Property & Casualty Insurance Book

Affordable
AffordableEducators
Educators
PROPERTY & CASUALTY
40-Hour Course
Copyright 2012 D&H Investment Trust
The objectives of this course is to expose you to a variety of contemporary insurance issues. In addition to laying a foundation of knowledge, it is hoped that these topics will
stimulate your curiosity to learn more about one or several of the subjects discussed. This
is a self-study course designed to help you meet your prelicensing requirement. It has been
accredited by the State. For best results, you should review the complete text. To measure
your knowledge, you must pass the online examinations associated with this course. For
details on the examination and procedures for earning a Certificate of Completion and credit
hours, go to www.preclass.com
This publication is designed to provide authoritative information in regard to the subject matter covered. It is sold with the understanding that the author is not engaged
in rendering legal, accounting or other professional services. The information within
these pages is general insurance education. It is not to be used to advise your clients or others in specific matters unless we agree in writing, in advance, that it will
be used for that purpose. If you need advice for specific client matters, seek a competent professional.
For more course offerings

call (800) 498-5100 or go to:
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CONTENTS
1 Introduction
2
2 Nuts & Bolts of A Policy
37
3 Contract Law
55
4 Personal Lines
66
5 Inland Marine
114
6 Other Property Products
129
7 Personal Auto
154
8 Commercial Coverages
198
9 Commercial General Liability & Professional Liability
10 Bonding & Crime
260
11 Commercial Auto
271
12 Workers Compensation & Employer Liability
13 Homeowners Insurance Valuation
313
14 Replacement Cost Coverage
350
15 Construction and Values
361
16 Catastrophe Coverage 375
17 Insurance Terms & Concepts
390
18 Licensing
403
19 Code & Ethics
438
20 The Commissioner & Insurers
447
21 Marketing & Trade Practices
465
22 California Insurance Guarantee Fund
483
238
289
Section PC 1
INTRODUCTION TO
PROPERTY & CASUALTY
Objectives
This unit will familiarize you with some of the basic and/or reoccurring
terms and themes in insurance. That way, as youre reading through
later units, youll hardly ever bump into a concept you dont know.
This unit can also be used as an addendum to the glossary.
This unit includes . . .
Introduction to Insurance
General Insurance Concepts
Methods of Handling Risk
Ideally Insurable Risks
Determining Loss/Loss Valuation
SPECIAL NOTE:
Until 2011, agents who sold homeowners, auto, commercial,
professional liability, workers compensation, flood, earthquake or
personal property insurance did so under one license . . . called a Fire
and Casualty License. Today, an agent selling these products is
required to have two licenses . . . A Property Broker-Agent License
and a Casualty Broker-Agent License. This course prepares you for
BOTH licenses. Similarly, our property-casualty workbook materials
(provided under separate cover), that prepare you for the State Exam,
cover BOTH Property and Casualty topics.
It is also of interest that Property and Casualty Broker-Agents today
are NOT permitted to sell health, disability and long term care
insurance products; products previously sold under the defunct Fire
and Casualty License. The sale of these health insurance products
3
today requires a separate Accident and Health License . . . a course

available from our school.
1. Introduction to Insurance
Insurance is a contract that indemnifies (repays) someone against
loss, damage, or liability. An insurance policy is a written
contract that outlines the obligations and responsibilities of the
insured and the insurer.
Insurance refers to transferring the risk of a loss to an insurer
under the terms and conditions of an insurance contract. The
insurer will indemnify the insured against loss, damage, or liability
arising from a contingent or unknown event.
Among the different types of loss/risk control, insurance is known
as the transfer of risk, or risk transference. If someone chooses not
to insure their valuables, then they are assuming the risk of loss.
Putting it into Context:
Heres an example of how this benefits society. Say neighborhood X
experiences an average of 1 devastating house fire annually. Without
insurance, the owner of the house will have to pay hundreds of
thousands of dollars. Instead, everyone in neighborhood X pays $500
in HO insurance, and in exchange they can rest assured that if their
home burns down, they will be fully compensated.
Related Lingo:
The Insured is the person protected under the Insurance policy.
The Insurer is the company or the individual who provides the
policy. The Named Insured is the person/persons specifically
listed in the policy as the insureds. Insured premises means a
location where coverage applies. Insured residence means

the insured lives where coverage applies.
Note: Insured is more of a general label for an insurance client. For
example, The Personal Auto Policy protects the insured against
damage or injuries from uninsured/underinsured motorists. Whereas,
Named Insured refers to a specific person, family, or group listed in
the policy. For example, The Joness are the named insured in the
Personal Auto Policy declarations.
A. The 6 Requirements for Insurance Policies
All insurance policies must contain:
1) Information about the parties involved in the contract
2) Description of the property or the life insured
3) The insureds insurable interest
4) Information about the risks the insurance covers
5) The policy period
6) Premium rates
Legal World: An insurers financial rating (A+, B, C, etc) is not
required to be specified in an insurance policy.
B. Insurance Classes & Companies
In order to regulate the industry, California code designates
different classes. These classes are:
Life insurance insures someones life and pertains to the

granting, purchasing, or disposing of annuities.
Property insurance protects against losses from fire,

lightening, windstorm, tornado, or earthquake to:
o Property
o Accounts and documents
o Moneys
Marine insurance includes insurance against any kind of

loss, and protects:
o Vessels
o Aircraft
o Cars
o Goods/freights/merchandise
o Accounts and documents
o Moneys
Title insurance protects the owners or lien holders of real

or personal property.
Surety insurance guarantees the behavior and

performance of hired contracts.
Disability insurance provides financial assistance when

an insured is disabled or killed from an accident or
sickness.
Plate Glass insurance protects against the breaking of

valuable glass.
Liability insurance assists the insured in paying thirdparty bodily injuries or property damage that the insured is
responsible for.
Workmens Compensation protects employees who are

injured on the job, and employers who are legally liable to
reimburse injured employees.
Common Carrier Liability insures truckers for any

injuries or property damages done to third-parties.
Boiler and Machinery insures against losses from bodily

injuries or property damage caused by explosions or
accidents involving:
o Boilers
o Tanks
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o
o
o
o
o
o
Pipes
Pressure vessels
Engines
Wheels
Electrical machinery
Etc.
Burglary insurance insures against losses from burglary

and/or theft.
Credit insurance protects insureds if a

business/individual extending credit to the insured can no
longer meet their financial obligations.
Sprinkler insurance protects against loss through water

damage if a sprinkler or pump breaks or leaks.
Team and Vehicle insurance protects against damages or

liability caused by the use of teams or vehicles.
Automobile insurance protects anyone who owns, uses,

or sells automobiles.
Mortgage insurance guarantees the payment of

principal, interest, and any other expenses that someone
has agreed to pay under a note, bond, or contract.
Aircraft insurance protects anyone who owns, uses, or

sells aircraft.
Mortgage Guaranty insurance protects against financial

losses due to the nonpayment of principal, interest, and
other fees that have to be paid under the terms of any
note, bond, or contract.
Miscellaneous insurance protects against direct or

indirect damages from:
o
o
o
o
Lightening
Windstorm
Tornado
Earthquake
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Miscellaneous insurance also protects producers in the

movie industry from delays, sicknesses, death,
cancellation, etc.
Property vs. Liability Coverages
Property insurance covers the financial loss we suffer when something
we own is stolen, damaged or destroyed. Liability or casualty
insurance is coverage for our actions or negligence which has caused
another person loss or injury.
There are many types of private insurance companies that serve
the industry. A mutual insurance company, simply put, is a
company that is not publicly traded and therefore has no shareholders.
Instead, policyholders are the ones who share in ownership of the
company. By contrast a stock insurance company is owned by a
group of stockholders, who are not necessarily policyholders. A
Reciprocal Insurance Exchange is a form of unincorporated
insurance company in which subscribers exchange policies through an
Attorney in Fact (a separate entity that runs day to day operations) in
transactions that share or spread their risk. USAA and Farmers
Insurance Group are examples of RIEs. Fraternal organizations are
described as any benefits society (without capital stock) conducted
solely for the benefit of its members and their beneficiaries and not for
profit. Such societies are typically voluntary groups of people
affiliated through ethnicity, religion, profession or some other tie, e.g.,
Knights of Columbus, Modern Woodmen of America, etc, offering
various types of insurance to its members.
2. General Insurance Concepts
The following concepts are key and reoccurring:
A. Indemnity
Indemnity is a type of contract, such as insurance, that serves
to restore the individual to the approximate financial position
occupied before a loss. To indemnify is to restore an individual
to the approximate financial position occupied before the loss.
Alert!
Indemnity is a noun: its a type of contract.
Indemnify is a verb: it restores the individual to their financial
position before the loss.
The Principle of Indemnity means an insured cant collect more
than the actual loss, or the insured cant collect twice for the same
loss.
If a question asks you what indemnity means, youll probably find the
definitions for indemnify, and for the Principle of Indemnity among the
choices. They mean to throw you off, so really familiarize yourself with
these concepts.
B. Risk
Risk is defined as the chance of loss, on any insured property or
item. The term risk is used in a general way to designate the
entire subject matter of insurance covered under a policy, or
upon which an application for insurance has been received. Risk
is also sometimes used to designate a policyholder, i.e., he/she
is a preferred or poor insurance risk.
Note: Isnt there an easier way to say that? Risk just means something
could be negatively affected by an event. If theres a fire, theres the
risk that Johns house might be damaged.
There are 2 categories of risk:
1) Pure Risk is defined as the uncertainty as to whether or not
a possible loss will actually happen. There could be a loss, but
no one knows when or how.
2) Speculative Risk is a loss thats more predictable, such as
gambling, business ventures, or playing the stock market.
Speculative risk assumes that, based on the persons

actions/decisions, there could be a loss or a gain.
Alert!
The main difference is that Pure Risk happens accidentally and
unexpectedly, whereas with Speculative Risk, the person is already
aware of the risk of loss. Insurance only covers Pure Risk: trust us,
thats on the final exam.
There are 5 methods of handling risk or the potential for
financial loss:
1) Avoidance is an individuals or corporations decision to
not expose themselves to a particular risk. This could
mean not going into a line of business prone to litigation,
or not engaging in an activity prone to injury.
2) Retention means an individual or corporation decides
against insurance, and will pay for any losses out of
pocket. This is also referred to as the assumption of risk.
3) Sharing means an individual or group of individuals,
corporation, or an association agrees to share any losses.
Sometimes associations handle their own Workmens
Compensation. Whenever someone is injured on the job,
all the members of the association share the expenses.
4) Reduction means taking measures that are specifically
designed to reduce the frequency and severity of loss. This
could mean disposing of hazardous materials to avoid a
fire (reduced frequency), or installing a sprinkler system to
keep people from being injured in the event of a fire
(reduced severity).
5) Transfer means transferring the expenses of potential
loss onto another party, i.e., purchasing insurance.
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The following criteria describes an ideally insurable risk:
The loss must be measurable
The loss must be accidental
The loss must be predictable
The law of large numbers has to apply
The loss must create financial hardship
Insurance must be affordable and practical
The loss must not be catastrophic
C. Insurable Events
This basically refers to any insurable circumstance that doesnt
involve speculative risk. So, everything is insurable unless its
gambling, the lottery, business ventures, etc.
D. Exposure
Exposure is defined as someones potential for loss, or their
loss exposure/exposure to loss. For example, a homeowner in a
particular region of the country will have different kinds of
exposures than a homeowner in another region. They may be
more vulnerable to hail, tornadoes, or forest fires, so they have
a higher exposure to loss to those particular perils.
E. Peril
Peril refers to the specific event causing a loss, such as fire,
windstorm or collision.
F. Hazard
A hazard is any factor that creates or increases the chance of
loss.
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Note: So whats the difference between a risk and a hazard? Risk is a

general term used for the possibility of damages/injuries in the future.
If were using hazard that means there is something present which
makes damages/injuries a lot more likely. For example, if a car has
really old, malfunctioning brakes, the faulty brakes are a hazard.
There are different types of hazards:
A Physical Hazard is created by the condition, occupancy, or use
of the property itself.
A Moral Hazard is a characteristic of the insured that increases the
chance of loss. Examples of this would include arranging an
accident to collect the insurance or inflating the amount of a claim.
So a moral hazard basically means the insured is shady.
A Morale Hazard is marked by the insureds carelessness or
indifference. So if Felicity goes to sleep at night without putting out
the scented candles, thats considered a morale hazard.
A Legal Hazard is created by decisions or actions of the courts. If
something could result in big, expensive lawsuits, this is considered
a legal hazard.
Concurrent and Non-concurrent Policies
If a property has multiple insurance policies, the policies are said to be
concurrent if the terms and conditions match. If they dont, the
policies are considered Non-concurrent. The purpose of establishing
this status helps to determine which policy is the primary policy.
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G. Occurrence
An occurrence is an event that results in a covered cause of
loss. An occurrence refers to gradual or accumulative damage
without regard to exact time or place. The easiest way to
understand occurrence in this context is its more wear and tear.
H. Accident
An accident is the insurance opposite of an occurrence. An
accident is defined as a sudden, unforeseen, and unintentional
act identifiable in time and place.
Note: The insurance definition of an accident has a lot of legal
implications. Its specifically designed to keep anyone from taking
advantage of the system:
Unforeseen: Unplanned
Unintentional: Not on purpose
Identifiable in time and place: It can be proven and documented
I. Insurable Interest
Insurable interest is a relationship or condition that loss or
destruction of life or property would cause a financial loss.
Insurable interest has to exist at the time of loss. Contingent or
expectant interests are not insurable.
When there is more than one person with an insurable interest in
the covered property, the companys liability will be no greater
than the insureds interest at the time of the loss, or for more
than the limit of coverage.
Note: When the test asks you about insurable interest, thats what the
answer is going to look like. However, in simpler terms, insurable
13
interest means X needs to cover Y, because if Y were lost or damaged,

it would cost X money. Mark needs to insure his car, because if his car
were lost or damaged, it would cost Mark money. Insurance exists to
protect against financial losses.
J. Burglary
A burglary is when someone removes property illegally after
forcefully obtaining entry to the premises.
K. Robbery
A robbery is when someone removes property illegally from
another person by threatening and/or using force or violence.
L. Theft
Theft is a general term for stealing.
Note: Remember this for the testburglary versus robbery:
Burglary is a person breaking in and stealing from a location.
Robbery is a person stealing from another person using threats or
force.
M. Loss
Loss refers to:
The amount sought through an insureds claim
The amount of reduction in the value of an insureds property

caused by a covered peril
The amount paid on behalf of an insured under an insurance

policy
There are 2 categories of loss:
1) Direct Loss, which refers to loss or damage done to the
primary subject of the insurance agreement. So, if an
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insurance policy insures a business against fire, and

theres a fire, the damage the fire does to the property is
called direct loss.
2) Indirect/Consequential Loss refers to any resulting loss
of income or destabilizing of finances resulting from
damages, loss, or the interruption of business operations.
So, if a commercial property is damaged by a fire and it
cant operate, the financial losses are the indirect losses.
Loss exposure refers to the particular losses an individual or
location is more vulnerable to. For example, a homeowner in
Oklahoma has a higher loss exposure to tornadoes and
hailstorms, then a homeowner in California.
N. Deductibles & Self-Funding
The deductible is the dollar amount beyond which the insurance
protection begins. The insured assumes the loss up to the
deductible limit and the insurer pays the remainder up to the
policy limit.
Most people are familiar with this concept, but just in case youre
not, heres a basic rundown: if Mike has $15,000 in collision
coverage with a $500 deductible, and Mike is in an accident, he
pays the first $500. Therefore, if the accident only ends up
costing $450, the insurance doesnt help pay for the damages.
Deductibles serve an important function:
Deductibles reduce insignificant claims
Deductibles keep the cost of insurance down
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Whenever deductibles are discussed it is important to determine

how they apply, especially where medical expenses are involved.
For example, does the deductible apply to multiple expenses
for one individual . . . or do the expenses of several family
members involved in a single accident apply to the stated
deductible . . . or do only sick care expenses apply to the
stated deductible.
Much like a deductible retains a portion of the insured risk, many
group insurance plans retain portions of the risk involved in
insuring their employees by setting up self-funded plans where
the employer sets aside funds to make claim payments. In the
long, these plans can results in savings on insurance costs as
well as increase preventative measures.
O. Certificate of Insurance
This is documentation of an insurance policyCOI if youre lazy.
A certificate thats been issued by a company or producer
verifies that the insurance policy is in effect for:
The named insureds

The stated amounts
The stated coverages
P. Law of Large Numbers

There are two important aspects to the Law of Large Numbers:
1) If you take a random sample from a larger population, its
more likely to represent the whole, then if you took a
random sample from a smaller population.
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2) The more people there are, the more the chance of risk
increases.
Q. Damages
Damages refer to the physical or mental harm resulting from an
accident or covered cause of loss. The damage could mean
someones car is scratched, or the damage could mean someone
was harassed and bullied at work until they suffered a
breakdown.
In legal terms, damages have to have a determinable and
compensatory value. Once the compensatory value of the
damage is assessed, someone who successfully wins a lawsuit or
claim can be compensated for those damages.
There are different ways damages are compensated:
General compensatory damages are straightforward.

Someone was injured in a car accident and those injuries
amounted to $50,000 in medical bills, so the person should
be compensated for $50,000.
Special compensatory damages are harder to

determine, because this has more to do with emotional or
mental suffering. If someone was injured in a car accident
and they were permanently disfigured, the person will ask
for special compensatory damages, which is sometimes
referred to as pain and suffering.
Punitive damages are designed to punish the liable

party. If a corporation withheld information about a toxic
leak, which poisoned neighboring groundwater, exposing
17
the citizens to the toxins, the court could decide on

punitive damages.
R. Proximate Cause
Proximate cause is the factor causing damage or loss for which
there is an unbroken chain of events between the occurrence of
the insured peril and the resulting injury or damage.
So, for example: a windstorm knocks over a tree, which lands on
a power line, which falls over and sets fire to a garage, which
collapses and damages a car. The proximate cause of damage to
the car was the windstorm. So in simplest terms, the proximate
cause is always that which gets the ball of destruction a-rolling.
A policy may or may not cover proximate causes. For example, if
Randys house is burning down, and the fire department puts out
the fire, but causes water damage, the water damage may be
covered under Randys fire coverage by reason of proximate
cause.
S. Pair and Set Clause

Loss to a pair and set provision recognize that the value of a pair
or set is at its highest when all parts of the set are accounted
for. In most states, this provides that loss to a part doesnt
mean a total loss of the pair or set, and the company has the
option to:
Repair or replace any part of the set, to restore the set, or to

pair its value before the loss.
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Pay the difference between the ACV of the property before

and after the loss.
Alert!
More often than not, insurers take the second option, so the test is
probably going to spring some math problems on you. Well simplify
the concept: Diane has an expensive pair of diamond earrings worth
$1,000 each, but the set is worth $3,500. Pair and set pays the
difference between the ACV of the property before and after the loss,
therefore the formula would be:
$3,500 - $1,000 = $2,500 will be reimbursed
T. Cancellation/Nonrenewal
Cancellation is the termination of a policy prior to the stated
expiration date. The insured can request that their policy be
cancelled, or the insurance company can decide to cancel the
policy for a justifiable reason (usually non-payment of
premiums).
There are different kinds of policy cancellations:
1) Flat rate cancellation just cancels the policy as of its date of
inception, without any premium charge. A 100% refund is
given to the client.
2) Pro-rata cancellation terminates the insurance contract, and
then adjusts the premium charge to the exact time the
protection was in force. The insurer keeps the earned
premium and refunds the unearned premium.
3) Short rate cancellation refunds any unearned premiums
minus administrative expenses. The insurer keeps earned
premiums plus an extra charge.
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Nonrenewal means an insurance company, agent, or insured

decides not to renew an insureds policy when it expires.
Policy Cancellations in California

