit plan.
 Simplified Employee pension – Employer contributes to IRA of each employee
 SIMPLE plan – for employers with < 100 eligible employees and not having any other
retirement plan
 Section 403(b) – Tax deferred employment plans for tax-exempt employers and public
schools. Employee contributes a % of her salary upto an annual limit
- 52 -
9.6 Individual Annuities

 Fundamental purpose of annuities is to provide periodic payments for a fixed periods or
over lives.
 Life insurers sell following annuities -
o An immediate annuity – purchased for lump sum – monthly payments received.
o A deferred annuity – money paid annually -> payment later in lump sum
o Flexible-premium annuity – pay variable premium till retirement -> receive
payment accordingly
o Fixed annuity – fixed payment and fixed receipt at retirement
o Variable annuity – depend upon variable return from investments of the fund.
Protects against inflation
9.7 Social Security

 Most people above 62 use this plan and most important plan in US
 Survivor, Disability income and Medicare benefits to beneficiaries
9.7.1 Basic Characteristics of OASDI

 Compulsory Program
o Most employers and employees must contribute to this program.
o Provides base financial security to the population.
o Adverse selection is controlled as all are covered
 Minimum Floor Of Income
o Provides a minimum floor of income with respect to covered losses.
 Emphasis on Social Adequacy
o Provide a standard of living to all beneficiaries.
o Formula weighted towards lower income groups, aged people an large families
 Benefits Loosely related to earnings
o Higher the covered earnings, greater the cash benefit
 Benefits prescribed by law
o OASDI benefits are based on federal law and is not a contract
 Financially Self-Supporting
o Funds derived from payroll tax contributions of employees, employers and the
self-employed
 Full Funding unnecessary
o Full funding means that if program should terminate assets discharge all
liabilities. Its unnecessary because
 Program is indefinite
 Since it is compulsory, new entrants to workforce will support it
 Federal government will back it in case of financial problems
 No means test
o Does not require a means test to get benefits
9.7.2 Covered Occupations

 Most occupations in private sector are compulsory covered
 Self employed workers with earnings of $400 or more
 Workers of NGOs, religious organizations, etc
 Federal civilian employees hired after 1983
- 53 -
9.7.3 Insured Status

 1 credit for each $870 covered earnings. Max 4 credits in 1 year allowed.
 3 kinds of insured status
o Fully Insured – full time workers for 10 years
o Currently Insured – earned 6 credits in the last 13 calendar quarters in which the
disability, death or retirement benefit occurs.
o Disability Insured - must be disability insured with credits depend on age.
 31 years + must be fully insured and have min. 20 credits for last 40
quarters
 Special rules for younger workers and blind persons
9.7.4 Types Of Benefits

The program has 4 major benefits -
 Retirement benefits –
o Require fully insured status
o Benefits payable at full retirement age of 65
o Monthly benefits based on primary insurance amount (PIA)
o Cost-Of-Living Adjustment
 Monthly benefits are adjusted automatically for cost of living through the
WPI or CPI
o Early retirement Age –
 For early retirement at 62, a person receives 80% of full benefits.
o Delayed retirement Credit
 For each year above 65, PIA is increased by 5%.
o Monthly Retirement Benefits – Paid to following persons -
 Retired workers upto age of 62 or older
 A retired worker’s spouse at least aged 62. An unmarried divorced
spouse , 2+ years divorce, 10+ years marriage, age 62+
 A retired worker’s unmarried children aged under 18
 A retired worker’s unmarried disabled children under age 18 or older if
they were severely disabled before 22 and continue disabled
 A retired worker’s spouse of any age caring for under 16 disabled
children
 Survivor Benefits
o Can be paid to dependents of a deceased worker –
 Unmarried children below 18
 Unmarried disabled children as defined above
 Surviving spouse caring for unmarried children under 16 or unmarried
disabled children
 Surviving spouse > 60, if deceased was fully insured
 Disabled widow or widower between 50 and 59, if deceased was fully
insured
 Dependent parent aged 62, if deceased was fully insured
 Disability Income Benefits
o Disabled workers and eligible dependents
 Medicare benefits
o Medicare program covers most people above 65
o Covers people with disabilities
- 54 -
Chapter 10 - Life Insurance
10.1 Premature Death

- Early death of a working person with outstanding or financial obligations.
Costs associated with premature death

- Income earned by the diseased terminates
- Additional costs for funeral expenses, uninsured medical bills, probate and estate
settlement costs, child-care expenses and federal and state taxes for large estates.
- A reduction in the standard of living
- Emotional and noneconomic costs
10.2 Need for Life Insurance

Financial impact on a family depends upon family structure:
10.2.1 Singles
Modest amount of life insurance for funeral expenses and uninsured medical bills.
Insurance needs could change in the future.
10.2.2 Single-Parent families

Great financial insecurity for the surviving dependent children despite the possibility of
receiving Social Security benefits. Generally they have low incomes and possibility of
purchasing life insurance is limited.
10.2.3 Two-Income Families

With children: financial insecurity to maintain customary standard of living. Without
children: reduced need. However, other concerns such as indebtedness and current or
future financial support of parents or other relatives might increase the need
10.2.4 Traditional families

- only one parent is in the labor force. There’s significant need for insurance. Need for
life insurance on the spouse can result in significant expenses, such as those for child-
care and housekeeping
10.2.5 Blended Families

