RMI 3011 Professor McHugh Test 2 Review The test will be 55 Multiple Choice 1 True False CAPITALIZED words are fill ins from the notes Compare exclusions conditions and declarations o Exclusions insurance contracts contain three major types of exclusions 1 Excluded PERILS ie flood intentional acts 2 Excluded LOSSES ie a professional liability loss is excluded in the homeowners policy 3 Excluded PROPERTY ie pets are not covered as personal property in a homeowners policy Why are Exclusions necessary Some perils are NOT commercially insurable ie catastrophic losses due to war Extraordinary HAZARDS are present ie using the automobile for a taxi Coverage is provided by OTHER contracts ie use of auto excluded on homeowners policy MORAL hazard problems ie coverage of money limited to 200 in homeowners policy ATTITUDINAL Morale hazard problems ie individuals are forced to bear losses that result from their own carelessness Coverage not NEEDED by typical insures ie homeowners policy does not cover aircraft o Conditions are provisions in the policy that qualify or place limitations on the insurer s promise to perform proof of loss is a common condition If policy conditions are not met the insurer can refuse to pay the claim Insurance policies contain a variety of miscellaneous provisions Ie cancellation subrogation grace period misstatement of age o Declarations are STATEMENTS that provide information about the particular property or activity to be insured Can usually be found on the FRONT page of the policy In property insurance it contains name of the insured location of property period of protection amount of insurance premium and deductible information Insurance contracts typically contain a page or section of DEFINITIONS o For example the insured is referred to as you Insuring agreement o The Insuring Agreement summarizes the major PROMISES of the INSURER o The two basic form of an insuring agreement in property insurance are Named Perils Open Perils Open vs Named Perils o Named Perils Endorsements and Riders coverage is where only those perils specifically named in the policy are covered BURDEN S ON THE INSURED excluded BURDEN IS ON THE INSURER to show that the loss is EXCLUDED o Open Perils or Special coverage is where all losses are covered except those losses specifically o Endorsements in property and liability insurance an ENDORSEMENT is a written provision that adds to deletes from or modifies the provisions in the original contract ie an earthquake endorsement to a homeowners policy PROPERTY o Riders in life and health insurance a RIDER is a provision that amends or changes the original policy ie a waiver of premium rider on a life insurance policy LIFE AND HEALTH Deductibles o A deductible is a provision by which a specified amount is SUBTRACTED from the total loss payment that otherwise would be payable The purpose of a deductible is to Eliminate SMALL claims that are expensive to handle and process Reduce PREMIUMS paid by the insured Reduce MORAL hazard and ADDITUDINAL Morale hazard With a straight deductible certain amount of dollars the insured must pay a certain number of DOLLARS of loss before the insurer is required to make a payment ie an auto insurance deductible An aggregated deductible means that all losses that occur during a specified time period usually a TIME LIMIT are accumulated to satisfy the deductible amount Deductibles in Health Insurance o A calendar year deductible is a type of AGGREGATE deductible that is found in basic medical expense and major medical insurance contracts o An ELIMINATION waiting period is a state period of time at the beginning of a loss during which no insurance benefits are paid ie disability income contracts that replace part of a disabled worker s earnings typically have elimination periods of 30 60 or 90 days or longer periods Coordination of benefits provision o The coordination of benefits provision is a group health insurance is designed to prevent over insurance and the duplication of benefits if one person is covered under more than one group health insurance plan SEE Equal Shares and Pro rata Coinsurance clause for property insurance know calculation examples from class text covers it too o A coinsurance clause in a property insurance contract encourages the insured to insure the property to a stated PERCENTAGE of its insurable value If the coinsurance requirement is not met at the time of the loss the insured must share in the loss as a coinsurer Amount Amount of of insurance insurance carried required x Loss Amount of recovery o The fundamental purpose of coinsurance is to achieve EQUITY IN RATING A property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial losses If the coinsurance requirement is met the insured receives a rate discount and the policy owner who is underinsured is penalized through application of the coinsurance formula Coinsurance clause or requirements penalizes under insured o Insurance to FULL VALUE o Insurance to HALF VALUE o Coinsurance in Health Insurance Health insurance policies frequently contain a coinsurance clause o The clause requires the insured to pay a specified PERCENTAGE of covered medical expenses in excess of the deductible o The purposes of coinsurance in health insurance are to 1 Reduce PREMIUMS 2 Prevent OVERUTILIZATION of policy benefits Elimination waiting period o An ELIMINATION waiting period is a state period of time at the beginning of a loss during which no insurance benefits are paid ie disability income contracts that replace part of a disabled worker s earnings typically have elimination periods of 30 60 or 90 days or longer periods o Elimination period has to due with Deductibles Law of large numbers vs large loss principle o The Law of Large Numbers means the larger the number of risks e g cars or homes etc that an insurance company insures the closer they will be able to predict the actual results of the chance of an accident occurring o Large Loss Principle transfer of high severity risks through the insurance contract to protect against catastrophic occurrences While insurance is generally not the most cost effective means of recovery of minor losses an insured cannot predict catastrophes and thus set aside enough money to cover losses on a mathematical basis or to self insure Other insurance provision multiple insurance companies cover same loss o The purpose of other insurance provisions
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