First, you need to understand that if a policy is cancelled, its
terminated during the policy period before the policy has expired. If a
policy is nonrenewed, it means the insurer or insured decides not to
renew the policy once its reached the end of the policy period.
Next, understand that depending on the type of insurance being
cancelled, California has some very specific rules about canceling
policies. In general . . .
When a policy is cancelled, the insurer must return the gross
unearned premium or the premium attributed to a reduction in
coverage to the insured.
Certain policies can ONLY be cancelled by the insurer for issues like
non-payment o premium, a license suspension, fraud, material
misrepresentation, a convition of the insured for a crime, failue of
the insured to protect the property after a loss or if the insured has
obtained replacement coverage.
In certain cases, an insure must offer to renew or give the insured
an option (like an assigned risk pool) before canceling his policy.
An insurer cannot refuse to renew a policy based on an insureds
age or a pending claim.
Insurers must provide the reason foro canceling upon a written
request by the insured.
An insurer cant cancel an insured while he is rebuilding an insured
property.
Violation of these cancellation rules is a misdemeanor, subject to a
fine of $1,000 per violation.
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U. Mysterious Disappearance
Mysterious disappearance means property disappears and no
one knows for certain how. Usually its assumed the
disappearance was the result of theft, but if theft cant be
absolutely determined, its referred to as mysterious
disappearance.
Julian left his digital camera on a park bench and didnt realize it until
nearly ten minutes later. When he ran back to get the camera, it was
gone. Julian assumes the camera was stolen, but because there were
no witnesses to the theft, its considered a mysterious
disappearance. We know it should be far cooler with a name like
mysterious disappearance. It should be something like: Julian gets
sucked into the Bermuda Triangle and has to battle evil frogmen
using an enchanted swordbut its not.
V. Vacancy/Unoccupancy
Vacancy refers to a building that doesnt have anyone living in
it, using it, and it doesnt have any contents. So, vacancy means
no people or stuff. A lot of times, this has a negative impact on
the propertys insurance. For example, in personal lines, if the
property is vacant for more than 30 consecutive days, vandalism
and related perils wont be covered.
Unoccupancy refers to a building that has all its intended
contents, but theres no one using it. So, unoccupancy means
stuff, but no people.
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A vacant/unoccupied building is more vulnerable to vandalism

and theft, as well as pipes/plumbing/electricity breaking down
due to lack of use or neglect.
W. Reinsurance
Reinsurance is when an insurance company transfers a
percentage of the obligations of a policy to one or more other
companies. This can happen if a particular policy could result in
an unusually high loss.
Reinsurance can happen in any type of insurance, but well just use
Commercial insurance for our example. We want you to bear in mind
that insurance companies decide to cede HO and other types of
policies.
Company A buys insurance from Company B, and the limit of liability
stated on the policy is well in the millions of dollars range. Company B
cedes a percentage of the policy to company C.
Now Company B is known as the Ceding Company or the Primary
Insurer, and Company C is known as the Reinsurer or the Secondary
Insurer.
If Company B cedes fifty percent of the policy to Company C, then
they split the premium profits and any losses between them.
3. Liability
Liability is someones debt, either immediately or in the event of a
loss. Liability is pretty much the core of any Casualty insurance,
because Casualty protects the insured against their own negligence
or legal responsibilities to third parties. Liability insurance protects
the insured against financial losses arising from:
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Bodily injuries to a third-party

Death to a third-party
Damage to third-party property
In English: Liability insurance protects other people and other

peoples stuff, never the insured or the insureds stuff.
A. The 4 Kinds of Liability
There are 4 kinds of liability:
1) Direct Liability means the liability comes directly from
something the insured did, or something the insured owns.
So, if the insured hops in their car and runs a red light,
theyre directly liable for any resultant damages or injuries.
2) Indirect/Contingent Liability means the person wasnt
directly responsible for the damages or harm, but because
of a significant connection with the responsible party, the
insured can still be found liable. For example, if the insured
hires contractors to renovate their house and something
dislodges from the house and damages a neighbors house,
the insured is indirectly liable.
3) Vicarious Liability means a person is liable for the
actions of/damage done by someone else. This usually
refers to negligence/liability on the part of the insureds
friends or family. For example, if the insured gives their
intoxicated friend permission to drive their car and the
friend is in a serious accident, the insured could be held
vicariously liable.
4) Contractual Liability means the insured has assumed
another partys liability via contract. A lot of times this
applies to business deals. Someone will hire a contractor
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and have the contractor sign a waiver stating that the

contractor accepts any liability from his/her actions (Thus,
the person hiring the contractor avoids indirect/contingent
liability).
B. Liability and the Law
There are various terms that relate to the legality of liability:
1) Tort means a civil wrong (not a pastryyoull thank us
later). Theres such thing as an intentional tort, which
means someone intentionally wronged someone else.
Someone who commits a tort is called a tortfeasoras
in: Nyah-nyah! Youre a smelly tortfeasor! Actually,
its probably more formal than that.
2) Strict Liability means that one party is liable for
damages or another partys injuries, regardless of fault.
This usually applies when a consumer is hurt by a
defective product, or to any Workers Compensation
claims when someone is injured on the job. The
important thing to remember about strict liability is the
liable party is allowed to defend themselves in court.
Paul woke up with a hangover from the night before and barely made
it into work. Several people commented that he still seemed a little
drunk. His boss asked him to deliver a message to someone on
another floor, and on his way down the stairs, Paul tripped and broke
his arm. Technically, under strict liability, Pauls boss will need to file
a Workmens Compensation claim. However, since Paul was noticeably
under the influence, Pauls boss can deny the claim in court, and prove
that Paul is liable for his own injuries.
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3) Absolute Liability refers to injuries that result from

obviously dangerous activities. These activities include
someone keeping dangerous animals (vicious dogs
included), using explosives, or doing something very
dangerous for a living. A person cant defend themselves
against absolute liability. If someone goes into the
Everglades to wrestle an alligator, and that person ends up
injured, he/she cant sue Florida. In that case, they are
absolutely liable for their own injuries.
Alert!
Remember the difference between strict liability and absolute
liability: in cases involving strict liability, the liable party is allowed
to defend themselves. In cases involving absolute liability, the liable
party is not allowed to defend themselves.
C. Other Liability Concepts
Here are 4 more liability concepts you should know:
1) Bodily Injury Liability covers the insured if there is an
auto accident, and the insured is legally liable for injuries
to another person.
2) Property Damage Liability covers an insured for any
damage his/her insured vehicle does to anothers property.
3) Personal Injury Liability covers injuries to a persons
body, mind, or emotional state.
4) Limits of Liability refers to the maximum amount of
money an insurance company agrees to pay in the event
of a covered cause of loss.
4. Determining Loss/Loss valuation
25
Determining loss/loss valuation is the method the insurer uses to

assess the value of something. The most common loss valuation
methods are:
1) ACV is the replacement cost of property minus depreciation.
For example, if a television was worth $350 when you bought
itbut that was a few years agoACV means youll receive
compensation for the televisions depreciated value amount.
Actual Cash Value Computation: Determining ACV can be very
subjective. Usage, wear and tear, obsolescence, etc are all
considerations. And, the definition of actual cash value in the policy
rules. In general, policies say it is defined as replacement cost, less
depreciation. If replacement cost is determined to be $400,000,
depreciation $99,000 and the deductible is $1,000 the actual cash
value is $300,000. However, real world situations are not always this
black and white.
2) Replacement Cost is the cost of replacing the item.
Therefore if the television cost you $350 when you bought it,
the replacement cost would be $350. In order to qualify for
replacement cost coverage, insurers may require an
inspection and analysis to determine that a sufficient amount
of coverage (and premium) is being purchased. Where
replacement cost is used, the policy limit is usually set for at
least 80% of the homes replacement cost, i.e. if you fail to
insure a home for at least 80% of the replacement cost, an
insurer may assess a penalty. When a replacement cost
claim is paid, insurers require that the property be repaired or
replaced BEFORE the full amount is paid. Typically, insurers
pay out the actual cash value and hold back the amount
attributed to depreciation until this is done.
Replacement Cost Computation: If the replacement cost of a home
is $400,000, then coverage must be purchased for at least $320,000
($400,000 X 80%).
For additional cost, a higher form of coverage is available
through guaranteed or extended replacement cost
insurance. A guaranteed policy will pay whatever it costs to
rebuild the home as it was before a disaster, even if it
exceeds the policy limits. Extended replacement cost policies
26
pay a certain percentage over the policy limit typically 20

to 25 percent.
While both optional coverages can provide protection against
sudden increases in construction costs due to a shortage of
building materials (typical after a major disaster) or rising
costs in general, neither routinely cover the cost of upgrading
a house to comply with current building codes. An ordinance
or law coverage endorsement is required here.
Agent World Replacement Cost Effects: In assessing the
valuation of a clients home and the coverage needed, it should be
noted the advice you give can effect your client. For example,
recommending the purchase of replacement cost insurance is good,
but without optional guaranteed or extended options, complete
replacement of the dwelling may not occur. And, while even these
additional coverages can provide protection against sudden increases
in construction costs due to a shortage of building materials (typical
after a major disaster) or rising costs in general, neither routinely
cover the cost of upgrading a house to comply with current building
codes. An ordinance or law coverage endorsement is required here.
Also consider that replacement cost coverage may only apply to the
residence, not other structures. Under terms of the policy, for
instance, a garage may be valued using actual cash value, not
replacement cost. Further, if a lost property was a rental, the loss of
rent that results from a disaster may clear limits in the policy.
Likewise, liability (bodily injury for example) claims your client incurs
as a result of a disaster could have very specific limitations as specified
in the declarations page of the policy. So, while replacement cost
coverage is advisable, you and your clients need to be aware that gaps
can still occur.
3) Functional Replacement Cost is the cost of replacing an

item with an item that is the functional equivalent of the
damaged/lost item. For example, if someone wrecks their
Corvette, under functional replacement cost, the person
would receive enough compensation to buy a much cheaper
car. The focus is on the function of the lost/damaged item,
not on the item itself.
27
4) Market Value means how much the item/property could be

sold for in the current marketplace.
Note: Well stick with the above example of the Corvette. If the
Corvette was a classic Corvette and the loss valuation was based on
market value, then the person would receive the amount that
particular model of Corvette would go for in the current marketplace.
5) Agreed Value means the insurer and the insured come to a
decision on the value of something, and then thats its
replacement cost if its lost or damaged. This happens a lot
with art and jewelry.
6) Stated Amount is the amount stated on the policy. This is
the amount that will be compensatedno matter what the
actual value of the propertyin the event of a covered cause
of loss. Usually stated amount policies pay the lesser of: the
cost to replace, repair, or the ACV.
7) Valued Policy means the policy gives the exact value of the
covered items. This is the value that will be paid in the event
of a covered cause of loss. Valued policies are used more for
expensive items, such as furs, fine art, and jewelry.
5. The Coinsurance Clause
This is a concept youre going to run into on the final exam.
Before we dive in, memorize this formula (for it will be your very
best friend):
(Insurance carried/Insurance required) x Amount of
loss=Recovery
28
Now for the nuts and bolts: coinsurance usually relates to

commercial policies. If a building is worth a certain amount, an
insurer might require a certain percentage of insurance on that
property. So, if a building is worth $500,000, and theres an
80% coinsurance requirement, that means the insured is
required to carry at least $400,000 in insurance. This doesnt
mean the insured will actually purchase that much: thats just
the coinsurance requirement.
Therefore if a building worth $500,000 with an 80% coinsurance
requirement, and the owner only buys $200,000 of insurance,
theyre underinsured, and this will affect how much money their
policy will cover in the event of a loss. If there is a loss, and the
loss is $60,000, how much will the insureds policy pay based on
the coinsurance formula? So, plug the numbers into the formula:
(Insurance carried) $200,000/(Insurance required)$400,000 x
$60,000 = $30,000. Therefore, in this situation, the insureds
policy will only cover $30,000 of the damages.
How about this question: Ingrids building is worth $600,000
with an 80% coinsurance requirement. Therefore she should
carry: $600,000 x .80= $480,000 in insurance.
Ingrid decides to carry $420,000 in insurance. There is a covered
cause of loss, and Ingrids expenses amount to $420,000.
Therefore ($420,000/$480,000) x $420,000= $367,500.
29
So, even though Ingrid is insured for the same amount of the
loss, she didnt meet her coinsurance requirement. Therefore,
Ingrids insurance policy will only pay $367,500 for the loss.
Alert!
Theres a chance the exam will just want to test your basic knowledge
of coinsurance, with easy questions like this: If Bobs building is worth
$100,000 and it has an 80% coinsurance requirement, how much
insurance is Bob required to carry? We know this because thats the
question we ended up with. Wed been planning for very complex
coinsurance math problems, so the ones they gave us were so easy,
we could answer them with our eyes closed. Wed suggest you take
this same approach: know coinsurance inside and out so by the time
you get to the actual exam, you fly through it in time to catch the next
matinee.
6. Negligence
Negligence is the result of carelessness, thoughtlessness, or
inaction, but its never intentional.
A. The 4 Elements of Negligence
Before a court will award any damages to an injured party due to
anothers negligence, the 4 elements of negligence must be
present:
1) Legal duty means the person has a legal responsibility to
take the necessary precautions to avoid being negligent.
2) Breach of duty means the person failed to uphold their legal
duty.
3) Damage or losses occurred as a result.
4) The breach of duty caused the damages or losses.
Heres a surreal story to help you remember the 4 elements:
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Bob decided to put quicksand outside his driveway. He thought to

himself, I should really tell people about this here quicksand. (Legal
duty) When Gwen was walking by, she said, Is that safe?
Bob forgot about the quicksand, and said, Yep. Safe as safe can be!
(Breach of duty) Trusting him, she went on her way, and was
promptly sucked into the quicksand. Luckily, she just happened to
have a copy of How to Escape from Quicksand, so she survived, but
she still lost one of her tennis shoes. (Damages or losses)
Hey, she said, I lost one of my tennis shoes because you said it was
safe! (Damages or losses caused by the breach of duty)
True, its a weird story, but were sure youll remember the 4 elements
of negligence long after youve developed senility and forgotten
everything else.
Note: If these 4 elements of negligence are present, the injured party
has a good chance of winning a lawsuit.
B. Legal Defenses Against Negligence
The legal defenses someone can employ to defend themselves
against accusations of negligence are:
Assumption of Risk means the person knew it was

dangerous and did it anyway. Therefore, if they end up
injured, they cant blame anyone else for negligence.
Contributory Negligence means if the person is even a

little bit responsible for their injuries or the damages, they
wont be reimbursed. This defense is considered way too
strict, and its not used that often.
Comparative Negligence is the answer to the black and

white nature of contributory negligence. Comparative
negligence takes the percentage of responsibility of each
party into account. So, if someone is 10% responsible for
what happened, and another person is 90% responsible for
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what happened, person A will pay 10% and person B will

pay 90%.
Doctrine of Last Clear Chance means the injured person

had time to avoid the conflict. This defense is employed a
lot of times in auto versus pedestrian cases.
7. Damages
Damages are the physical or mental result of an accident or
covered cause of loss.
The damage could mean someones car is scratched, or the damage
could mean someone was harassed and bullied until they suffered a
nervous breakdown.
In legal terms, damages have to have a determinable
compensatory value. Once the compensatory value of the damage
has been assessed, someone who successfully wins a lawsuit or
claim can be compensated for those damages.
A. Compensation for Damages
There are different ways damages are compensated:
General Compensatory damages are straightforward.

Someone was injured in a car accident and those injuries
amounted to $50,000 in medical bills and property
damage, so the person should be compensated $50,000.
Special Compensatory Damages are harder to

determine, because this has more to do with emotional or
mental suffering. If someone was injured in a car accident
and theyre permanently disfigured as a result, the person
would ask for compensation for pain and suffering.
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Punitive Damages are designed to punish the liable

party. If a corporation withheld information about a toxic
leak, which poisoned neighboring groundwater, and
citizens were exposed to the toxins, the court could decide
on punitive damages.
8. Underwriting
The object of underwriting is to assess the applicants individual risk
exposures and determine whether or not that applicant qualifies as
a desirable insurance risk.
Underwriters try to assess whether the applicant will end up having
a loss thats different from the predicted loss when the rates were
first formulated.
A. The 3 Methods of Rate Determination
There are 3 main methods of determining what an applicants
rates should be:
1) Manual/Class Rating/Pure Method refers to set rates that
apply to a specific risk exposure that falls within a determined
class or group. The groups are set up so that loss data is easy
to collect, and anyone who falls into a specific group/class is
charged the same rate.
2) Loss Ratio, Expense Ratio and Combined Ratio Methods
Insurers need to determine profitability. This is done using
one of these three methods: The loss ratio measures the
success in covering current losses out of premium income,
i.e., claims divided by premiums. The expense ratio
measures the percentage of premium dollars used to cover
33
company expenses, i.e., company expenses divided by

premiums; the combined ratio adds the loss ratio and the
expenses ratio to determine breakeven, measured at 100%,
i.e., claims plus company expenses divided by total
premiums.
3) Individual/Merit Rating Method takes the individual
characteristics of a specific risk into account and then rates
that risk accordingly.
Loss Cost Rating
Rating is the process of examining and rating a building's construction,
hazards, public and private fire protection, occupancy, and other
exposures. Companies such as ISO (Insurance Services Office)
provide this service in order for insurers to rate or price policies. The
California Workers Compensation Inspection Rating Bureau
provides rating information for workers compensation and employers
liability insurance. In addition, there are out-of-state rating
organizations like the National Council on Compensation
Insurance (NCCI).
B. The 3 Classes
1) Preferred risks have strong records and low risk exposures.
Theyll end up with the best rates.
2) Standard risks have average records and/or average risk
exposures. Theyll end up paying a higher premium than
the preferred risks.
3) Poorer risks have a history of insurance claims and/or very
high risk exposures. Theyll end up paying the highest
premiums to justify the cost of covering the risk.
9. Claim Terms
There are some basic claim concepts you must understand:
34
First Party Claim: The insurance policy pays directly to the named
insured, less any deductible.
Third Party Claim: The insurance policy pays to a third party on
behalf of the insured who might have otherwise been liable himself.
Subrogation: The policy pays the insured for his loss caused by
another party in exchange for the insured giving up his right to collect
or sue the person at fault. He insurer then is able to pursue the liable
party in the shoes of the insured.
Arbitration: An independent or third party settles the loss between
insureds and/or insurers in dispute.
Loss Reserves: Estimated funds an insurer is required to set aside to
cover claims due but not yet payable.
10. Methods of Policy Valuation
When claims are paid, various methods of valuing property are used:
Actual Cash Value (ACV): Replacement cost minus depreciation.
The insurer determines the replacement cost and subtracts and
amount for depreciation.
Replacement Cost: The insurer agrees to pay a cash settlement to
allow the purchase of new property to replace the lost or damaged
property.
Market Value: Insurers pay the claim based on the market value of
the property rather than actual cash value.
Stated Value: The insurers agrees to pay the full amount stated in the
policy without regard to current value or appraisal, i.e., the loss is
predetermined.
35
36
Section PC 2
NUTS & BOLTS OF A POLICY
Objectives
This unit is designed to put contract law into a context thats
easy to understand. Section 2 goes into the framework of your
everyday insurance contract.
This unit includes:
D.I.C.E
Other parts of the Policy
Common Policy Provisions
Other Insurance Concepts
Named Insured Provisions
Insurer Provisions
Third-Party Provisions
1. D.I.C.E
Its easy to remember the basic parts of an insurance policy by
using the acronym D.I.C.E, as in: Come on, baby, come on!
Daddy needs a new pair of shoes!
Declarations
Insuring agreement
Conditions
Exclusions
37
A. Declarations and Agreement

The declarationsface sheet or dec page, for you swingin
insurance industry cool catsis part of the policy contract. The
declarations lists:
Insureds name and address
When coverage begins and ends
Coverage amounts
Premium
Deductibles
Any endorsements
Schedule of coverage
Property description
Insurer (insurance company)
Note: In the declarations, you and your refer to the insured.