- one in which a divorced person with children marries someone who also has children.
Need for life insurance is great
- 55 -
10.2.6 Sandwiched Families

one in which a son or daughter with children provides financial support or other types of
assistance, such as physical care, to one or both parents. The son or daughter is
‘sandwiched’ between the older and younger generation
10.3 Determining the Amounts of Life Insurance to Own
10.3.1 Needs Approach

This is based on survivors’ financial needs and the amount of existing life insurance,
financial assets, and expected Social Security benefits. The most important family needs
include the following:
- An estate clearance fund: funeral expenses, uninsured medical bills, car loans and
installment debts, and estate administration expenses
- Income during the readjustment period
- Income during dependency period
- Income to surviving spouse during the blackout period: Social Security benefits can
be paid to a surviving spouse with eligible children under the age of sixteen. The
benefits do not resume until the spouse reaches 60. Children’s benefits continue till
the child reaches 18
- Retirement income
- Special needs, such as paying off a mortgage, an emergency fund, or a college fund
for children
10.4 Types of Life Insurance
10.4.1 Term Insurance

If the insured dies within the term or policy period, the face amount of the policy is paid;
if the insured survives beyond that period, nothing is paid
- Temporary insurance: no of years or till a certain age
- No cash value/savings element
- Usually renewable and convertible: Generally do not renew after a certain
age
- Are based on mortality rates: increases with age as mortality rates increase
Cash Value: funds that accumulate in a whole life insurance policy – can be accessed by
borrowing, paid-up life insurance and surrendering the policy in exchange for the cash value.
Renewable: characteristics of term life insurance that allows renew ability for additional
periods without evidence of insurability
Convertible: Can be exchanged for some type of permanent life insurance policy with no
evidence of insurability
Mortality rates: Probabilities of death at specific ages.
- 56 -
10.4.1.1. Types of Term Insurance
- Yearly renewable term: policy owner has the right to renew for successive one-year
periods
- Specified period term: Premium increases on renewal at end of the term; doesn’t
change within the term
- Decreasing term: Used frequently to pay off a mortgage at the death of a homeowner
- Reentry Term: the premium is increased substantially if the insured cannot provide
satisfactory evidence of insurability
10.4.1.2. Uses of Term Insurance
- When income is limited and substantial amounts of life insurance are needed.
Premium has decreased over time because of intense price competition and increases
in life expectancy
- To meet a temporary need, such as the need fro income during the readjustment,
dependency and the blackout period
- To guarantee the future insurability of the insured: might convert it later into a
permanent policy without evidence of insurability
Evidence of Insurability:
A requirement that insured demonstrate that he or she still meets the insurer’s
underwriting standards - submit a medical questionnaire or have a physical examination.
Disadvantages: not suitable for lifetime protection since premium increase with age
prohibitively. They do not develop cash values.
- 57 -

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INS 22 Reference Guide

INS 22 – Reference Guide

Chapter 1 -Overview of Personal Insurance ....................................................................... 8

2.4.4 Specialty Insurers ............................................................................................. 16

Chapter 4 – Personal Auto Policy (PAP) Part- II ............................................................. 24

5.2.3.4 Section I: Property Coverages ...................................................................... 32

8.1.2 Inland Marine Floater Policy Provisions ......................................................... 43

10.2.1 Singles ............................................................................................................ 55

Chapter 1 -Overview of Personal Insurance

1.1 Property Loss Exposures

1.1.1. Elements of Property loss exposures

 Property exposed to loss

1.1.2 Classification of personal property

 High-value personal property:

 Property with unusual or intrinsic value:

 Business personal property

 Motor vehicles, trailers, watercraft and aircraft

1.2 Property Loss Exposures

1.2.1 Elements of Liability loss exposures

 Financial consequences that might occur

1.2.2 Types of claims

o Negligence – failure to act in a reasonably prudent manner

o Intentional torts – regardless of whether harm is intended – deliberate act

o Absolute liability- dangerous activities/defective products, regardless of degree

1.3 Liability Loss Exposures

It involves the following steps:

1.3.2 Techniques to treat loss exposures

 Avoidance: by choosing not to own a particular property or engage in particular

 Retention: no transfer of loss exposures to insurance company or anyone else.

1.3.3 Types of Personal Insurance Policies

Chapter 2 – Automobile Insurance and Society

2.1 Problems associated with automobile insurance

2.1.1 High Frequency of Auto Accidents

The accident frequency has increased due to -

2.1.2 High Costs of Automobile Accidents

 Costs over $50bn in a year.

2.1.3 Underwriting Losses

2.1.4 Irresponsible Drivers

 Drivers with no automobile insurance

 Drivers under influence of alcohol & drugs

 Other high-risk drivers

o Habitually violate traffic laws

2.1.5 Availability & Affordability of Automobile Insurance

2.2 Compensation of Auto Accident Victims

2.2.1 The Tort Liability System

2.2.2 Financial Responsibility Laws

2.2.3 Compulsory Insurance Laws

2.2.4 Unsatisfied Judgment Funds

Those opposed to these point out the following flaws –

2.2.5 Uninsured Motorists Coverage

2.2.6 Underinsured Motorists Coverage

2.2.7 Low Cost Auto Insurance

2.3 No Fault Automobile Insurance

 Monetary Threshold – Claim has to be below a monetary threshold to avail this

2.3.1 Characteristics of No-Fault Laws

Typical No Fault Benefits

Right to seek compensation from party at fault

Exclusion of Property Damage

2.3.2 Types of No Fault Laws