We, us and our refer to the insurer.
B. Insuring Agreement
The insuring agreement is considered to be the core of any
insurance contract. It states what the insurer wont do, and what
the insurer will do regarding claims, in exchange for premium
payments.
C. Conditions
The policy conditions explain the insureds responsibilities and
duties in the event of a loss, and how the insurance company
will settle that loss.
The conditions include:
38
The insureds rights and duties
The policy period
The effect of concealment, fraud, or any other dishonest

act
Cancellation and nonrenewal provisions
Valuation determination and claims settlements
How the insurer will handle a loss if that loss is covered by

more than one policy
Alert!
Were going to nag and nag. You will run into questions on the final
exam like this one:
Where would you find the policy period in the insurance policy?
Just make sure youre absorbing what each policy section includes,
because they like to try to catch you on the details.
D. Exclusions
The exclusions section of the policy contract specifies any
losses that arent covered by the policy.
Note: You should recognize that property insurance policies contain
many items but NOT the insureds property address.
The actual
property address of the insured is typically only found in the

declarations page.
2. Other Parts of the Policy
Along with the standard parts of a policy, there are some
additional parts that are found in most policies. Some of these
39
parts can be added to a policy to give an insured extra coverage,

or to individualize the policy.
Many forms, riders, contracts and policies can be obtained through the
Insurance Services Office (ISO) . . . a provider of standardized forms
serving ISO serves insurers, reinsurers, agents and brokers, insurance
regulators, risk managers, and other participants in the
property/casualty insurance marketplace.
A. Additional/Supplemental Coverages
These are coverages that can be added to a policy to provide the
insured with extra protection. For example, a basic dwelling
policy protects the insured against fire, lightening, and explosion
perils. If the insured wants to add hail coverage, that coverage
would be an additional or supplemental coverage.
B. Endorsements
Coverages are added to an insurance policy through
endorsements. A more refined definition would be:
endorsements are a modification to an insurance policy that
changes the contract of insurance.
Note: Additional/Supplemental coverages and endorsements sound a
lot alike. Can they be used synonymously? Actually, they are two
completely different concepts. Additional/supplemental coverages
are completely new coverages that are added to the policy. An
endorsement modifies the policy when it adds the
additional/supplemental coverage. Think of it this way: the
40
additional/supplemental coverages are the extra pages that change

the story, and the endorsement is the staple.
C. Definitions
The definitions section of a contract carefully defines any term
or concept to eliminate any chance of misinterpretation. Its very
important that the meanings are clear. More insurance related
cases end up in court because the interpretation of words in
insurance contracts might be misinterpreted.
3. Policy Period
In simplest terms, the policy period is when the policy contract
takes effect through when it ends. That seems pretty easy!
Except you probably wont get too many test questions that look
like this:
A ________ is when the policy begins through when it ends:
a. Policy period
b. General average
c. Commercial General liability
d. Property Insurance
Its possible theyll throw you one or two tokens, but its more
likely that youll bump into a question like this:
If Marges policy is for 6 months and it began June 7th at 3:30 in
the afternoon, when will Marges policy end?
a. December 7th at 3:30 PM
b. December 7th at 12:01 AM
c. December 7th at 3:31 AM
d. December 7th at 12:01 PM
41
If a policy is scheduled to terminate on December 7th, it

terminates at 12:01 AM: all policies terminate 1 minute into
the day theyre scheduled to end.
4. Policy Territory
The policy territory is the geographical area covered under a
specific policy. Some policies (homeowners, dwelling, etc.) cover
property at a specific address, whereas some policies (personal
floaters) cover property anywhere in the world. This really
depends on the policy and the needs of the insured.
The main areas covered by insurance policies include:
The US
US Territories
Canada
Puerto Rico
For example, the minimum automobile liability coverage required
in California is 15/30/5: $15,000 bodily injury per person,
$30,000 bodily injury per accident, and $5,000 for property
damage.
Canada, on the other hand, has one of the highest minimum
liability requirements at 100/300/50! But, because Canada is still
considered part of the policy territory, youre still covered if you
get into an accident in Canada. If you have the minimum
coverage required in California and you drive to Canada, your
42
coverage automatically goes up to match their minimum

requirements.
5. Deductibles
Once the chosen deductible is paid, then the insurance
protection begins. The insured assumes the loss up to the
deductible limit, and the insurer pays the remainder, up to the
policy limit.
Most people are familiar with this concept, but just in case youre
not, heres a basic rundown: if Mike has $15,000 of collision
coverage for his car with a $500 deductible, and Mike is in an
accident, Mike pays the first $500. Therefore, if Mikes accident
ends up costing $450, then the insurance wont help pay for the
damages.
Deductibles serve a couple of important functions:
Deductibles reduce insignificant claims
Deductibles keep the cost of insurance down
E. Limits of Liability
The limits of liability refer to the MAXIMUM amount an
insurance policy will pay. This could be per event, or per
individual. Limits of liability are written in a variety of ways,
such as:
Per occurrence/accident means the limit of liability is

expressed as a MAXIMUM that will be paid per event. An
occurrence/accident could cause a variety of expenses
43
ranging from property damage to medical bills. If the

occurrence amount is $50,000, every expense related to the
event is covered until the $50,000 has been exhausted.
Per person means the limit of liability extends to each

individual. Therefore if the limit of liability is $25,000 per
person, no one person involved in the accident will receive
more than $25,000, even if the accident/occurrence amount
is higher.
Alert!
We know for a fact theyll try to trick you with the per person
concept on the test. Say the maximum amount allowed per
occurrence/accident is $50,000, but theres a $25,000 per person limit
of liability. So, if the insured is driving his/her carpool to work, and
theres an accident, everyone in the car has up to $25,000 in coverage
without going over the maximum amount of $50,000 per accident. If
there are four people in the car, and they all have $4,000 in medical
expenses, then $16,000 will be covered.
Aggregate means the limit of liability are handled annually

instead of split per person or per accident. So, the insured
knows they are covered for $100,000 a year for losses. If
they exhaust that $100,000 of coverage, the insurance
wont pay for any other claims until the following year.
Split means the limits of liability are divided into sections.

You usually see this with automobile insurance. For
example, the minimum split limits in California are
expressed as 15/30/5. Therefore, the limits of liability are:
44
$15,000 for bodily injuries per person/per accident, $30,000

for bodily injuries per accident, $5,000 for property damage.
Combined single is basically the same as per

occurrence/accident. Instead of dividing up the limits of
liability, there is one maximum sum that has to cover all
expenses relating to one event.
7. Named Insured Provisions

The insured has certain options and obligations relating to
his/her policy, such as:
A. Duties after a Loss
This is a biggie. After a covered cause of loss occurs, the insured
has to perform certain duties, otherwise they may not receive
any compensation from their insurance policy. Those duties are:
The insured must notify the police if any law has been
broken.
The insured must notify the insurer immediately after a

covered cause of loss.
The insured has to send the insurer any legal documents

that relate to the claim.
The insured has to cooperate with the insurer to help settle

the claim, including attending any hearings or trials.
The insured cant voluntarily make payments or incur any

expenses, unless he/she wants to pay for it themselves.
Alert!
There are 2 big no-nos related to duties after a loss:
1) Settling the claim without the insurance company
2) Having the damages assessed without the insurance company
45
B. Assignment
Assignment means that rights are transferred from one party
to another, usually in writing. In insurance, the insured assigns
certain rights under contract to their insurer. The party granting
the right transfer is called the assignor and the party receiving
the rights is called the assignee.
Here are a few examples of this: if someone has automobile
insurance and someone else hits them, theyre not allowed to
accept money from the person that hit them, and from the
insurance company. They have assigned the right to recover
payment from the at-fault party to the insurer.
8. Insurer Provisions/Obligations of the Insurance Company
The insurer has certain options and obligations relating to the
insured, such as:
A. Subrogation
Subrogation is the right of the insurance company to go after
the liable/at fault party for compensation for claims paid.
Subrogation also keeps the insured from collecting twice for the
same loss. So, if Joes actions result in damages to Blakes
property, the insurance company reimburses Blake, and then
goes after Joe for recovery. This is subrogation.
Note: Sometimes youll run into a question that looks like this:
Bob tossed his cigarette into a dumpster, which caused a fire at
Raphaels apartment complex. After Raphaels insurance company
46
pays her for the damages, the company goes after Bob for
compensation. Which word best describes this situation?
a.
Assignment
b.
Duties after a loss
c.
Salvage
d.
Coinsurance
Youre immediately looking for subrogation, but remember, Raphael

has assigned her right to recover payment from the at fault party to
her insurance company.
B. Liberalization
This means that if the state or national legislature broadens
policies or endorsement forms, and an increase in premiums
isnt required, the same coverage will be automatically
broadened in existing policies.
C. Claim Settlement Options
There are different ways to settle claims. There are 2 basic
options:
1) The insurer pays the claim in a lump sum.
2) The insurer makes a series of payments until the financial
obligation is fulfilled.
D. Duty to Defend
This means the insurance company is responsible to defend their
clients no matter who is at fault. Certain types of policies include
defense expenses, but thats not part of the duty to defend.
Simply put, the duty to defend means the insurance company
47
wont desert their client if a claim is made against him/her. The

company will see the claim through to the end, always trying to
swing things in the insureds favor.
9. Third-Party Provisions
If a policy involves a third-party, then the third-party has certain
options and obligations relating to the policy, such as:
A. Standard Mortgagee Clause
If the insured borrowed money from a bank or some other
lender to finance property, then that third-party also has an
insurable interest in the property. To protect the mortgagee, the
standard mortgagee clause is used almost universally. It
states that the mortgagee has the following rights:
The mortgagee will continue to receive any losses or

damage payments regardless of the property owners
insolvency, regardless of any increase of hazards, and
regardless of any change of ownership.
The mortgagee will receive at least 10 days notice if a policy

is going to be cancelled.
The mortgagee can sue under the policy.
In exchange for those rights, the mortgagee is obligated to do the

following:
Notify the insurer if there is any change in ownership,

occupancy, or the hazards increase on a property.
The mortgagee has to pay the insurance premium if the owner

fails to pay. This only applies if the mortgagee wants to continue
that coverage.
48
The mortgagee must submit a proof of loss to the insurer just in

case the owner fails to do so.
The mortgagee must surrender any claims it has against the

owner to the insurer, if the mortgagee has received payments
from the insurer. (Assignment/subrogation)
B. Loss Payable Clause

This simply means that the insurer can make a loss payment to
a person (mortgagee/loss payee) other than the insured, if the
mortgagee/loss payee has an insurable interest in the property.
The only downside to the loss payable clause is if the insured
fails to make the premium payments or violates the insurance
policy, the mortgagee cant collect either. Basically, if the
insured has no rights to collect, neither does the mortgagee.
C. No Benefit to Bailee
No benefit to bailee means that no one but the insured can
benefit from an insurance policy. That sounds obvious, except
certain Inland Marine policies involve leaving property with
bailees. If the property is damaged, the bailee wont benefit from
the insurance (the bailee needs his/her own insurance for that).
10. Binders
A binder gives the insured temporary coverage on his/her property
until the insurance policy arrives. An insured may have just
requested or applied for the insurance, and he/she doesnt actually
have the official documentation in hand, but the binder means the
insurer has agreed to provide temporary coverage pending
approval.
49
Someone can receive a binder and still be denied insurance. If the

insurance company gives the person a binder while the insurance
application is being processed, that binder doesnt guarantee a
certificate of insurance. If the insurance company decides not to
insure someone, the company has to issue a legal notice of
cancellation. Until then, the binder will continue to provide
coverage.
11. Sources of Insurability Information
Sources of insurability refer to any information that confirms
whether or not someone is a desirable insurance risk. The primary
source of insurability is the application for insurance.
Other sources include:
The producer/agent report
Consumer reports
Inspections
Insurance reporting agencies
Alert!
You may run into this question on the test: Whats the primary source
of insurability? And you may be tempted to answer: appraisal, credit
report, photographs, etc. The primary source of insurability is the
application: the application is the primary source of insurability. So, if
someone asks you what the primary source of insurability is, youll
answer:
THE APPLICATION
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12. Fair Credit Reporting Act

The Fair Credit Reporting Act means that the applicant has to
know in advance if an insurance agency is going to request a copy
of their consumer report. If the applicant is denied because of any
information in that report, the applicant has the right to find out
what information affected either the issuance of an insurance
policy, or an increase in the premium rate.
Not only does this serve to protect peoples privacy as much as
possible, it also helps to maintain accurate information.
The Fair Credit Reporting Actor FCRA if youre lazyonly
allows insurers to use information from consumer reports under
certain conditions:
The insurer has to get the applicants consent before

obtaining medical information.
The insurer has to give the applicant written disclosure within

3 days of requesting a consumer report.
If the insurance coverage is denied because of the consumer

report, the consumer can find out what that information is,
just in case its inaccurate.
If the person receives an adverse notice report, that report has

to include:
The contact information for the consumer reporting agency
A legal statement that the consumer reporting agency didnt

have anything to do with the person getting denied for
insurance
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A notice that the applicant has the right to dispute the

information in the report. Upon request, the consumer
reporting agency (NOT THE INSURER) will then supply the
person with a free copy of the report within 60 days
13. Notice of Claim

A notice of claim is the insured letting the insurer know that a
covered cause of loss has occurred, and he/she/they think they
should be reimbursed for that loss.
14. Claims Made Policies versus Occurrence Form Policies
There are 2 kinds of policies relating to claims:
1) Claims Made Policies cover claims that are reported during
the policy period. If an occurrence took place in an earlier
year, the insured is only covered if he/she/they purchased the
same insurance year after year.
2) Occurrence Form Policies cover claims that occurred during
the policy term, regardless of when the loss was reported.
If Bob is exposed to asbestos in the sixties, and the health problems
dont surface until the nineties, Bob is still covered under an
Occurrence Policy formeven if Bob only had insurance for that
year and then never renewed. On the other hand, if Bob is covered by
a Claims Made form, he cant make a claim in the nineties that
started in the sixties unless he purchased the same insurance year
after year.
Note: A claims-made policy is more flexible. Because a claim has not
been made yet, you can increase your limits or buy new coverage that
you did not have when you started. Occurrence policies, on the other
hand, are more permanent. You are protected forever by the policy
you had that year with no need to renew or buy tail coverage.
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Here are some associated terms you should know:

Retroactive Date & Prior Acts: A policy may be endorsed to cover
incidents which occurred prior to the policy start date.
Tail Coverage: Coverage for incidents that have not been reported
during the policy term.
Basic Extended Reporting Period: Begins when the policy period
ends. Activated when the policy is cancelled or non-renewed.
15. Loss Settlement Provision
This provision defines the method that will be used to determine
the amount of money the insured will receive for a claim.
Usually this provision stipulates that claims will be paid on an ACV
or replacement basis. This provision also determines how claims will
be paid per item, per loss. Therefore, items A, B, and C are all
covered on an ACV basis, but items X, Y, and Z are covered on a
replacement basis.
16. Consent to Settle a Loss
With certain kinds of lawsuits, its less expensive to settle than
to defend the claim. This is especially pertinent with Professional
Liability, such as Malpractice insurance.
This is a tricky concept, because settling a claim can sometimes
damage a persons professional reputation. If a doctor is wrongly
accused, and he/she settles to save on cost, in the public eye it can
seem like an admittance of guilt. His/her practice could suffer as a
result.
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If a policy has a Consent to Settle Provision, it may mean that the

insurance company decides if a claim will be settled or defended
based on whats more cost efficient.
Some companies offer Professional Liability insurance without this
provision, stipulating that their clients reputation is more important
than money. Its important to note their wording: If you are
wrongly accused, then It could be financially crippling to an
insurance company to defend a justified lawsuit.
Summary
That should give you an idea of the inner workings of insurance
policies. Youll need to have an understanding of a policys makeup as
well as its applications for the final exam.
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Section PC 3
CONTRACT LAW
Objectives
You need to know about the different kinds of insurance contracts.
This unit includes:
The Elements of a Legal Contract (C.L.O.C)

Characteristics of an Insurance Contract
Legalities
1. The Elements of a Legal Contract (C.L.O.C)

There are certain elements that make a contract a legal contract,
and therefore a legally binding contract. The term legally binding
means that the terms of the contract will be upheld by a court of
law.
There are 4 important elements to a legal contract:
1) Competent Parties means the people entering into the
contract have to be considered legally capable (of age,
mentally stable, etc.).
2) Legal Purpose means a contract has to have a lawful
purpose. If it doesnt have a lawful purpose, its not
enforceable.
3) Offer and Acceptance means both parties agree on the
terms of the contract and now the contract is considered
legally binding.
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4) Consideration means the physical return both parties get

from the contract. In insurance terms, the consideration the
insurer gets is premium payments, and the consideration the
insured gets is insurance coverage.
Note: Notice that the 4 elements almost spell clock. This is how most
people remember it. We prefer the mnemonic: Can Lucy Overcome
Claustrophobia? We pride ourselves on being more creative than all
those other blah pre-licensing schools.
2. Characteristics of an Insurance Contract
There are different characteristics of insurance contracts that can
change the entire tone of the contract. These include the following:
A. Contract of Adhesion
This kind of contract means take it or leave it. In this type of
contract, one party has all the bargaining power, and the other
party has no bargaining power. This type of contract doesnt
allow for negotiation or quibbling over contract wording.
B. Aleatory Contract
This kind of contract means the amount of money paid by one
party could be a lot more or less than the other party. Most
insurance contracts are considered aleatory contracts, because
the insured could make premium payments for years for an
occurrence that never happens, or the insurer could end up
compensating an insured after only a few premium payments.
C. Unilateral Contract
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This kind of contract means that someone promises to do or not

do something in return for consideration. This is also referred to
as a one-sided contract. A very simplified example of this
would be: if you pay me $500, Ill paint your house.
D. Conditional Contract
This type of contract depends entirely on an event actually
happening. An easy example of this is if someone is selling their
house, they wont get paid until the house actually sells.
E. Personal Contract
This type of contract insures the person who owns the property,
but does not insure the actual property.
3. Legalities
Here are some important legal characteristics affecting contracts:
A. Indemnity
This refers to a type of contract, such as insurance, that serves
to restore the individual to the approximate financial position
occupied prior to the loss.
B. Representations/Misrepresentations
Representations are statements made by the applicant for
insurance before the policy is issued. These statements arent
considered set in stone: usually the wording is the above is true
to the best of my knowledge.
Legal World: A representation made by an applicant for insurance
may be altered or withdrawn before the insurance goes into effect, but
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not afterwards. A representation is considered false when the facts fail

to correspond with its assertions or stipulations.
If the information turns out to be incorrect, this is called a
misrepresentation. Intentional misrepresentations can void
an insurance policy, because it affects the determination of
potential risks.
Heres an example of intentional misrepresentation: Chriss Health
insurance application asked if Chris has any family history of heart
problems. Chris is completely healthy, but there is an extensive history
of heart problems in Chriss immediate family. Worried that checking
yes, would affect her premiums, Chris checked no. If the
producer/agent finds out about Chriss intentional misrepresentation, it
could keep Chris from being insured, or it could void Chriss policy.
C. Warranties
A warranty is a statement made by the applicant that becomes
a condition of the contract. False warranties void the entire
contract.
Mona wants Boatowners insurance. She tells her insurer shes only
going to use her sailboat on rivers and lakes. The hazards of using a
sailboat on rivers and lakes are different from the hazards of using a
sailboat on the open seas, so this becomes a condition of Monas
insurance contract. This is Monas warranty.
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A warranty is either:
Expressed warranties are in written form and attached to
the policy.
Implied warranties are not written but still exist under the
law. Some representations may qualify as implied
warranties.
Legal World:
A representation in an insurance contract qualifies as an implied
warranty.
D. Concealment
Concealment means withholding important information
regarding a loss or the events surrounding a loss. Concealment
immediately voids coverage.
Victors roommate backed her truck into Victors parked car. Victor
wants to repair the damages, but he doesnt want to adversely affect
his roommates auto insurance. If Victor reports the claim, but leaves
out the fact that his roommate hit his car, this is concealment.
E. Fraud
This is a dishonest or deceptive act meant to cheat or gain an
advantage.
For example, if an insured signs a claim form for a fraudulent
claim, they would be committing a fraudulent act.
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The California Department of Insurance has set up a Fraud

Division to handle the possibility of insurance fraud.
An insurance claims analysis bureau is set up specifically to:
Compile information and data concerning insurance claims
Provide information to insurers/subscribers about

insurance claims to avoid attempts to defraud the industry
Help develop programs to further insurer fraud prevention,

fraud investigation, and fraud prosecution
Provide all California data and information regarding claims

to the Commissioner
An Insurance Contract Does NOT Need . . .

Information that DOES NOT need to be communicated in an insurance
policy is:
Known information
Information that should have been known
Information which the other party waivers
Information not material to the risk
F. Waiver and Estoppel
This is a really interesting legal concept. If someone gives up
one of their known rights, this is known as a waiver.
For example, Angies house burns down and she loses
everything. Because shes having a really difficult time coming
up with an inventory of items lost to submit her proof of loss
form on time, her insurance company tells her theyll give her an
extra 30 days to submit the form. Even though the insurance
company has the legal right to demand the form by a certain
date, they are waiving that right.
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Estoppel is a court/judge blocks someone from asserting the

original right they chose to waive. The exact definition of this
can be along the lines of: If someone behaves in a manner thats
inconsistent with their behavior in the past. This is a very
circuitous way of saying, if someone goes back on their word,
but look out for that answer on the final exam.
An example of estoppel would be if Angies insurance company
suddenly changed their minds and said they wouldnt reimburse
her loss because she didnt submit her Proof of Loss on time.
Angie takes the company to court and the judge issues an
estoppel, which forces the insurance company to honor the
conditions of the waiver.
G. Reasonable Expectations
An insurance contract has to give the insured reasonable
expectations. It cant confuse the insured with complex legal
language, or promise the sun and the moon if it wont deliver.
Its up to the insurance company to make the insurance policy as
clear to the insured as possible to guarantee that the insured has
reasonable expectations.
H. Utmost Good Faith
Insurance policies are considered contracts of utmost good
faith, which basically means all the parties involved were
completely honest and disclosed any and all relevant information
and facts. Utmost good faith means mutual trust during the
negotiation of a contract.
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I. Materiality
Materiality has to do with facts and information relevant to an
insurance policy. Materiality can be determined using three
questions concerning the information:
1) Can the information convince or dissuade either party to
enter a contract?
2) Does the information create a disadvantage for either
party?
3) Does the information have any affect on the risk or
insurability involved?
Materiality concerns both the insurer and the insured. Each party
involved in the contract have to have all the relevant information
that could have any positive or negative affect on the contract.
Real World:
Materiality of concealment is the rule used to determine the
importance of misrepresentation, i.e., someone is considered to have
misrepresented an answer on an application if the concealment is
considered material.
J. Ambiguities in a Contract of Adhesion
Basically, this means something was unclear and because it
wasnt clear it was misinterpreted. If a contract of adhesion has
ambiguities, the courts will usually rule in favor of the insured.
K. Rescission
Rescission means the same as revoke or remove. An insurer
could legally rescind an insureds policy if:
Theres been intentional or unintentional concealment
Theres been an intentional and fraudulent omission
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A misrepresentation comes to light after a policy has gone

into effect
A material warranty or a material policy provision has been

violated
L. Premium Rating
The California Insurance Code specifies that premium rates cant
be excessive, discriminatory, or inadequate. If any insurer
wishes to change their rate, they have to file a complete rate
application with the Commissioner. The rate change will be
approved unless a consumer requests a hearing within 45 days.
If the rate change exceeds 7% of the usual rate for Personal
Lines, or 15% for Commercial Lines, the Commissioner has to
hold a hearing.
If all goes smoothly, the rate change application should be
approved 180 days after the Commissioner receives the rate
change application.
The different systems used to ascertain whether or not a
premium rate is fair and adequate, are:
File and Use System means the company can use a rate
as soon as its filed.
Prior Approval System means the company has to have

the rate approved before they can use it.
Mandatory System means that the premium rate is

determined by the federal government, and then all
companies have to abide by that rate.
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After a basic rate has been determined, the insurance company

then has to apply that rate to individuals with different needs.
There are different ways an insurance company determines a
premium rate. Those ways are:
Judgment Rating is based on the individuals risks or risk

exposure. The underwriter uses its own best judgment to
determine a rate.
Merit Rating rates the individual by what group or class

they belong to, and then the rate is tailored to that
persons unique situation.
Manual Rating means the underwriter only assesses the

persons group or classification to determine the rate.
Retrospective Rating means the premium can be

credited back at the end of the period if it turned out to be
too high based on the persons actual losses. The premium
can also be adjusted if the persons losses were higher
than expected.
Experience Rating modifies the Manual Rating, by

putting the person in their group or classification, and then
adjusting the rate based on that persons loss history.
M. Unearned vs. Earned Premium

Unearned versus earned premiums are based on whether or not
someone has paid for future coverage.
If someone pays an annual premium, and six months have gone
by, then they have six months of:
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Unearned premium, for the six future months that are

prepaid
Earned premium, for the six months that have already

gone by
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Section PC 4
PERSONAL LINES INSURANCE
Objectives
This unit explains the importance of protecting your clients domestic
sphere, that is, his/her non-professional life. No matter the clients
particular insurance needs or type of property, unit 4 explains how to
insure it all.
This unit includes:
Part A: Dwelling Insurance
Dwelling Forms
Extended Coverage Perils
Dwelling Form Coverages A-E
Other Coverages
General Exclusions
Part B: Personal Liability
Personal Liability
Part C: Homeowners Insurance
Homeowners Insurance
Part D: HOP Section 2
Introduction: The History of Fire Insurance and the Standard

Fire Insurance Policy
New York developed the first Standard Fire Insurance policy
during the early 1900s. That policy was used throughout most of
the United States, because it was so well designed. This policy
became known as the 165-line policy.
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The SFP is the only insurance policy that has its wording
standardized by law. The SFP used to be included in all fire
insurance policies, even though it was never a complete contract by
itself. Obviously, the insurance industry continues to evolve along
with peoples needs, so the original SFP isnt used any longer.
However, many of the same perils, exclusions, and provisions that
could be found in the original SFP are still found in current
insurance forms.
California created their own California Standard Form Fire Insurance
Policy, also known as the Standard Fire policy (SFP). It contains
similar provisions to the industry standard form with the exception
that the California SFP coverage can also provide equivalent to or
more favorable coverage.
The California Insurance Code states that: All fire policies on
subject matter in California shall be on the standard form, and
except as otherwise provided shall not contain additions thereto.
Associated terms you should know include the following:
Open Policy: The value of the coverage is not agreed upon, its
left open.
Valued Policy: The thing being insured is valued at a specified
sum.
Warranty: A statement in a policy that imports there is an
intention to do or not to do a thing which materially affects the
risk. It can relate to the past, present or future. Can be
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expressed or implied. If it relates to a person or thing insured it

is expressed.
Return of Premium: An insured is entitled to a return of his
premium if the policy is canceled, rejected, surrendered,
rescinded or voidable (due to known or unknown fraud or
misrepresentation).
The return can be whole if the insurer has
not been exposed to any risk or proportionate with the unexpired

time.
No homeowner policy may contain a provision that mandates
that premiums are fully earned upon the happening of any
contingency.
Part A: Dwelling Insurance

1. Dwelling Forms (DP Forms)
Dwelling insurance is used more frequently for landlord (tenant)
properties and homes that dont qualify for standard or
preferred Homeowners insurance policies.
Dwelling policies are similar to Homeowners policies. Both provide
property insurance for:
Residential dwellings and contents
Appurtenant structures/other structures on covered premises
Loss or damage to the dwelling
Eligible and/or ideal Dwelling policy properties are:
Rental properties (1-4 units or apartments)
Older and/or lower-valued homes
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Homes with minor cosmetic problems
Homes with a market value thats below replacement cost
Customers with credit and/or loss problems
Dwellings under construction, vacation homes, or rentals
Permanent mobile homesa mobile home that isnt on wheels
Offices, studios, or storage facilities
Under certain circumstances, an insured could prefer a Dwelling

policy (DP) over a Homeowners policy (HOP). A DP would be
preferable if:
The property is vacant
The insured isnt living in the dwelling, but could be renting it
Up to five roomers or boarders occupy the dwelling
The dwelling is rated poor to good based on condition, value,

and age
The insured is required to only carry coverage protecting the

dwelling
Note: Under a Homeowners form, the contract includes personal

property and liability coverage. Under a dwelling form, the insured can
choose the coverages they need, and exclude the coverages they dont
need.
Note: The standard deductible for a DP is $250.
There are 3 Dwelling forms:
1) Basic Form (DP 01)
2) Broad Form (DP 02)
3) Special Form/Open Peril (DP 03)
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A. Basic Form (DP 01)

The Basic form (DP 01) policy is the simplest and most
affordable Dwelling policy. This policy might be used to cover a
residential home, rental properties (1-4 families), seasonal
homes, qualifying vacation homes and homes that are being
renovated. Coverage is based on ACV.
Note: Just a reminderACV is computed on the basis of replacement
cost minus depreciation.
The coverages provided are named perils: including coverage
on the dwelling against the 3 main perils:
1) Fire
2) Lightening
3) Internal Explosion
Note: An example of an internal explosion would be if a furnace or
water heater explodes.
Note: Were going to provide you with mnemonics whenever possible,
even if theyre not the coolest mnemonics youve ever seen. So, for
the basic perils, just remember F.L.I, as in, Shoo F.L.I, dont bother
me, or, Say, waiter. Theres a F.L.I in my soup. We know its a
stretch, but humor us.
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B. Extended Coverage Perils

Since the basic form is so bare bones, the insured can add
extended coverage perils to the Basic form for an extra
premium.
Although its a bit on the colorless side, you can memorize the
extended coverage perils by using the acronym W.H.A.R.V.E.S:
Windstorm, which includes tornadoes and hurricanes.
Hail is external coverage only, unless the weather makes

a hole in the roof or walls.
Aircraft insures property against a plane crash or objects

falling off a planethere has to be actual physical contact
with the insured property.
Riot or Civil Commotion insures property thats stolen or

damaged during a riot.
Vehicle coverage applies if a car crashes into the property

or a passing car kicks up objects that damage the
property.
Note: This coverage doesnt apply if the vehicle in question belongs to

the insured.
Volcanic Eruption insures buildings and their contents

against volcanic eruption. Damage caused by ash, smoke,
lava flow, or airborne shockwaves is covered.
Note: If a volcanic eruption causes an earthquake, earth movement, or

other land born shockwaves that cause damage to the dwelling, the
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dwelling isnt covered under volcanic eruption. Earthquake, flood, and

mudslides are all excluded.
Explosion covers both internal/external sudden and

accidental explosions, which occur either on or off the
insureds premises.
Note: This coverage doesnt apply to the insureds steam boiler.
Smoke covers sudden and accidental smoke damage.
Note: Smoke doesnt cover damage caused by a fireplace or nearby

industrial factory.
For an extra premium, the insured can also choose to have the
additional extended coverage peril Vandalism and Malicious
Mischief (V&MM). V&MM covers losses or damages to property
that happen either intentionally or randomly.
Note: This coverage doesnt protect dwellings that were vacant for
more than 30 consecutive days before the loss.
Fun Factoid:
Benjamin Franklin and associates began of the first American fire
insurance companies. After a horrible fire ravaged Philadelphia in
1730, Benjamin Franklin began writing articles about fire safety and
prevention. Franklins recommendations led to the formation of
Philadelphias first official fire brigade. Shortly thereafter, Franklin and
other great thinkers started an insurance company called, The
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Philadelphia Contributionship for the Insuring of Houses from Loss by

Fire.
C. The Broad Form (DP 02)
The Broad form (DP 02) covers dwellings on a broad named
perils basis. The Basic form is much more limited, but the Broad
form automatically includes the extended coverage perils and
V&MM. Coverage is on an ACV basis.
In addition to the basic coverages, the Broad form policy
includes the following additional named perils:
Damage by burglars covers the damage done by

burglars, but doesnt replace stolen property. For example,
if a burglar broke down a door and stole jewelry, the door
repairs would be covered, not the jewelry.
Note: Coverage doesnt apply if the building was vacant for more than
30 consecutive days before the break-in.
Weight of Ice, Snow, or Sleet covers damage to a

building and its contents, but doesnt cover any losses to
external items (patios, porches, etc.).
Falling Objects covers loss or damage caused by falling

objects, such as trees, branches or the Kal-El meteorite.
Coverage is mainly external, but contents on the inside are
covered if the building was initially damaged by a falling
object. For example, if a tree falls on a house and creates
an opening in the roof, any objects damaged inside the
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home as a result of the hole in the roof are covered up to

policy limits.
Accidental Discharge or Overflow of Water or Steam

covers loss or damage caused by sudden and accidental
water damage from the plumbing system, or broken
appliances.
Note: Coverage doesnt apply if the water overflow is the result of

freezing, due to the building being poorly maintained or vacant for
more than 30 consecutive days.
Freezing covers freezing of plumbing or household

appliances.
Note: Coverage doesnt apply if the freezing is due to the building

being poorly maintained or vacant for more than 30 consecutive days.
Sudden and Accidental Damage from Artificially

Generated Electrical Current, which is a fancy way of
saying, damage from any man-made, non-lightening,
electrical source.
Sudden and Accidental Tearing Apart, Cracking,

Burning, or Bulging of an Appliance for Heating Water
covers household appliances, steam and hot water heating
systems, air conditioning systems, and fire sprinkler
systems.
There are 3 coverage extensions, which are expanded in the DP 02:
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1) Explosion isnt as restricted in the DP 02 as it is in the DP

01. Steam boiler explosions are covered on or off the
insureds location if it damages covered property.
2) Vehicles provide some coverage for vehicles owned by the
insured (unlike in the DP 01, which provides no coverage
for vehicles owned by the insured). This coverage wont
cover fences, driveways, or walkways. So, if the insured
runs his/her car into the house, the damages are covered.
However, if the insured runs his/her car into the fence, the
damages arent covered.
3) Smoke in the DP 02 covers any losses caused by smoke
from a fireplace. For example, if the insured starts a fire in
the fireplace, and forgets to open the damper, the
resultant smoke damage is covered.
Note: Losses under the DP 02 are on an ACV basis. Therefore, the
current cost of the damaged property minus depreciation applies to
both the dwelling and separate structures.
B. All Risk/Open Peril (DP 03)
An all risk/open form policy insures property and other
structures against any direct physical loss perils, except the
perils that are excluded by the policy. This type of policy doesnt
list the perils that are insured, but instead lists the perils that are
excluded. So, the policy could specify that earthquake coverage
is excluded, which means every other peril except earthquake is
covered.
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Its important to remember that the Open Peril (named

exclusions) coverages apply only to the dwelling and
appurtenant structures. Personal property is covered on a Broad
Form Named Peril Basis. The Special form provides coverage
thats specifically designed for any customers who need broader,
more comprehensive coverage.
The Special form (DP 03) policy is intended for:
Owner-occupied homes
Rental properties (1-4 units)
Seasonal homes
C. Special Form Exclusions

The following are DP 03 exclusions:
Weather damage to satellite dishes (wind, hail, ice, snow,

or sleet)
Collapse, unless this is covered separately by collapse

coverage
Freezing in dwellings that are poorly maintained,

unoccupied, or under construction
Theft to uninsured property or property under construction
V&MM if the dwelling has been unoccupied for more than

30 consecutive days
Any leakage from appliances or plumbing thats been

constant or has repeated over a period of time
Wear and tear or gradual damage/deterioration caused by

air pollution, smoke, rust, mold, settling, cracking, or
shrinking
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Any non-human (birds, insects, rodents, domesticated

animals, aliens, etc.)
Note: Collapse is additional coverage that can be added in dp 03, but

not DP 01
Note: Special form losses are settled on a replacement cost basis,
which means depreciation isnt deducted from the current value of the
property. Therefore, if the insured loses a couch in a fire, under the DP
03, he/she will be able to replace the couch with a new, similar couch
at todays price.
Microbial Matter Exclusions: A common exclusion in current
personal lines policies is microbial matter (mold, mildew, viruses)
which includes fungi and bacterial matter which reproduces through
the release of spores living or not.
2. Personal Property Coverage and Contents
All of the Dwelling forms settle losses on an ACV basis for
personal property and content losses. Personal property
coverage is on a Broad Form Named Peril basis, therefore, the
same exclusions that apply to the Broad form (DP 02), also
apply to the Special form (DP 03) personal property perils.
3. Dwelling Form Coverages A-E
All 3 Dwelling forms (DP 01, 02, and 03) offer the same basic policy
coverages, which are referred to as Coverages A-D:
Coverage A: Dwelling
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Coverage B: Appurtenant Structures (other buildings on the

property that arent attached to the main dwelling)
Coverage C: Personal Property
Coverage D: Fair Rental Value
All of the Dwelling forms offer Coverages A-D. However, the Broad
form and Special form also offer Coverage EAdditional Living
Expenses.
The main idea behind Coverage E is to cover the additional
expense of functioning after a covered loss. So, if the insured has to
stay in a motel and eat fast food for a week, because he/she cant
be in their home, those expenses are covered by Coverage E.
Therefore:
Coverages A-C cover direct losses:
Coverage ADwelling
Coverage BAppurtenant structures
Coverage CPersonal Property
Coverages D-E cover indirect losses:
Coverage DFair Rental Value
Coverage EAdditional Living Expense
Note: The best way to memorize the information is to take it out of the
official insurance-eeze, and put it in a real world context. Its
presented to you in this formal way, because thats how its going to
appear on the final exam, and thats how youll get used to reading it
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and referring to it as a licensed producer. But for the sake of easy

memorization:
Coverage A: The main house
Coverage B: Other buildings
Coverage C: Stuff
Coverage D: Any income lost if renters cant use the property
Coverage E: The cost of getting by after a covered cause of loss
Note: Liability insurance isnt automatically included in the DP. If the
insured wants liability, theyll have to add a Comprehensive Personal
Liability policy, or, if theyre insuring a rental dwelling, they could
extend liability coverage onto the rental using their Homeowners policy
(HOP). More on liability later in the unit.
A. Coverage ADwelling
Coverage A covers the dwelling and any items or materials used
to maintain the dwelling. Coverage A doesnt include land.
Coverage A includes:
The dwelling and structures attached to the dwelling (i.e.

an attached garage)
Materials/supplies on the premises that are used to

service/repair/construct the premises
Building and outdoor equipment used to service/maintain

the premises (i.e. lawnmowers, etc.)
Note: If an insured has their riding lawnmower specifically named

under Coverage CPersonal Property, then it wont be covered by
Coverage A. Make sense? In that way, its not covered twice and the
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insured cant collect twice for the same loss. So, its either covered
under A or C, but never both.
B. Coverage BSeparate (Other) Structures
Coverage B covers appurtenant structures that are located on
the same premises as the dwelling. Such structures could include
a detached garage, pool, or storage shed. Coverage B doesnt
cover land, or any structures that are used for commercial or
farming purposes.
Requirements for Coverage B include:
The appurtenant structures have to be completely separate

from the dwelling
The only connections allowed between the appurtenant

structure and the dwelling, are impermanent connections
like fences or utility lines.
Note: All 3 DP forms limit Coverage B to 10% of the Coverage A

Dwelling amount. This doesnt reduce the Coverage A amount, it just
places a cap on the Coverage B amount.
C. Coverage CPersonal Property
Coverage C covers the personal property thats owned or used
by the insured. It also covers the personal property of resident
family members, employees, and on-premises guests.
Note: Personal Property is covered on an ACV basis. Its also covered
for the same named perils as in the Broad form (DP 02).
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Coverage C includes a provision for coverage if the insured is

moving. The provision is called Automatic Removal, and it
gives the insured 30 days coverage for personal property at the
new residence. Any personal property thats lost or damaged
during the move isnt covered.
Coverage C also provides 10% coverage of Coverage C for
personal property located anywhere in the world.
D. Personal Property Exclusions in DP forms
There are certain types of personal property that are exclusions
in all 3 DP forms (Basic, Broad, and Special). The following are
Personal Property Exclusions:
Any pets or domestic animals
Aircraft and parts. This exclusion doesnt apply to model

aircraft, because theyre not designed to carry people or
cargo (duh, right?)
All boatsexcept on-premises rowboats and canoesare

excluded
Motor vehicles that arent used to maintain the premises or

designed for the handicapped (motorized wheelchairs)
Stamps and tickets
Credit cards/fund transfer cards
Currency, coins, metals, and medals
Personal records (bills, bank notes, manuscripts,

passports, etc.)
Any data, electronically stored or otherwise
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Note: The DP forms dont include theft coverage for certain items that
are usually targeted by thieves, like jewelry, furs, and firearms. Most
insurance companies will provide coverage for those items through
endorsements.
E. Coverage D
This coverage protects properties that are being rented out. So,
if the insureds rental property is damaged, and the renters cant
live there, Coverage D will reimburse the insured for the lost
rental income.
Coverage D pays the insured the Fair Rental Value for the
shortest period of time it takes to repair/replace the damages.
Coverage D is limited to 10% of the Coverage A dwelling
amount, and covers up to a 4-family unit for rental losses.
Coverage D never reimburses for any extra expenses, only lost
income.
F. Coverage EAdditional Living Expenses
Coverage E covers additional living expenses. This coverage is
available only in the Broad and Special forms, and not the Basic
form.
If a covered loss forces the insured to leave the insured
residence, Coverage E covers the additional expense of
maintaining a normal standard of living.
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Coverage E pays for any necessary increase in living expenses.

Payments end when the property is fixed, or if the insured has
permanently relocated and settled someplace else.
Note: Keep in mind that the expenses Coverage E pays have to be
over and above the insureds normal living expenses. Coverage E is
intended to help the insured maintain his/her familys normal standard
of living. Therefore, if the insured decides to rent out the Presidential
Suite and order room service three times a day, the insurance
company will probably decide this doesnt constitute a necessary
expense.
3. Other Coverages
DP forms also provide the following Other Coverages to help
eliminate a few gaps:
Separate (Other) Structures coverage specifies that any

coverage for damages to separate structures doesnt reduce
the amount of Coverage A available for damages to the main
dwelling due to the same loss. So, if the dwelling and the
detached garage are damaged by the same loss, Separate
Structures covers the damage without decreasing the
available Coverage A limit.
Note: Remember coverage for Other Structures is limited to 10% of

Coverage A.
Power Failure means the insured isnt covered for an offpremises power failure.
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Note: Like the above exclusions, if the off-premises power failure

resulted in a direct, covered loss to insured premises, then the
resultant loss is covered.
Neglect means the insured isnt covered if he/she didnt use

all reasonable means to save and preserve property after a
loss.

Lucy came home and saw that a rainstorm had caused a heavy branch
to fall on her roof. The branch opened up a hole in the roof, and rain
was starting to leak into her home. After she reported the fallen object
to her insurance company, Lucy spent the next few days at her
brothers house, and left her house as it was. Because Lucy didnt take
any steps to protect the interior of her house, any water damage done
to the contents wont be covered. Lucy will be reimbursed for the
damages done to her roof, but not for any personal property inside the
house.
War means the insured isnt covered if their property is

damaged as the result of any kind of war, undeclared or
otherwise.
Nuclear Hazard means the insured isnt covered against

nuclear hazards. The following losses that could result from a
nuclear hazard are all EXCLUDED from coverage:
o Fire
o Smoke
o Explosion
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o Genetic mutations resulting in superhuman powers that

cause emotional upheaval or any damage to personal
property
Intentional Loss means the insured will never be

reimbursed for any losses or damages done on purpose.
Loss to Lawns, Plants, Shrubs, or Trees (Basic form)

means the Basic DP doesnt cover floraarent we ever-sofancy?
Note: Losses to plants are covered by the Broad and Special forms.
Concurrent Causation Exclusions excludes the following

losses from Coverages A and B:
o Severe weather that coincides with any general
exclusions
o Acts or decisions made by the government or a member
of an organization.
o Sub-par or faulty design, construction, or maintenance
Concurrent clause is a loss where two perils are involved at the

same time and one peril is covered, but the other is excluded.
Part B: Personal Liability DP Endorsement
1. Personal Liability
Personal Liability insurance covers the insured if he/she is legally
obligated to pay bodily injury or property damages to a thirdparty.
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The law considers it the responsibility of each individual to act in a

reasonable and prudent manner in order not to injure another
person, or damage another persons property. But its a fact of life
that some people are natural oafs, and everyone has the potential
for unintentional oafishness. If someone isnt careful, and their
actions result in injuries or damages to another person or their
property, then the law could hold that person liable for those
damages.
Personal liability is also referred to as Third-Party Insurance,
since the person injured, or the person whose property is damaged,
is not a party to the contract between the insured and the
insurance company.
Alert!
The final exam may try to trick you with a question like this:
Which of the following wouldnt be covered under an insureds
Personal Liability?
a.
A neighbor who hurts themselves on the premises
b.
A friend who hurts themselves on the premises
c.
The insureds son who hurts himself on the premises
d.
A client of the insured, who hurts themselves on the premises
The insureds son wouldnt be covered, because Personal Liability

relates to third-parties: it never covers anyone directly connected to
the insured, such as spouses, children, or relatives who live in the
house.
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Personal Liability coverage isnt automatically included in any of

the DP forms. The insured can add liability and third-party
medical expenses to their DP through endorsement.
The 2 additional liability coverages are:
1) Coverage L$100,000 Personal Liability
2) Coverage M--$1,000 Medical Payments to Others
Note: Coverages L and M are always automatically included in HOPs.
More on Homeowners Policies later in the unit.
If the insured chooses to add the Liability Endorsement to their DP,
it includes:
A. Coverage LPersonal Liability
Coverage L protects the insured against third-party lawsuits due

to third-party damages or injuries from a covered peril. The
insurer provides and pays for a legal defense, and pays up to the
coverage limit for damages. The coverage limit is usually
$100,000.
B. Coverage MMedical Payments to Others
Coverage M provides coverage for all necessary, third-party
medical expenses within 3 years of an accident from a covered
peril. The coverage limit is usually $1,000.
Note: Heres an easy way to remember DP Coverages L and M,
and we are absolutely sure were the first ones to ever think of
this, ever!
Coverage L stands for Liability!
Coverage M stands for Medical Payments to Others!
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Were giving you pearls here, baby, pearls!

Coverage applies if the insured is liable for bodily injury to:
Someone who was on covered premises with permission,

and they hurt themselves
Someone who left the covered premises, but ended up

injured because of a condition on the covered premises
Someone who was injured by the actions of the insured
Someone who was injured by an animal in the insureds

care

Under Coverage M, how could someone leave the premises and then
end up injured because of a condition on the premises? Well, say a
neighbor comes over for a visit, and ends up getting stung by a wasp.
Youve been ignoring that huge wasps nest for a while now, because
you just didnt want to deal with it. The neighbor leaves, and an hour
later has a severe allergic reaction to the sting, and has to be admitted
to the hospital. Coverage M would take care of this situation, because
the neighbor ended up with injuries that were due to a condition on
the premises, even though he/she was off the premises when the
injury emerged.
C. Claims Expense
Claims Expense is the insurers expenses to defend the insured
during a lawsuit. If the insured needs to help with the
investigation or their defense, they can be compensated for up
to $50 a day in lost income.
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D. First Aid to Others

First Aid to Others covers any expenses for administering first
aid to someone else if the expense is a result of a BI covered by
the policy.
E. Property Damage of Others/Voluntary Property Damage
If an insured causes damage to someone elses property, the
damage is covered up to $500 per occurrence. This coverage
doesnt require that the claimant prove the insured was
negligent.
Part C: Homeowners Insurance (HOP)
1. Homeowners Policy Forms (HOP)
When someone owns their own home, they want to protect that
investment, plus they face additional risks and exposures due to
home ownership.
Homeowners need protection from 3 major risks:
1) Damage or destruction to the house
2) Damage or destruction to personal property
3) Liability (and any lawsuits)
HOPs are designed to protect a person or family against the 3
above risks. Whether an insured owns or rents a home, a HOP
provides valuable and necessary protection.
Most insurance companies offer Homeowners Package Policies that
provide coverage for all the risks. Besides combining coverages for
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the dwelling, personal property, and personal liability, the HOPs

also include fire, theft, and vandalism, along with other extended
and additional coverages.
HOPs cover any and all common problems associated with owning
or renting a home. The HOP is also more complete and convenient
than the DP, which is why Homeowners Package Policies are more
popular.
These policies can differ state-to-state. As long as you know what
state youre in, you can double-check any differences. If you dont
know what state youre in, were worried about you. No more
Margaritas for you.
Note: The coverage definitions and policy contract terms are similar
between the HOP and the DP.
A. Customer Eligibility
Not only do HOPs offer one-stop shopping coverages, the
packages are often priced more competitively than the DPs. In
order to protect competitive pricing, insurance companies look
for clients who are better-than-average risks. Better-thanaverage risks are clients who show Pride of Ownership and live
in preferred dwellings.
A client must meet the following eligibility guidelines for an HOP:
The house has to be occupied by the owner with a

maximum of 2-family units (remember the DP allows up to
4-family units)
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The home has to be inspected to make sure heating,

plumbing, and electrical systems meet state codes, and
are installed properly.
The owner has to be checked for his/her loss historythe

number and type of insurance claims he/she has filed in
the past.
Property is inspected for Pride of Ownershipis the house

in good condition? Is the house well-constructed? Is the
landscape well-kept? Are there any uninsurable risks on
the premises?
The house is a residential property, and is never used for

commercial purposes.
Note: An inspection of the home could reveal an unusual hazard that

makes the property an undesirable risk. Such hazards could include a
vicious dog, an unfenced swimming pool or pond, or broken
windowpanes.
Note: As an insurance producer/agent, youll be looking for the betterthan-average risks, as opposed to the Im-surprised-the-paroleboard-let-you-out-early risks. Youll thank us later for our golden
wisdoms.
2. Homeowners Package Policies
There are 6 versions of HO package policies. All of the policy
packagesexcept the HO 04apply to owner-occupants, that is,
someone who both owns and occupies the dwelling. The HO 04 is
the Tenants form, which provides coverage for the personal
property of renters.
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The differences in the HO policy forms apply only to the property

and personal contents coverage: the liability coverage is the same
for all the HO forms. All of these HO forms include liability coverage
as part of the HO package.
The forms include:
Broad Form (HO 02) provides Broad form (named perils)

coverage for both the dwelling and personal contents
Special Form (HO 03) provides Special form coverage (all

risk except for the named exclusions) on the dwelling and
other structures, and includes Broad form (named peril)
coverage on personal property.
Tenants Form (HO 04) provides Broad form (named peril)

coverage for tenants and renters. There is no coverage for
the dwelling, because the renter doesnt own the dwelling.
Note: The owner of the dwelling should carry a separate DP or a

Landlord Package Policy to cover any damages to the structure. That
kind of policy wouldnt cover the tenants personal property, so the
tenant would need to carry an HO 04.
Comprehensive Form (HO 05) provides Special form

coverage (all risk coverage except for the named
exclusions) on the dwelling, personal property, and other
structures on the premises.
Unit Owners Form (HO 06) provides Broad form (named

peril) coverage for condo owners.
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Modified Form (HO 08) provides ACV modified peril

coverage for owner occupied dwellings that are older or
that are less desirable risks. This is the only coverage in
which both the buildings and contents are protected only
against basic named perils with the extended coverage
perils and V&MM coverage. Again, this form is used a lot
with older homes, that are higher insurance risks.
Note: An HO 01 isnt sold in California. So if you see that option on the

test, you can scratch it out as a possibility right away.
3. Homeowners Package Coverages
The HOP is divided into 2 parts:
1) Section 1 provides coverage for the dwelling, other
structures, and personal property.
2) Section 2 provides Personal Liability coverage and Medical
Payments to Others coverage.
Alert!
Section 2 covers the insureds liability for damages or injuries done to
a third party. Anyone considered to be an insured under the HOP
would be covered by Section 2, which is the insured, the insureds
spouse and dependents, and anyone else specifically named in the
declarations.
Section 2 doesnt pay for the insureds own injuries or property
damage, because its for third-party expenses. So you may run into a
question that asks you who wouldnt be covered under Section 2, with
a selection of answers like this:
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A. A neighbor injured on the insureds premises

B. A friend injured on the insureds premises
C. The insureds spouse injured on the insureds premises
D. A neighbor who sustains an injury off the premises that is directly
related to a condition on the covered premises.
All of the above people are covered, except the spouse. The spouse
doesnt count as a third-party.
Here is a sample Dec-page from an HO:
Section I
Coverage A:
Dwelling
$200,000
Coverage B:
Separate (Other) Structures $20,000
(Usually 10% of Coverage A)

Coverage C:
Personal Property/Contents
$100,000
(Usually 50-55% of Coverage A)

Coverage D:
Loss of Use
$10,000
(Usually 20% of Coverage A)

Section II
Coverage E:
Personal Liability
$100,000
Coverage F:
Medical Payments to Others $1,000
Note: Section 1 coverages in the HOP are the same as they are in the
DP. Remember:
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Coverage A: House
Coverage B: Other buildings
Coverage C: Stuff
Coverage D: Fair rental value and additional living expense rolled into
one.
A. Coverage A
In HO 02, 03, 05, and 08, Coverage A applies to:
The main dwelling
Structures attached to the dwelling
Materials and supplies on the premises used to construct,

repair, or service the dwelling and nearby structures
In HO 06 (Condos), Coverage A only applies to:
Alterations, appliances, fixtures, and improvements the

insured has made to his/her own unit. For example, if the
insured makes improvements to the outside of their unit
after a loss, only the insured will be reimbursed for the
improvement even though the unit is part of a larger
whole. No one else but the insured has a claim on those
repairs.
Fixed property in the unit. For example, the furniture that

was present before the insured moved in: cupboards,
counters, refrigerator, etc.
Any property the Condominium Owners Association

requires insurance for.
Structures on the premises other than the unit (i.e.

garages, etc.)
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Note: The unit or condo owner owns everything inside the bare walls
with the exception of some fixed items and electrical wiring. This is
referred to as the Bare Wall Doctrine. Many times, the HO 06
coverage doesnt adequately cover the condo owner, and they may
end up needing to increase their coverage through endorsements.
These endorsements can increase the limits and protect the insured on
an all-risk basis.
B. Coverage A Exclusions
Coverage A excludes:
Land
Commercial structures
Structures being rented to a non-tenant, unless its being

used as a private garage
C. Coverage B
Coverage B isnt included in HO 04 or HO 06, because tenants
and condo owners wouldnt need to worry about appurtenant
structures on the premises.
Coverage B applies to:
Detached garages
Pools
Storage sheds
Fences
Gazebos
Wells
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Coverage B will usually provide coverage for any structure on

the premises that is:
Separated from the dwelling by a clear space
Connected to the dwelling by only a fence, utility line, etc.
D. Coverage B Exclusions
Coverage B excludes any structures, which are:
Commercial or used for any commercial purpose
Rented to someone who isnt a tenant (unless theyre

using it as a private garage)
E. Coverage C
Coverage C protects the insureds personal property anywhere in
the world.
Note: Under Coverage C, an insured is anyone protected by the
policy, including: anyone in the household, relatives, or anyone under
the insureds care.
The named insured can request that the policy also cover
personal property owned by:
Others, while the property is on covered premises
A guest or resident employee (servant, nanny) while the

property is on covered premises.
F. Coverage C Limits
The limit for Coverage C is 50% of the Coverage A limit.
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However, personal property in an insureds secondary residence

(a weekend house, summer cottage, ect.) is only covered for
10% of the Coverage C limit, or $1,000whichever is greater.
G. Lower Coverage C Limits for Certain Kinds of Property
There are lower coverage limits for the kinds of property or
losses that are excluded by DP forms:
Coverage
Personal Property
Limits
$1,500
Electronic apparatus while in/on/away from an

auto
$2,500
Business property on the premises
$500
Business property off premises
$200
Money, coins, and other precious metals
$1,500
Securities, valuable documents, etc.
$1,500
Watercraft, related watercraft accessories on the

premises
$1,500
Trailers on the premises that arent used with

watercraft
Special Limits Apply to Theft Related Losses
Coverage
Personal Property
Limits
$1,500
Jewelry, watches, furs, precious and semiprecious stones
$2,500
Firearms
$2,500
Valuable silverware, goldware, pewterware, etc.
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Note: Special limits pay for the loss of all property in a single category.
Specific items can be insured for larger amounts with endorsements or
floaters.
H. Coverage C Exclusions
These personal items arent covered:
Animals
Aircraft and parts
The property of any non-relatives staying on premises
Rented property off covered premises
Credit cards or ATM cards (unless theyre protected by

additional coverages)
Business or commercial data
Motor vehicles and any item or electronic equipment inside

the vehicle or made for the vehicle
Any item listed and insured separately in the

declarationsthis keeps the insured from being paid twice
for the same loss
Note: Coverage C does cover vehicles that dont need to be registered

such as a motorized wheelchair, a garden tractor, or a riding
lawnmower.
I. Coverage D
In the HOP, Coverage D is the DP coverages D and E rolled into
one. Therefore, in the HOP, Coverage D provides:
Fair Rental Value coverage reimburses the insured for

lost rental income when a covered loss makes the rented
premises unfit to live in.
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Additional Living Expense coverage reimburses the

insured for necessary living expenses after a covered
cause of loss makes the premises unsafe to occupy.
Note: If the premises are the insureds principal place of residence, the
insured can either choose between Additional Living Expense and Fair
Rental Value, or choose to have both coverages. If the insured doesnt
live on the premises, the insured can only get Additional Living
Expense coverage.
J. Coverage D and an Order of Civil Authority

If a civil authority wont allow the insured to use the residence
because of neighboring damage, Additional Living Expenses or
Fair Rental Value Loss (Coverage D) is covered for a MAXIMUM
of 2 weeks.
Alert!
Youre not there yet, but were going to draw attention to the
difference now. In the HOP, if the premises are barred by an order of
civil authority, Additional Living Expenses or Fair Rental Loss is
covered for a MAXIMUM of 2 weeks. However, in commercial
insurance, if theres an order of civil authority, Coverage D covers
expenses for a MAXIMUM of 3 weeks. Remember to differentiate the
two on the final exam.
Coverage D lasts while the insured either repairs the damaged
residence, or moves to another residencewhichever is shorter.
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K. Additional Coverages
The following are Additional Coverages that can be added to the
HOP:
Debris Removal pays for the removal of:

o Debris on the premises
o A neighbors tree or trees that fell as a result of a
covered peril and did direct damage to the insured
structure
o The named insureds tree or trees that fell after or
during a windstorm or hailstorm
Note: The only HO form that doesnt cover trees falling due to the
weight of ice, snow, or sleet, is the HO 08. This is because the HO 08
is basic coverage.
Note: The 2000 HOP in California now provides up to $1,000 to
remove a fallen tree. This includes fallen trees blocking access to a
driveway that didnt actually cause any damage to the property itself.
Reasonable Repairs covers the cost of protecting damaged

property from more damage.
Removal covers property against any direct loss when its being
removed from endangered premises. During the time removal
coverage applies, the policy becomes open risk/all risk.
Lawn, Trees, Shrubs, and Plants covers loss to noncommercial trees, plants, and shrubs on covered premises.
The limit for any one plant, shrub, or tree is $500in the HO
08, the limit is reduced to $250. The total limit is 5% of the
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Coverage A limit in HO 02, 03, 05, and 08, and 10% of the
Coverage C limit in HO 04 and 06.
Fire Department Service Charge pays up to $500 for liability

if the fire department is called to save or protect covered
property. This is additional insurance with no deductible.
Glass Breakage covers glass breakage on a building, storm

door, or storm window. Damage caused by broken glass is also
covered.
Note: Theres no coverage if the building has been vacant for over 30
consecutive days.
Collapse (in all forms except HO 08) covers loss to covered

property from collapse. The collapse has to be caused by
Coverage C perils. Some examples of covered causes of collapse
would be:
o Unknown decay
o Unknown insect damage
o Rodent damage
o Strain from anything inside the structure (people, animals,
contents)
o Rain collecting on the roof
o Defective building design or defective tools
o Any broad form peril
Note: Collapse doesnt cover the collapse if it occurred from the

natural decomposition of a poorly maintained structure. This could
include shrinking, bulging, or settling. Collapse also doesnt cover
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damages if there was decay and/or insect damage and the insured
knew about it and didnt do anything about it.
Credit Card, ATM card, Forgery and Counterfeit Money

pays up to $500 per loss resulting from:
o Theft/unauthorized use of a credit card
o Forgery
o Accepting counterfeit currency
This additional insurance has no deductible. It also includes any
necessary legal fees from a lawsuit or investigation.
Note: Credit Card, ATM card, Forgery and Counterfeit Money

doesnt cover losses that were intentional on the part of the insured,
the result of the insureds family borrowing (with permission, hence
borrowing and not stealing) credit cards/currency and then losing
the credit cards, or the insureds failure to follow the terms of the
credit card.
Loss Assessment relates to the Homeowners Association. If a

property owned by a collective is damaged by a covered peril,
then the Homeowners Association has to complete a loss
assessment. The Association charges the members for this
assessment. Under the Loss Assessment additional coverage, an
insured can receive up to $1,000 per loss for his/her share of
the loss assessment expenses.
Note: In the 2000 HOP, the deductible now applies to this coverage
under Section 1. No matter how many assessments are required for a
single occurrence, the insured only has to pay the deductible once.
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Building Additions applies if the insured is a tenant who has

paid to make improvements to the unit. The insured can use this
coverage to insure those additions.
Landlords Furnishings covers the landlords personal property

thats in dwellings rented to others. Typically, this coverage is
limited to $2,500.
Ordinance or Law used to be excluded in Homeowners, and

was available only through state endorsement. Now this
additional coverage is included in all 2000 California HOPs.
Ordinance or law covers:
o The property value of a house thats torn down in
compliance with building code requirements
o Demolition and debris removal expenses
o Any expenses to make necessary repairs or additions to
comply with building code requirements, except to make a
restroom comply with the American Disability Act (ADA).
Putting in into Context:

If someones house is ravaged by a covered cause of loss, they may
discover that there are certain modifications that have to be made to
comply with building code requirements. In this situation, it could be
cheaper to just demolish the house and rebuild it in compliance with
the new building code requirements. If the person has Ordinance or
Law coverage, those expenses are covered.
Grave Markers now provides up to $5,000 for damages to

gravestones and mausoleums caused by a covered cause of loss.
This is standard in the new 2000 HOP form.
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4. HOP Property Endorsements

The following endorsements can be added to an HOP in order to
individualize the coverage for the insured:
A. Mobile Home Endorsement
When the Mobile Home Endorsement is added to an HOP, then
the Mobile home is the insured dwellingnothing else changes.
B. Other StructuresIncreased Limits Endorsement
The Other StructuresIncreased Limits Endorsement increases
the standard limit for other structures on the premises. The
standard limit is 10% of the dwelling amount.
C. Scheduled Personal Property Endorsement (HO 15)
This is the exact same thing as a Personal Articles Floater, or the
PAF. The PAF protects personal property on a scheduled basis,
anywhere in the world. This can include breakage of glassware
caused by an earthquake.
D. Inflation Guard Endorsement
The Inflation Guard Endorsement automatically increases
coverage limits by a certain percentage annually to account for
economic inflation.
E. Special Personal Property Coverage Form Endorsement
This endorsement is frequently used to protect items that have a
higher value, such as furs, jewelry, and precious stones/metals.
The Special Personal Property Coverage Form Endorsement
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changes the standard coverage for personal property from broad

form perils to special form perils.
F. Personal PropertyReplacement Cost Endorsement
This endorsement changes Coverage C valuation from ACV to
replacement cost.
G. Earthquake Endorsement
This endorsement adds earthquake coverage to the HOP.
Earthquakes are usually excluded from the HOP.
Note: The Earthquake Endorsement isnt used that much in California,
because it doesnt offer the most extensive coverage. See Other
Property Products for more detailed information on Earthquake
coverage.
H. Guaranteed Replacement Cost Endorsement
Adding this endorsement means that the insurer will pay the
total cost to rebuild a structure, even if the cost to rebuild the
structure exceeds the policy limits.
I. Additional Residence Rented to Others
The Additional Residence Rented to Others provides Liability
coverage for an insureds additional residence that they are
renting to others. The endorsement only covers the property
itself.
Note: The Ordinance or Law Coverage Endorsement is no longer an
endorsement. Its just automatically included in the 2000 HOP.
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J. Workers CompensationResidence Employees

Endorsement
5. HOP Home Business Endorsements

The following 2 coverages are used to cover home businesses:
1) Permitted Incidental Occupancies Endorsement adds
Liability coverage for any business use inside a residence.
Otherwise, the areas in a personal residence used for
business purposes wouldnt be covered by the HOP.
2) Business Pursuits Endorsements adds Liability coverage
to include the insureds business activities.
Note: The Business Pursuits Endorsement doesnt cover a business
that the insured owns, because that would need to be covered under a
Commercial coverage.
A. The Earth Movement Exclusion
Were just going to shoehorn this in here for emphasis. Any
damages resulting from earth movement is specifically excluded
in the HOP. Earthquakes, and the like, are covered by
Earthquake insurance. We go into Earthquake insurance in
greater detail in Other Property Products. Earth movement
includes:
Earthquake
Mudflows
Landslides
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Erosion due to mining/deforestation
Note: If an earthquake or any earth movement directly causes

damages that are considered covered perils (fire, explosion, etc.), then
the damage is covered under the principle of Proximate
Cause/Concurrent Causation.
Part D: Homeowners Liability InsuranceSection 2
1. Section 2
Section 2 in the HOP deals with Liability. Unlike the DP, Liability
is automatically included in the HOP. Section 2 of the HOP
provides the following 2 coverages:
1) Coverage EPersonal Liability
o Usually $100,000 per occurrence
o The insured has to be determined negligent
2) Coverage FMedical Payments to Others
o Usually $1,000 per person
o The insured doesnt have to be negligent for this
coverage to apply
A. Additional Coverages
The following additional coverages are automatically included in
the HOP Section 2. There is an additional expense for these
coverages:
Claims Expense covers the insurers cost to defend the

insured in a lawsuit. The Claims Expense coverage now
provides up to $250 per day to the insured for any lost
income due to the lawsuit and/or investigation.
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First Aid to Others covers the expense of administering

first aid to others when their injuries were the result of
covered causes of loss.
Loss Assessment covers any assessment amount that

exceeds the Homeowners Association Liability limit. This
coverage provides up to $1,000.
Property Damage of Others now provides up to $1,000

per occurrence in the new 2000 California HOP.
Note: Under the Property Damage of Others, hovercraft loss is

excluded. So, all you hovercraft owners out there, go elsewhere for
your hovercraft coverage needs.
C. Insured Locations
The following locations are covered by an HOP Section 2:
The residence
A new residence
Second homes
Vacation homes
Non-agricultural land
Land the insured plans to construct something on
The insureds cemetery plot
Rented premises
D. Section 2 Endorsements
The following endorsements have a significant impact on Section
2:
Workers Compensation Endorsement is mandatory in

California. If a residence employee is injured, and theyve
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worked a certain number of hours and received a certain

amount of income, the insured is considered that persons
employer. The insured needs to provide Workers
Compensation benefits to the injured residence employee.
Personal Injury Endorsement expands the definition of

BI to include personal injury damages, such as:
o Defamation of Character
o Libel
o Slander
o False arrest
o Invasion of Privacy
Watercraft Endorsement provides Liability and Medical

Payments to Others coverage for scheduled watercraft,
including sailboats engaged in a race.
Note: Boat owners may need to look beyond their homeowners

policy to boat owners coverage if their boat is too big or where
specialized coverage like extended travel, fuel spills, personal
property, replacement cost coverage and more are limited or excluded.
In addition, liability under boat owner policies includes operations
liability, passenger liability and flotilla liability.
Yacht coverage refers to a more comprehensive policy where hull,
trailer, marine liability (protection and indemnity for crewmembers not
covered elsewhere) are included.
E. Exclusions
The following exclusions apply to Section 2:
War
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Intentional losses
Business risks/ventures
Professional Liability claims
Uninsured premises that are rented out
Anything to do with uninsured vehicles: land, sea, or air
If the Insured gives someone an STD
Any type of abuse on the part of the insured: sexual,

physical, mental
Anything to do with illegal drugs
2. The California Residential Property Insurance Disclosure

Statement
In California, you cant renew a policy for a residential property,
unless youre given the California Residential Property Insurance
disclosure statement.
The disclosure gives you a basic rundown of California insurance
coverage for residential properties. The disclosure is required to
include and explain the following points:
Guaranteed Replacement Cost Coverage and the Full

Building Code Upgrade pays replacement costs even if they
exceed the policys limit of liability. This includes any
expenses resulting from changes to building codes.
Guaranteed Replacement Cost Coverage with Limited or

No Building Upgrade pays any replacement costs within the
policys limit of liability, but doesnt pay for any upgrades to
meet building code requirements.
Extended Replacement Cost Coverage pays replacement

costs up to a certain limit above the policys limits of liability.
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Replacement Cost Coverage pays the replacement costs up

to the policys limit of liability.
ACV pays the actual cash value of the property at the time of
loss, up to the policys limit of liability.
Building Code Upgrade Coverage pays up to the policys

limit of liability in order to modify a dwelling to meet basic
building code requirements.
3. Differentiating Between a DP and an HOP

Here are the major differences between DPs and HOPs. This is
an overview of everything weve already gone over, but
sometimes its just easier to see a visual representation. Check
out our outstanding graph for a better idea:
Outstanding Graph
Dwelling Policies
Liability available through
Homeowners Policies
Liability automatically included
endorsement
Additional Living Expenses and
Loss of Use limit is 20% of
Fair Rental Value is 10% of
Coverage A (HO 02, HO 03)
Coverage A
Personal Property Coverage can
Personal Property Coverage is
be added
automatically included
Theft isnt included in the broad
Theft is one of the broad form
form perils
perils
10% of the Coverage C limit is
Personal property is covered
available for personal property
anywhere in the world
off the insured premises
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HOMEOWNERS INSURANCE VALUATION

This section discusses the methods of estimating replacement value
and explaining various levels of coverage under a homeowners
insurance policy.
General Concepts
The insurance industry has used Standard Fire Policies for years.
California has created their own standard fire policy which embraces
equivalent or more favorable coverage. The purpose of standard
policy forms is to provide common language that will be similar
from state to state.
Coverage is typically for loss by fire and
lightening on an actual cash value basis. Perils not covered include

war, explosion, riot (unless fire ensues), neglect by the insured,
theft, vacancy beyond 60 consecutive days, etc.
A dwelling policy provides coverage for both dwelling and
contents on a named perils basis, while a homeowners policy
provides coverage for the dwelling and contents on an all perils
basis (a.k.a. all risk), and for the contents on a named perils basis.
Why would a structure be insured under a dwelling policy instead
of a homeowners policy? Well, if it was a rental unit on your
property, it will be covered by a dwelling policy. Homeowners
insurance, on the other hand, is suited for those who own and
reside in their own home.
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Section PC 5
INLAND MARINE
Objectives
This unit discusses the importance and range of Inland Marine
insurance. Inland Marine insurance covers valuable items in transit.
Your client could need coverage on an expensive camera during a
vacation, or he/she could need coverage on an overseas shipment of
electronics. Since most other coverages specify that the covered
items must remain on covered premises, Inland Marine insurance
protects items that dont stay in one place on an open-peril basis.
This unit includes:
The 2 Kinds of Marine Insurance

The 6 Categories of Property that Marine Insurance covers
Ocean Marine Insurance
Inland Marine Insurance
Inland Marine Floaters
Dealers Forms
Bailees Policies
Miscellaneous Inland Marine Policies
Transportation Coverages
Transportation Coverage Forms
1. The 2 kinds of Marine Insurance

Marine insurance is designed to protect items on the go. There
are 2 kinds of Marine insurance:
1) Ocean Marine
2) Inland Marine
2. The 6 Insurable Categories
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There are 6 categories that define the types of property that can be
insured by Marine insurance:
1) Imports
2) Exports
3) Means of transportation or communication
4) Domestic shipments
5) Commercial Property floater risks
6) Personal Property floater risks
3. Ocean Marine
Ocean Marine insurance provides coverage for a ships cargo,
and the ship itself, when traveling on the ocean.
A. Protected Losses
There are 4 types of protected losses:
1) Hull Insurance includes coverage for the ship itselfthe
value of the ship and its equipment.
2) Cargo Insurance protects the value of the goods being
shipped, and protects the person shipping the goods for
any losses during importation or exportation.
3) Loss of Freight Insurance protects the ship owner for
his loss of income if the cargo (including passengers) is
lost or not delivered.
4) Marine Liability Insurance protects the ship owner if
he/she is determined to be legally responsible for injuries
to other people or damages to other peoples property.
Note: the insured has to meet the following criteria in order to have
their Ocean Marine Insurance apply:
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The vessel has to be seaworthy
Cargo/freight has to be packed correctly
The vessel has to follow a planned route and not stray from that
route (Whee! Lets stop off at Bermuda, dudes!)

B. Coverage and Exclusions
Hull and Cargo insurance is covered on an open risk/open peril/all
risk basis, which means all perils are covered unless the policy
specifically excludes them.
Some of the common exclusions are:
War
Riots
Rot/Decay
Wear and tear
Inherent vice

Inherent vice basically means it goes with the territory. So, if a ship
is carrying a cargo of perishables, and the ship is delayed, the spoiled
perishables arent covered. Thats because if perishables sit around for
too long, they spoilit goes with the territory.
Any Ocean Marine insurance on a named perils basis usually
includes:
Perils of the sea such as wind, wave action, sinking, the

Kraken, etc.
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Perils on the sea such as fire, lightening, jettison, and

barratry. Barratry means intentional, illegal acts
committed by the captain or the crew.
4. Inland Marine Insurance: Commercial and Personal

We dont spend a lot of time talking about Inland Marine
coverage, because it isnt used much by the general public. Its
extremely important to any commercial businesses, which depend
on all types of shipping.
Note: In Inland Marine policies there is a valuation clause, which
states that if there is a covered cause of loss, the value of the property
is determined at the time of loss.
The property value is determined as the lesser of:
ACV
Cost to repair/restore the property
Cost to replace the property with a functional replacement

A. The 4 Insurance Categories
In Inland Marine insurance, the 4 insurance categories are:
1. Transportation
2. Means of transportation or communication
3. Commercial Property Floater risks
4. Personal Property Floater risks
Heres a more detailed look at each category:
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Transportation Forms protect shipments in transit over

land, on inland waters (rivers, lakes), along coastlines, or
stored in shipments that are about to be transported.
Means of Transportation Forms insure property that

provides transportation or communication. This form would
cover items such as docks, tunnels, and radio and TV towers.
Personal Property Floaters insure certain classes of

personal property anywhere in the world.
Commercial Property Floaters insure business property

anywhere in the world.
A. Filed versus Nonfiled Forms

Certain types of Inland Marine Insurance forms are filed and
certain types are nonfiled. The difference between the two forms is
the risk involved.
If the risk is normal for a particular property or class, then a filed
form is appropriate.
If the risk isnt predictable, because the coverage or situation is
so individualized, then a nonfiled form is appropriate.
Check out our rockin graph for some examples of each:
Rockin Graph
Filed Forms Examples
Nonfiled Forms Examples
Accounts Receivable;
Electronic Data Processing Floaters;
Signs Coverage
Contractors Equipment Floaters
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Because theres a Personal Inland Marine and a Commercial Inland

Marine, were going to break this into two sections, just to make it
a little easier:
Section 1: Personal
1. Floater Inland Marine Insurance Policies
These policies are used to cover valuable property that moves
around a lot (they float, get it?). There are 2 basic types of floaters:
Personal Articles and Personal Effects.
A. Personal Articles Floater (PAF)
The Personal Articles floater covers specific personal property
that is usually more valuable. Each item is listed, described, and
insured separately. In order to obtain a PAF, the insured has to
obtain a written appraisal for each item, and submit that
appraisal to the insurer.
A Personal Articles Floater would be used to insure items such
as:
Cameras
Musical instruments
Fine art
Jewelry
Stamp or Coin collections
Tableware
Golfing equipment
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Besides the normal exclusions, fine arts and stamp and coin
collections have their own additional exclusions:
Fine Arts coverage excludes:
Damage to the item while its being stored or repaired
Accidental damage to any fragile items
The Velvet Elvis
Stamp and Coin Coverage excludes:
Any damages to the item while its being worked on
Any damages due to changes in climate, temperature,

humidity, etc.
Your 12-year old using your rare 1881 edition quarter in a

gumball machine
Note: Loss Settlement for fine art is insured on an agreed value

basis. Therefore, the insured could claim that their autographed Dogs
Playing Go Fish is worth $50,000, but the value was already
negotiated before the painting was insured. Nice try, sneaky.
Loss Valuation for all other property is the lesser of:
ACV
Repair costs
The cost to replace the item with a similar item
A scheduled amount
Note: The PAF offers the exact same coverage as the Scheduled
Personal Property Endorsement, which can be added to an HOP.
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B. Personal Property Floater

The Personal Property Floater policy provides open risk/all risk,
national or international coverage for property on an
unscheduled basis. The Personal Property Floater doesnt require
an appraisal to determine coverage limits.
Note: A Personal Property Floater is similar to the HO 15 Endorsement
(Scheduled Personal Property Coverage Endorsement)
The Personal Property Floater insures such items as:
Cameras
Jewelry
Furs
Musical Instruments
Etc.
Alert!
Remember that the PAF is scheduled and the Personal Property Floater
is unscheduled. Thats definitely on the California State Insurance
Exam.
Section 2: Commercial
1. Commercial Inland Marine Insurance
Commercial Inland Marine coverage consists of:
Common policy declarations
Common policy conditions
Commercial Inland Marine Coverage Part:

o Commercial Inland Marine Declarations
o Commercial Inland Marine Conditions
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o One or more Commercial Inland Marine coverage forms

o Any Endorsements the insured needs
A. The 4 Inland Marine Coverage Forms
1)
Business Floaters
2)
Dealers Forms
3)
Bailees Policies
4)
Miscellaneous forms
Heres a closer look at those 4 forms:

A. Business floaters
Business Floaters cover mobile personal property off the
premises. This includes:
Commercial Articles Coverage covers commercial items

that are separately listed, described, and insured.
Contractors Equipment Floaters cover any equipment

or machinery used by building contractors.
Note: Each item in the Contractors Equipment floater is listed,

described, and insured separately. Anything that can be put into
categories can be covered on a blanket basis (i.e. a toolset is insured
for $5,000, but the tools arent individually insured). Equipment can be
covered on a scheduled basis depending on when its being used or its
not being used.
Installation Floaters cover property being installed in newly

built buildings. The coverage lasts until construction is complete.
The Installation Floater can insure an owner, contractor, or
installer.
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B. Dealers Forms
Dealers Forms insure business stock and merchandise on or off
the premises. Dealers Forms also insures customers private
property in the custody of dealers.
The Dealers Forms include:
Equipment Dealers Coverage covers the inventory of

businesses that sell or rent contractor or agricultural
equipment. This coverage would also cover the customers
personal property in the dealers custody for servicing.
Jewelers Block covers the inventory of retail jewelers.

This coverage also protects the personal property of
customers, and any jewelers that work for the insured.
Camera/Musical Instruments Dealers Coverage

covers dealers who sell cameras and musical instruments.
Dont you dare get that wrong on the final exam.
Furriers Block covers retail fur dealers.
C. Bailees Policies
Bailees policies cover bailees, which is a person temporarily in
charge of other peoples property for the purposes of servicing or
repair. A television repairman would be an example of a bailee.
The Bailees Customer policy covers the bailee for any loss or
damage to a customers property. Even if the bailee isnt at fault,
the Bailees Customer policy still covers the damage. Coverage
is on a named perils basis.
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2. Miscellaneous Inland Marine Policies

Miscellaneous Inland Marine policies insure other kinds of
property, such as:
Accounts Receivable Coverage protects the insureds

financial records. Loss of financial records could make it
difficult for the insured to collect payments due from
customers. This coverage also covers collection expense,
which would mean the insured had to hire a collection agency
to recover a payment.
Valuable Papers and Records Coverage covers the cost of

valuable records or documents.
Electronic Data Processing (EDP) covers any loss of data,

or the insureds liability for the loss of data that belongs to
someone else.
Note: Electronic Data Processing policies cover computer hardware and

software. Obviously, you can cover computer hardware and software
under a Commercial Property policy, but depending on your clients
level of EDP loss exposure, it might be more beneficial for them to
purchase an EDP. Here are some of the benefits to choosing an EDP:
EDPs cover property that moves around, so any computer
equipment thats mobile or used away from covered premises would

be covered.
EDPs include coverages that are excluded from Commercial
coverage, such as covering expenses to replace destroyed data.
EDPs are less expensive
Contractors Equipment
Signs Forms insure signs on the premises or while in transit.
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Note: Signs Form coverage is on a scheduled basis and each sign is

separately listed, described, and insured.
A. More Coverage Forms
Here are some of the various coverage forms you may bump into
with Inland Marine:
Commercial Articles Coverage Form, which insures

such items as:
o Equipment for films/movies, etc.
o Musical instruments
Commercial Fine Arts Coverage Form, which insures

such items as:
o Paintings
o Sculptures
Contractors Equipment Form, which covers a

contractors tools at different job sites and in storage.
Equipment Dealers Coverage Form, which insures such

items as:
o Tractors
o Graders
Film Coverage Form, which insures such items as:

o Motion pictures
o Soundtracks
o Videos
Floor Plan Merchandise
Jewelers Block Coverage Form

o This form includes coverage for money in a safe
Mail Coverage Form, which insures such items as:
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o Bonds
o Stock certificates
o Securities
Physicians and Surgeons Equipment Coverage Form,

which insures such items as:
o Medical Equipment
o Dental Equipment
Theatrical Property Coverage Form, which insures such

items as:
o Sets
o Props
o Costumes
o Scenery
3. Transportation Coverages
Transportation coverages cover the domestic shipments of
shipping firms and independent truckers. Shipping firms are also
known as common carriers, and independent truckers are also
known as contract carriers.
Note: A negligent contract carrier would be liable for all losses to
cargo.
When a common carrier receives the shipment, they issue a receipt
called a bill of lading. Once the company issues the bill of lading,
they are legally obligated to the owner for the goods. The common
carrier is always legally liable for loss or damage to any goods it
transports.
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The bill of lading includes:
The names of the shipper and the consignee
The point of origin and destination
The number of packages
Description of the freight
Weight/volume of the freight
Note: A bill of lading actually limits a common carriers liability on a

particular shipment, which could result in the carrier being
underinsured. See Motor Truck Cargo LiabilityOwners form
below, just because were too lazy to repeat ourselves.
A. Motor Truck Cargo Forms
Motor Truck Cargo forms are used to insure property in
transit. Such forms include:
Motor Truck Cargo PolicyTruckers form insures

contract carriers against any loss or damage to their cargo.
Motor Truck Cargo PolicyShippers form insures

cargo being transported by common carriers.
Motor Truck Cargo LiabilityOwners form insures

company property thats lost or damaged while its being
transported by company trucks.

Silverlines Co. transports tractor parts to several large tractor dealers
in the Midwest. The company doesnt pay a contract to transport the
tractor parts, because now the company is big enough to transport the
equipment themselves. If a Silverlines Co. shipment is lost or
damaged while being transported by a Silverlines Co. truck, the
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company is protected under the Motor Truck Cargo Liability

Owners Form.
Someone transporting their goods may also want his/her own
property coverage on specific shipments for the following reasons:
The goods could be transferred from one carrier to another,

and then if a loss occurs, it could create some doubt as to
which carrier is liable.
The bill of lading could limit the carriers liability, rendering

the shipment underinsured.
The carrier might not have appropriate insurance, or could be

underinsured for a loss.
Transportation Coverage forms cover the owners of goods being

transported using any means of transportation. The
Transportation forms include:
Annual Transit Coverage insures all shipments from their

origin to their destination during the entire year. This is
usually provided on a named perils basis.
Trip Transit Coverage insures a specific shipment for a

specific trip.
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Section PC 6
OTHER PROPERTY PRODUCTS
Objectives
You may have noticed in the previous chapters that there were some
reoccurring exceptions to the policies. You may have wondered what
someone does for insurance protection if they live on a fault-line or in
a flood zone. This unit covers the other types of coverage that can be
included or added.
This unit includes:
Earthquake Insurance
Flood Insurance
Pleasure Boat Coverage
Commercial Ocean Marine
Umbrella/Excess Liability
The California FAIR Plan
New Developments
Part A: Catastrophic Coverages

1. Earthquake Insurance
Dwelling and Homeowners policies specifically exclude
Earthquake coverage, including earth movement. Earthquake
coverage is obtained through endorsement or as a separate
policy.
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California Insurers must offer earthquake insurance when writing new

business on dwellings with up to four units.
Because earthquakes are such a significant risk exposure in
California, a lot of private insurers were either not offering the
coverage, or offering very limited coverage. The California
Earthquake Authority (CEA) was established as a privately
funded, publicly controlled risk pool in order to make this
coverage available for everyone.
Note: Few places in the US are safe from the dangers of earthquakes.
In fact, during the last 100 years, earthquakes have occurred in 39 US
states and have caused some damage in all 50 states.
Between 1975 and 1995 there were only 4 states that did not have
any earthquakes:
1)
Florida
2)
Iowa
3)
North Dakota
4)
Wisconsin
A. Defining an Earthquake
We know you know what an earthquake iswe still need to
define it, so no whining.
An earthquake is a sudden, rapid shaking of the earth caused by
the breaking and shifting of rock beneath the Earths surface.
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There are 3 factors that determine the earthquake risk of a

property:
1) Location, or the risk taken when the home is selected.
2) Hazards, or the surrounding natural phenomena that
could worsen an earthquake and cant be lessened through
human intervention.
3) Vulnerability, or the risk factors that could lead to
damages in following earthquakes.
B. CEA Policy Provisions
CEA Policies contain the following provisions:
Dwelling coverage with a deductible thats 15% of the

dwelling limit
$5,000 personal property coverage
$1,500 for Additional Living Expense coverage
No coverage for pools, fences, landscaping, driveways, and

other structures
Note: Theres an optional coverage that allows the insured to purchase

$10,000 for any building code upgrades.
Note: CEA only deals with residential Earthquake insurance.
C. Advantages and Disadvantages
There are advantages and disadvantages to using the
Earthquake endorsement with an HOP.
The advantages are:
Deductibles might be lower
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Earthquake peril coverage is added to each separate

coverage
Extended Replacement Cost, Personal Property

Replacement Cost, and Ordinance and Law endorsements
apply to earthquake-related claims
The Disadvantages are:
The deductible, which is 15% of the dwelling amount,

applies to each separate coveragethis means an insured
could end up paying more than one deductible depending
on the amount of damage after an earthquake
The deductible applies one time on separate policies
Coverage is typically pricier than a separate policy
Single limit vs multiple limit? Some stand alone earthquake

policies have a single limit of coverage, that is, dwelling, other
structure, content and loss of use losses would be lumped together
into one single limit. Reimbursement, after the deductible, would be
made based on a single amount. Homeowner policies with
earthquake endorsements are more likely to follow a multiple limit
approach where a formula is applied: a dollar amount for the
dwelling; 10% of the dwelling amount to other structures; 50% for
contents and $25,000 for loss of use. Add the applicable amounts,
less the deductible, to calculate the claim total.
2. Commercial Property Earthquake Coverage
The Commercial Property Causes of LossEarthquake form
adds coverage for earthquake and volcanic eruption to selected
property coverage forms, such as:
All types of Commercial Property Business forms. There is

a per occurrence deductible thats the percentage of each
item.
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Note: In Commercial insurance, an occurrence includes all earthquake

shocks or volcanic eruptions that occur within a 168-hour period.
Business Income and Extra Expense Coverage forms.
Note: This doesnt provide coverage for any losses to buildings over 4
stories high during the first 168 hours after an earthquake-related or
volcanic eruption-related loss.
Commercial Property Coverage Forms
A. Other Earthquake Coverage Exclusions
Fire
Explosions that arent part of a volcanic eruption
Collapsed mines
Tidal wave, tsunami, flood
Mudslides or mudflow
3. The Businessowners Earthquake Endorsement

The Businessowners Earthquake endorsement adds the same
coverage as the Commercial Property form mentioned above,
but without the exclusions. Theres an easy one for you.
Part B: Flood Insurance

1. Flood Insurance
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A flood is defined as a normally dry area that is temporarily

submerged under water. This might be an overflow of a river or a
tidal wave, a mudslide, or any other unusual accumulation of water.
A lot of people dont realize that neither the Dwelling nor the
Homeowners policies provide any coverage for flood damage. Even
if they do know they arent covered for flood insurance, a lot of
people still choose not to carry the coverage. They think flood
damage could never happen to them.
However, as Hurricane Katrina has just proven, major floods do
happen and more often than most people imagine. In fact,
according to national statistics, more than 90% of all natural
disasters involve flooding.
A. Flood Coverage
Flood coverage is very important for anyone who lives in areas
prone to flooding. These areas are called flood plains, or flood
zones, and are usually located near rivers or along coastlines.
In addition, homeowners can be required to carry flood coverage
by mortgage lenders if their home is located on one of these
flood plains, and they are getting a mortgage thats insured,
guaranteed, or owned by a federal agency.
Such mortgages include those that are:
Insured by the Federal Housing Administration
Guaranteed by the Department of Veterans Affairs
Made by a federally insured bank or thrift
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Purchased by Freddie Mac or Fannie Mae
Flood coverage is available for residential and commercial

properties, including manufactured homes, condos, and contents
of a regular unit.
B. What is Covered
The Flood policy typically includes, but isnt limited to, coverage
for:
Loss of insured property, building and/or contents (with

exceptions), from flood, mudslide and flood-related
erosion.
Losses from abnormal tidal action
The cost of removing debris after a flood-related loss
C. Flood Policy Exclusions

The Flood policy typically excludes the following:
Damages from normal soil erosion caused by a nearby

body of water
Sewage backup
Any damages caused by conditions within the insureds

control
Additional living expense and rental value
D. Peril Exclusions
Flood coverage doesnt apply to any resultant flood losses
caused by:
War
Nuclear reaction
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Operation of building codes
Neglect
Fire, windstorm, or explosion
Erosion, earthquake, landslide, or any other earth

movement except a flood-related mudslide.
2. National Flood Insurance Program

NOTE: In order to sell flood insurance through the National
Flood Insurance Program, FEMA requires California agents to
take a special 3-hour Flood Training Course.
Flood insurance is can be supplied by the federally sponsored and
subsidized National Flood Insurance Program (NFIP). The
NFIP is administered by the Federal Emergency Management
Agency (FEMA) branch, which is responsible for setting Flood
insurance rates, coverage limits, and eligibility requirements.
Even though Flood insurance is a federal government program,
NFIP policies can be sold through insurance companies and any
licensed agent or broker. This is known as the Write-Your-OwnProgram, which started in 1983. The idea behind the Write-YourOwn-Program is that private insurance companies sell federal
Flood insurance under their company name and collect premiums.
The company keeps a percentage of the payments for operating
expenses and invests the rest for any future claims. If losses are
higher than the companys income permits, the government pays
the difference.
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Insurance producers cant give someone a Flood insurance binder.

Typically, theres a 30-day waiting period for Flood insurance. This
prevents people from waiting until they hear a hurricane or a
tsunami has been predicted, before stampeding for Flood insurance.
One exception to the waiting period is when a new home is
purchased, at the time of title transfer, Flood coverage can become
effective immediately if its one of the conditions of the loan.
3. The 2 Types of Flood Coverage
There are 2 basic types of flood insurance available to the public.
The amount of Flood coverage depends on certain phases.
Communities will be placed in different phases, which allows for
more or less Flood insurance:
1) Emergency Program
When a community first applies to the NFIP for Flood insurance,
theyre placed in the emergency program until the federal
government determines the flood rate. Only limited Flood
coverage can be purchased to cover buildings and contents
during this phase:
Emergency Program Coverages
Property Types
Single Family Residence
Building
Contents
$35,000
$10,000
Other Residential Structures $100,000 $10,000

Non-residential Structures
$100,000 $100,000
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Note: $1,000 standard deductible applies to each building and

contents, per each loss.
2) Regular Program
Once the rates are determinedassuming theres no imminent
flood dangerthe community is put in the regular program,
which then offers higher limits of coverage:
Regular Program
Property Types
Building
Contents
Single Family Residence
$250,000 $100,000
Other Residential
$250,000 $100,000
Small Business
$500,000 $500,000
Other Non-residential Structures $500,000 $500,000

A. Eligibility
Both residential and non-residential buildings are covered
against a flood peril if the building:
Is in an eligible community
Has at least two rigid walls and a roof
Is anchored to prevent potential shifting during a flood
Is mostly above ground
The policy covers losses to the building and the cost of debris
removal caused by a flood or flood-related mudslides. The
insured has to request a policy that covers personal contents.
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When a flood is threatening personal property, the policy covers

the reasonable expense of moving insured contents to safety
and/or temporary storage for up to 45 days.
Part C: Pleasure Boat Coverage
1. Personal Watercraft
The HOP offers an optional Watercraft endorsement, which offers a
very limited amount of Liability and Medical Payments to Others. In
order to get coverage for Physical Damage or Medical Payments,
the insured would need to purchase a Boatowners policy.
A. Boatowners Policies
Boatowners policies offer the following coverages:
Physical Damage to the boat, motor, and trailer
Liability
Medical Payments
Note: Boatowners Liability coverage includes Operations Liability,

Passenger Liability, and Flotilla Liability. Flotilla Liability is coverage for
accidents involving more than one vessel.
Section 1 provides property coverage for the boat (usually on an
ACV basis) with optional replacement coverage. Coverage
includes:
Coverage A for the boat and permanently attached items
Coverage B for the outboard motors and startup equipment
Coverage C for trailers used to transport the boat
Coverage D for miscellaneous equipment used in operating

the boat
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Additional coverages include:
Reasonable repairs covers the cost of keeping the property

from becoming even more damaged.
Recovery covers the cost of recovering a boat thats lost or

that sinks.
Automatic coverage replaces the boat, motor, or trailer

listed in the declarations. If the insured just bought the boat
or related equipment, the new items are covered if the
insurer is notified within 45 days. This may result in
additional premiums.
Coverage is on an open perils basis and excludes:
War
Nuclear hazard
Wear and tear, including gradual deterioration
Mechanical breakdown or faulty manufacturing
Mysterious disappearance
Damage while the watercraft is being repaired/serviced
Damage while the watercraft is carrying passengers or cargo

for payment
Loss to covered property thats been rented out to someone

else
Damage to covered property, except sailboats, involved in a

race or speed test
Section 2 provides liability coverage for bodily injury or damage to

personal property while:
The named insured is operating any boat
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Others are operating the insured boat with permission
It includes coverage for:
Watercraft Liability coverage for expenses that arise out of

any lawsuit the insurer defends, bond premiums, expenses
from the insurers requests, and any interest on judgments
Medical payments for accidents that happen in, upon, or

getting into or out of covered watercraft
Uninsured boaters, usually for $10,000, for accidents with

uninsured watercraft
Liability coverage usually doesnt apply to a boat thats:
Rented out
Racing
Carrying people or stuff for a fee
Being transported by vehicle over land
Operated by Sonny Crocket
Note: Most policies limit coverage to losses that happen in specific

navigational zones.
2. Yacht Insurance
Yacht insurance covers yachts, sailboats, inboard pleasure craft,
and catamarans, usually for the term of 1 year and on an agreed
value basis.
A. Hull coverage
Hull coverage covers damage to the yacht on either a named
peril basis or open peril basis.
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Hull coverage excludes:
Unexplained disappearance of any equipment besides the

boat or motor
Damages while the boat is being transported over land
Any wages
Losses resulting from capture or seizure
Loss to spars, sails, and rigging on sailboats during a race
B. Protection and Indemnity Coverage

Protection and Indemnity coverage covers bodily injury, property
damage, and medical payment insurance.
C. Yacht Insurance Provisions
The following provisions might be included in the policy:
Lay-up Warranty comes into play when the yacht isnt

being used during the winter.
Omnibus clause extends coverage to any non-employees

using the yacht with the insureds permission.
Navigational limits confines coverage to specific

geographical areas.
Part D: Commercial Ocean Marine

Fun Factoids:
Did you know that one of the most successful private insurance
companies actually started in a London coffee house in the 1690s? A
group of businessmen put up fliers to attract merchants and ship
owners. The merchants and ship owners met with the businessmen
and agreed to pay a certain premium in exchange for the
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businessmens assurance that the ships and cargo would be insured for
perilous overseas journeys. This small group of independent insurance
agents is known today as Lloyds of London.
1. Commercial Ocean Marine
Theres no standard Marine insurance form. However, Marine
insurance generally covers the:
Hull
Cargo
Freight
Protection and indemnity
A. Hull Insurance
Hull insurance insures the ship owner against direct loss or
damage to the ship, its machinery, and equipment. Hull doesnt
cover cargo or baggage.
Hull insurance can include a Collision clause/Running Down
clause to cover liability for damages to another ship or another
ships cargo.
Hull insurance excludes:
Any other types of property
Any deaths
Note: The insurance can be written to cover one or several watercraft.
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B. Cargo Insurance
Cargo insurance insures the owners of goods/cargo against loss
or damages to cargo while its being transported on water.
Note: If the Cargo insurance includes a warehouse-to-warehouse
clause, then the goods/cargo are covered from the time it leaves the
original warehouse until it reaches its intended destination.
Cargo insurance can be written on either a single trip basis or
an open cargo basis. If the insured chooses open cargo, then
insurance will cover all reported shipments within a specific
period.
C. Freight Insurance
Freight insurance insures the owner of a ship or the owner of
cargo for any lost income resulting from lost shipping charges
(freight) if the trip is interrupted, or the cargo is lost or
damaged.
D. Protection and Indemnity Insurance
Protection and Indemnity Insurance is liability insurance written
separately or with other coverages. It covers a ship owner
against liability for:
Injury or death to the crew, passengers, visitors, or harbor

workers
Why is Protection & Indemnity Insurance required? Simply put,

legislation, like those detailed below, exposes boat owner /employers
to added liability which can only be satisfied through additional P&I
coverage. In some cases, there are stiff penalties and consequences
for failure to obtain this additional coverage.
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Under the Jones Act a seaman has remedy against his employer if his
injury was caused by employer negligence. Workers comp policies
typically exclude coverage for work aboard vessels.
Under the USL&H Act, an employers liability can include employee
injuries on navigable waters as well as adjoining piers, docks, marine
railways or any loading / unloading area.
Under the Defense Base Act requires workers compensation
coverage for employees working on a military base outside the U.S. or
employees working on U.S. sponsored public works projects outside
the U.S.
Loss or damages to cargo due to negligence
Types of property damaged by the ship that arent covered

by the Collision clause/Running Down clause
Note: in the event of a total loss, Marine policies reimburse for the
face value of the policy.
E. Averages and the Sue and Labor Clause
Partial losses are called Averages:
General Average means part of the ship or cargo is

thrown overboard to salvage remaining cargo. In such
cases, the losses must be shared by all the owners whose
property was saved by the sacrifice. This includes the
owners of the ship and cargo, plus anyone with a vested
interest in the freight.
Particular Average means an accidental, partial loss of

cargo. No one decided to sacrifice the cargo; it was just
accidental damage. In this case, everyone pays for their
own loss.
The Sue and Labor Clause is a biggie in Marine

insurance policies. The clause states that if a loss occurs,
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the insured has to do everything possible to preserve the

rest of the goods. Even if the insured doesnt manage to
save the endangered goods, the insured will still be
reimbursed for the expenses of doing everything possible
to save and preserve the goods.
Note: If the insured fails to do everything possible to save and
preserve the goods, then he/she has violated a condition of their
policy. This could mean that the insured has to pay for their own
salvage, legal fees, etc. If the insurer does agree to reimburse the
insurer, the limitations on incurred expenses will be a great deal
stricter.
Part E: Umbrella and Excess Liability
1. Umbrella Policy
An Umbrella policy is a separate policy that provides extra liability
protection in addition to the protection the insured already has on
his/her autos, homeowners, or other products requiring liability.
Most umbrella policies provide excess protection in the following 2
ways:
1) By adding excess liability coverage over and above the limits
that are already in the underlying policies. Umbrellas are
usually written for additional liability protection of $1 million
and up.
For example, the underlying auto policy might have the
liability limits of 250/500/100. The Umbrella policy then adds
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the additional liability coverage of $1 million, making the total

liability coverage $1.5 million.
2) By expanding the liability coverage to cover specific
exclusions in the underlying policy.
For example, most homeowner policies exclude coverage from
damages due to libel (a written attack), slander (a verbal
attack), or defamation of character (a campaign to willfully
damage a persons reputation). The Umbrella policy can provide
the missing protection.
A. Commercial Umbrella Policies
A Commercial Umbrella policy is a separate policy that
extends liability coverage over and above Commercial policy
limits.
Agent World: There is no standard commercial umbrella policy
although there is an ISO Form. Most insurers, have developed their
own form with unique coverage.
A Commercial Umbrella policy can be written for $1 million
per occurrence with a $2 million general aggregate limit. Each
insurance company determines how much liability coverage the
underlying policies should have, i.e., an underlying policy with
specific limits is required to be maintained to qualify for a
commercial umbrella policy.
The Commercial Umbrella policy extends liability coverage
protection for:
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CGL
Commercial Automobile Liability
Businessowners
Garage Liability
Employers Liability Exposures

Gina runs a child daycare center out of her home. One day, a 3-year
old grabbed a heated curling iron lying on the bathroom counter. The
resulting third degree burns on the childs hand left permanent and
possibly disabling scars. The childs family decided to sue Gina. Ginas
$1 million CGL policy would not cover the damages awarded. But,
here $3 million Commercial Umbrella policy kicked in to pay the
balance.
Self-Inured Retention
B. Personal Umbrella Liability Policy
A Personal Umbrella Liability policy adds excess liability
coverage for personal liability exposure due to any of the
following:
Owning or maintaining a home
Owning or maintaining a personal auto
Participation in sports or other non-professional activities
Damages from the indirect acts of others in the insureds

custody, such as children and pets
Owning or maintaining boats, recreational vehicles, or

other personal motorized vehicles
C. Blanket Limits
An Umbrella policy that provides all existing policies an
additional total liability limit is referred to as a Blanket limit. A
minimum Blanket limit is usually $1 million.
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Existing policies cover claims up to a certain limit, or the

underlying liability limit. Afterwards, the additional liability
coverage policy pays the remainder of the claim up to the
Blanket limit.
2. Umbrella Policy Coverages
An Umbrella policy adds coverage for some of the types of losses
excluded by primary policies.
For example, coverage for personal injury (e.g., libel and
slander) can be added to an HOP.
Hanna was involved in a multi-car pileup that was determined to be
her fault. She was liable for $800,000 in damages and medical
expenses. Her auto policy covered $300,000 of the liability, and her $1
million Personal Umbrella policy covered the remaining $500,000. If
she didnt have the Umbrella policy, she would have been responsible
for $500,000 out of pocket.
A. Primary Liability Requirements
The insured has to carry primary Liability coverage before they
can purchase an Umbrella policy. The minimum limits can differ,
but typically they are:
$500,000 Auto Liability
$300,000 Personal Liability
B. Standard Umbrella Deductibles/Self Insured Retention
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The Umbrella policy can include deductibles or self-insured

retention for losses excluded by the primary policy. The
difference is that a deductible is paid to the insurance company
when a self-insured retention is paid directly to the claimant.
This is usually in the amount of:
$25,000 and up for a Commercial Umbrella policy
$250--$1,000 for a Personal Umbrella policy
3. Excess Liability vs. Umbrella Policies

The difference between an Umbrella and Excess Liability
Policy is that the Excess Policy ONLY adds additional liability
protection to the limit of the underlying policy without expanding
other coverage.
For example, if someone has fire insurance and
they think they need Excess coverage, they can extend their fire
coverage ONLY. If a loss results from another peril, the excess
fire liability does nothing.
F. The California FAIR Plan
FAIR stands for Fair Access to Insurance Requirements. Most
states have their own FAIR Plan, which acts as a safety net for
people who may otherwise have trouble getting insurance.
If someone needs insurance for an insurable property and theyve
been denied normal insurance coverage, they then become eligible
for the FAIR Plan. The fair plan serves two primary areas: Brush
hazard zones an inner-city areas.
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All insurance producers in California have to participate in the

California Fair Plan Association (CFPA). The Fair Plan is
important because:
It keeps Property insurance stable
It guarantees that Property insurance is available for anyone

who needs it
It guarantees that insurers always provide insurance for

insurable properties
Insurable property that isnt insured under the normal insurance

market has to be insured through the FAIR Plan. If the property
is physically insurable, coverage cant be denied, even if the
property has been previously declined because of its location or
any environmental hazards.
Putting it into Context
Sals dream of owning a hotel finally came true. After purchasing the
Home Sweet Home Inn for next to nothing, he contacted his insurance
agent to set up a policy. His agent told him that he qualified for the
FAIR Plan because the gas station next to Sals property had caused
extensive pollution in the area. The pollution was out of Sals control
and he was legally bound to insure his property, so the insurance
company was obligated to write him a policy.
FAIR Plan properties may be higher insurance risks, but insurers
equitably distribute these risks.
A. Qualifying for the FAIR Plan
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In order to obtain insurance through the FAIR Plan, the applicant

has to have:
1) Physically insurable property
2) Made attempts to get insurance through normal insurance
markets
3) Been categorized as a high risk by the normal insurance
market
If all 3 conditions apply, then the applicant qualifies for the FAIR
Plan.
B. Basic Property Insurance
Basic Property insurance falls under the FAIR Plan umbrella
covering:
Fire and Lightning
Windstorm
Riot and civil commotion
Explosion
Vehicles
Smoke
Hail
Aircraft
Vandalism
Both personal and commercial risks can be covered in the Plan.

However, farm and autos are ineligible. Any licensed agent or broker
may submit risks to the FAIR plan.
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Important:
The FAIR Plan covers only well-maintained properties.
A property with faulty wiring could not be covered.

G. New Developments
Agents should be reminded that there are ALWAYS new developments
in Commercial Lines legislation and laws. Recently, for example, the
industry has responded with products and coverage in the following
areas:
Cyperspace liability insurance: Covers internet and computerrelated losses caused to other parties
Identity Theft and Restoration: Provides consumers with the
services of a fraud specialist to assist and guide in the process of
restoring and protecting stolen identity (some homeowners policies
include this coverage.
Intellectual Property Insurance: To protect against the threat of a
competitor suing for infringement on ideas or intellectual property.
Summary
If you combine Other Property coverages with Personal and
Commercial lines, youll be providing the most extensive coverage for
your clients. Even if your clients are worried about certain exceptions,
you can put their fears to rest with your knowledge of all the available
options.
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Section PC 7
PERSONAL AUTO
Objectives
Its likely that most of your clients will own and/or drive an auto.
Therefore, its important that you know the different components of
Personal Auto Insurance, including covered autos, and the duties the
insured has to perform in the event of an auto accident.
This unit includes:
The Components of the Personal Auto Policy

Auto Policy Definitions
Personal Auto Policy Coverages
A Closer Look at the 4 Parts
Uninsured/Underinsured Motorist
Auto Assigned Risk Plan
The California FAIR Plan
Financial Responsibility Law
1. The Personal Auto Policy

This section gives you an overview of a Personal Auto Policy. In
California, the Personal Auto policy format is:
Declarations
Definitions
Part ALiability (mandatory)
Part BMedical Payments (includes coverage for the insured)
Part CUninsured Motorist
Part DProperty Damage to Insureds Auto/Physical Damage
Part EDuties After an Accident or Loss
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Part FGeneral Provisions
Note: You might see the term Personal Auto Policy shortened to PAP.
We have our own personal aversion to that acronym, so well just stick
with Personal Auto Policy.
Rates and premiums for Personal Auto policies are determined
by:
1) The insureds driving safety record
2) The number of miles the insured drives annually
3) The number of years driving experience the insured has
Auto Policy or ISO Policy? ISO (Insurance Services Office) develops
standard policy forms for personal and commercial auto insurers.
Because these forms are widespread and well known, agents need to
know how their companys policy differs from the an ISO standardized
policy.
A. Policy Definition of a Personal Insured Auto
The Auto Policy insures personal autos that are:
Not used as commercial autos for business reasons
Owned or leased for a minimum of 6 months at a time by

a person, or spouse living in the same household
Note: If one of the spouses leaves the household, theyre still covered:
For up to 90 days
Until they get new coverage
Until the policy expires
In other words, within limits, any person qualifies as an insured while

using a covered auto.
Newly Acquired Auto?
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A. A newly acquired auto will have the broadest coverage provided for
any vehicle shown in the Declarations of an existing policy (except
collision coverage for damage to your auto).
B. Where existing collision coverage is listed, it will begin for the
newly acquired auto on the date the insured becomes the owner with
notification of 14 days.
C. If the insured does not have collision coverage on at least one auto
listed in the Declarations page, collision coverage on a newly acquired
auto begins on the date the insured becomes the owner, but the
insured must request it within 4 days and a $500 deductible applies.
D. If a newly acquired auto is in addition to any vehicle shown in the
Declarations, the insured must notify the insurer within 14 days.
B. Coverage Territory
The Auto Policy covers accidents that happen during the policy
period within:
The US
US Territories (this mostly applies to Puerto Rico)
Canada
Note: An insurer can cancel a Personal Auto policy for the following
reasons:
Nonpayment of premium
Suspended/revoked license
Illegal activities
Misrepresentations regarding the drivers record or history
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If any of the above reasons apply, the insurer can cancel the Auto
policy if they notify the insured within 20 days of the cancellation
date.
If the insurer chooses nonrenewal of policy, they have to let the
insured know within 30 days.
2. The 4 Basic Components of an Auto Policy
Every Auto Policy has 4 basic components to the contract. Well
discuss each component separately.
1) Declarations
2) Insuring Agreement
3) Conditions
4) Exclusions
Note: Remember the acronym DICE? The 4 parts of the auto contract
are exactly the same. Easy one, right? Take em as they come.
Primary, excess and special physical damage: Auto insurance
coverage follows the ownership of the vehicle first and the driver
second. So, if you are an authorized driver of your car and you get in
an accident, your insurance is primary. If someone else was driving
your car with your permission, your coverage would still be primary,
the drivers insurance company, however, might be called upon to
cover any excess or secondary coverage (damages beyond your
limits). Certain types of vehicles, like RVs, snowmobiles, etc may be
eligible for special physical damage coverage.
A. Declarations
This section of the Auto Policy contract is also referred to as the
Face sheet or the Dec-page. This section includes the following
information:
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Names of all insured drivers, and the names of the

producer and insurer
Lists all the covered autos
Policy number
Policy period
States when and where coverage applies
Notes which coverage limits the insured has chosen to

carry
Specifies deductibles, endorsements, and premium amount
Note: Weve mentioned this a couple of times, but just to reiterate

more than one party can have an insurable interest in property. In the
case of autos, a lot of people borrow money to finance purchasing a
new or used auto. The person or entity that loans the money has an
insurable interest in the insured auto. Since insurable interest has to
exist at the time of loss, if the financed car was totaled, it affects both
the insured and the person/entity who provided the loan. Someone
who provides a loan is referred to as a leinholder, and since they have
an insurable interest in the auto, theyre also listed in the Declarations.
Note: Insurance policies renew or expire at 12:01 a.m. If an insured
gets a notice that their policy will cancel for nonpayment on May 5th,
and they bring in the money to pay that morning at 10:00 a.m.,
theyve actually been without coverage since 12:01 a.m.
B. Insuring Agreement
This section of the Auto Policy states which losses are covered,
the property thats covered, and which perils are insured against
(i.e. theft, collision, fire, etc.)
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An example of an Insuring Agreement might state as follows:

We agree with you, in return for your premium payment, to insure
you subject to all the terms of this policy. We will insure you for the
coverages and the limits of liability shown in the Declarations of this
policy.
Note: In the above example, you and your refers to the named
insured.
The Insuring Agreement states that as long as the insured pays
his/her premiums and doesnt let the policy expire, the insurer
will pay for any losses covered by that policy.
C. Conditions
This part of the Auto Policy outlines the duties and
responsibilities of both the insured and the insurer.
The Conditions section includes (but isnt limited to):
Policy Period and Territory meaning where the

coverage applies and for how long.
Changes means that any changes an insurance company

makes to an Auto Policy have to be made through
endorsements. A new Declarations page and/or policy will
then be issued.
Legal Action Against Us details the procedure the

insured has to follow if they want to sue the insurer.
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Transfer of Your Interest explains what has to happen if

the insured wants to transfer their rights and/or interests
in the event of their death.
Our Right to Recover Payment means that after paying

damages to an insured, an insurance company will try to
recover money from the at-fault party. (Subrogation)
Two or More Cars Insured refers to anti-stacking.

Say you have two cars: a really nice one, and an old beater. Youve
underinsured the old beater, becausewell, its an old beater. The
really nice car has plenty of insurance. One day youre out tooling
around in the old beater, when you accidentally run a stop sign and
cause an auto accident. Even if you have enough insurance on the
really good car, you werent in the really good carso if youre
underinsured in the old beater, youre underinsuredend of story. You
cant combine the insurance you have on both cars to cover the
accident you had in the beater, because this would be stacking. The
insurance follows the car not the person.
Bankruptcy means that if the insured goes bankrupt

during a period when the insured was liable for an auto
accident, the insurer isnt relieved of any financial
obligations under the policy.
Termination or Reduction of Coverage describes what

will happen if a policy is terminated, cancelled, or
nonrenewed. If an insured is notified that their policy will
terminate on May 5th, they need to be aware that the
actual termination occurs at 12:01 a.m. on May 5th.
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Note: Time changes dont apply to automobile policies. So, if someone

buys their policy on June 1st on the East Coast, and on June 1st the
following year, their on the West Coast, the policy expires at June 1st
12:01 a.m. West Coast time.
D. Exclusions
The Exclusions describes property, perils, persons or situations
that arent covered by the Auto Policy.
Specific Exclusions in the Auto Policy could vary depending on
the type of coverage and the situations the contract is designed
to cover.
Some Auto Policies list separate Exclusions under each of the
following coverages:
Liability
Uninsured/Underinsured Motorist
Personal Injury Protection (PIP)
Damage to the Insureds Car
E. Additional Auto Policy Sections

The Auto Policy has several more sections in addition to the 4
basic components. They include:
Auto Policy Coverages

o Liability Coverage
o Personal Injury Protection Coverage (PIP)
o Uninsured/Underinsured Motorist
o Coverage for Damage to the Insureds Car
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Definitions
What to do in Case of an Accident
No Coverage in Mexico
Note: The 4 Auto Policy Coverages listed above will be covered in

more detail later in the unit.
3. Auto Policy Definitions
The Definitions section of the Auto Policy contract defines certain
key terms used in the policy. These definitions help clarify the
intent of various coverages and conditions.
Theres a section at the beginning of the contract listing general
definitions that apply to the entire contract. In addition, each
coverage section (i.e. Liability, PIP, etc.) might include definitions
that are specific to that coverage.
Probably the most important definition to fully grasp is the legal
definition of the Named Insured.
A. Named Insureds
The Named Insureds on an auto policy can include:
The primary insured, any family members, and any

relatives living in the same house. Anyone who is going to
be using the covered auto needs to be listed as additional
drivers on the Declarations page.
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Note: There is a family Auto Policy provision called the Omnibus

Clause, which allows the parents, in-laws, brothers and sisters (etc.) of
the primary insured to be listed in the Declarations.
Any person using the insureds covered auto, unless

he/she doesnt have the insureds permissionlike carjackers, just to toss out an example.
Other persons occupying the insureds car such as

passengers
Anyone acting on the Named Insureds behalf.
Any individual or organization is covered for liability due to

the insureds acts.

If the insured uses an insured auto for a church or school function, and
the insured is in an accident, the church or school would be covered
for liability under the insureds policy.
Note: Most insurance companies will also defend any claim or lawsuit
asking for those damages. But remember, an insurance company
wont defend any lawsuit or make additional payments once the Limit
of Liability has been exhausted. So, depending on the situation, the
minimum amount of Liability coverage in California (15/30/5)
wouldnt go very far.
B. Who isnt a Named Insured?
An insured person can never mean:
The USA or any of its government agencies
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Any employees of the US government using a personal

auto in the course of their job
Anyone using the car who isnt quite sure if they have
permission or not
Note: This is called Grand Theft Auto, and its frowned upon in all 50
states. Golden wisdom #302.
C. Accident or Occurrence
An Accident or Occurrence is defined as an event that results
in an insured loss. Coverage on an Occurrence basis differs from
coverage on an Accident basis in that:
Occurrence means gradual or accumulative damage that

cant be exactly placed in time or place. This is more along
the lines of wear and tear.
Accident refers to instantaneous damage, unintentional,

and identifiable as to time and place.
D. Legally Liable
This means responsibility is imposed by the law, rather than by a
contract.
E. Bodily Injury
This refers to harm to the body, sickness, disease, or death of
any person
F. Property Damage
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This refers to physical injury to or destruction of tangible

property, including loss of its use. In English: when stuff gets
busted up, thats property damage.
4. Auto Policy Coverages
The Auto Policy coverages can be divided into 2 parts:
1) Part 1Liability and Medical Expenses
2) Part 2Physical damages to the insured auto
A. Part 1
Part 1 consists of:
Liability and Supplementary Payments
Medical Payments and PIP
Uninsured/Underinsured Motorists
B. Part 2
Part 2 consists of:
Automobile DamageCollision and

Comprehensive/Other than Collision
5. A Closer Look at the 4 Coverages

Heres a little summary of each of the coverages mentioned
above:
A. Liability and Supplementary Payments
Liability and Supplementary Payments means the insurance
company will pay for any third-party injuries or property damage
if the named insured is legally liable after an auto accident.
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Supplementary Payments include expenses due to defending a

Named Insured during an auto-accident related lawsuit. These
Supplementary Payments include:
Any expenses for settling a claim or defending a lawsuit
Interest on a judgment, as long as it doesnt exceed the

Limit of Liability coverage
Any lost wages or salary up to $50 per day, if the insurer

requests that the insured attends hearings or trials
Premiums on Appeal Bonds
Up to $250 for Bail Bonds
Note: The insurance company doesnt have to defend a suit or settle a

claim once the Limit of Liability is exhausted, or if the injuries or
damages arent covered by the policy.
The following Exclusions apply to Liability:
Intentional injury or property damage
Bodily injuries or damages if the insured auto was being

used to carry people for a fee (for hire)
Note: This doesnt include people using their car for carpools or
share-the-expense car pools. This exclusion only refers to people
who are charging their passengers.
If the Limits of Liability have been exhausted
If the covered auto is being used without permission
The insureds personal property or property in the custody

of the insured thats damaged while its in the car
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Any of the insureds employees who are injured on the job

(this exclusion usually doesnt apply to domestic
employees)
Any vehicles used in the course of business
Note: That last Exclusion doesnt apply to private passenger autos,

pickups, vans, or trailers. Basically that Exclusion is set up to keep
people from using commercial vehicles as personal autos.
If the insured owns a flower shop and uses their industrial commercial
van to make deliveries, the van would be excluded under the Personal
Auto Policy. But if the insured uses their personal auto to visit a client,
then coverage still applies. The insured would need a Commercial Auto
Policy to cover the business auto.
Bodily injuries or property damage thats covered by a

Nuclear Liability Policy
Note: Okay, heres the skinny on the above Exclusion, which we know
sounds pretty extreme. First of all, its obvious that Exclusion doesnt
apply to your average motorist. The reason why this Exclusion is even
listed is because a nuclear energy incident is considered a
Catastrophic Event. The Personal Auto Policy isnt designed to
handle Catastrophic Events.
For damages done by or to off-road vehicles with four

wheels, or for any vehicles with less than 4 wheels
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For race cars or autos used in any race (street race, drag
race, etc.)
Minimum Limit of Liability refers to the minimum amount of

liability required by state law in order to drive an auto. There
usually isnt a maximum limit of liabilitydifferent insurance
companies are willing to insure drivers for different amounts.
The minimum limit of liability in California is referred to as Splitlimit coverage, and its expressed as three numbers separated
by slashes15/30/5:
15 means the insured wont get more than $15,000 for

bodily injuries for any one person involved in the accident.

If there are two people in an accident, and their medical expenses are
$10,000 and $5,000, they are both fully covered because neither one
exceeds the Bodily Injury Liability of $15,000.
30 means that $30,000 is the most the policy will pay for
the bodily injuries of everyone involved in the accident.

If there are three people in an accident, and their expenses are
$20,000, $21,000, and $10,000 respectively, none of them have
exceeded the Bodily Injury Liability limit, but it exceeds the total
Bodily Injury Liability limit. Everyone could receive up to $15,000 for
their injuries, until the expenses reach $30,000.
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5 means a maximum of $5,000 will be paid for all

damages to all property involved in any one accident. This
could mean the insured only has $10,000 to pay for a
number of autos damaged in a multi-car accident if the
insured is at fault.
Note: Since its hard to buy one new car for $5,000let alone pay for
multiple carsand a few nights in the hospital for one person can cost
up to $30,000, in our opinion, carrying the minimum requirements
isnt the safest idea.
B. Medical Payments/PIP Coverage
Medical Payments Coverage is optional coverage in some states.
This is sometimes referred to as PIP or Med-pay.
Medical Payments/PIP coverage covers the reasonable
medical expenses for anyone traveling in a covered auto. Such
expenses could include:
Emergency room visits
Ambulance fees
Hospital expenses
Etc.
In the very worst-case scenario, Medical Payments/PIP also

covers funeral expenses.
Medical Payments/PIP could be offered in increments of $1,000
up to $100,000. Whatever the amount, everyone riding in the
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covered auto has that total amount of medical coverage, no

matter if there is one person in the car, or six people in the car.
Alert!
With Medical Payments/PIP, the Limit of Liability applies per person.
Therefore, if the limit of liability is $100,000,that means its $100,000
per person, not for everyone involved in the accident.
Example:
Frank has $50,000 in PIP coverage. He and his three friends are in an
auto accident, and each of their medical bills amounts to $50,000.
How much will Franks PIP cover?
A.
$50,000 only
B.
Franks injuries only
C.
Everyones injuries are covered
D.
Franks injuries are covered first and then whatever is leftover is
divided among the other friends

The answer is C. They want to lull you into a Limit of Liability stupor,
so remember, in Medical Payments/PIP, its per person, not per
occurrence.
Medical Payments/PIP is considered No-Fault coverage. This
means it doesnt matter whose fault the accident was,
everyones covered in the insured auto. This allows the injured
people to have their medical expenses taken care of
immediately, because the insurance company doesnt have to
wait to determine fault.
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Medical Payments/PIP coverage only applies to the insureds and

the insureds passengers personal medical or funeral expenses,
never third-party expenses.
In California, Medical Payments/PIP covers any related expenses
that happen within 3 years of the date of the accident (some
states only allow 1 year).
Medical Payments/PIP covers:
The insured or family members driving a car designed for

public roads. In simpler terms, the family in the family
carnot the family in the dune buggy.
The insured or family members if theyre hit by a car while

their walking or riding a bicycle.
Any passengers in the car.
Medical Payments/PIP excludes:
Vehicles with less than four wheels.
Vehicles used on private lands/roads (golf cart,

maintenance truck, etc.).
Any vehicle used/designed for racing.
A vehicle thats used without the owners permission.
A business vehicle, or a vehicle being used for business

purposes.
If the primary coverage is Workers Compensation.
If the insured is driving a car other than the covered car

(hopefully the other car has its own PIP in this situation).
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During war or a nuclear hazard, but at that point, if youre

worrying about your PIP coverage, youve lost sight of the
big picture.
Note: Since PIP coverage is optional in a lot of states, producers dont

always encourage their auto insureds to carry that particular coverage.
Most insureds will have health insurance plans to pay for any
automobile accident-related injuries. Bear in mind that oftentimes, the
insureds passengers might not have a health plan, or they have a
very insubstantial one. In our opinion, every insured should include
PIP as part of their Auto Policy.
C. Uninsured/Underinsured Motorists (UM/UIM)

UM/UIM coverage is extremely important. Most people feel that
if they get in an accident, it wont be their fault, so theres really
no reason to carry high Limits of Liability. If its not their fault,
the other motorist has to pay, right?
Not necessarily. If your client is in an accident with an uninsured
or underinsured motorist, they could find themselves with
hundreds of thousands of dollars in medical expenses and
property damage. If the other motorist isnt insured/is
underinsured, and they dont have other assets, theres really no
way for your client to recover payment without UM/UIM
coverage.
An Uninsured Motor Vehicle is a vehicle that:
Doesnt carry Bodily Injury or Property Damage Liability
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Has an insurance policy on the car, but their insurance

company denies them coverage
Has a driver who declares bankruptcy within 2 years of the

accident
Is involved in a Hit-and-Run or a Phantom Vehicle
Whats the Difference?

Youre driving along when a pick-up truck runs a stop sign, and
smashes into your car. The pick-up truck quickly drives off before you
can get a good look at the driver. Youve just been the victim of a hitand-run.
Youre driving along when a pick-up truck runs a stop sign. You see
the truck in time to avoid being hit, but when you take evasive action,
you end up hitting a parked car. The pick-up truck quickly drives off
before you can get a good look at the driver. Youve just been the
victim of a phantom vehicle.
A hit-and-run directly causes the accident, and then leaves the scene.
A phantom vehicle indirectly causes the accident, and then leaves the
scene.
An Underinsured Motor vehicle means the person has insurance,
but its not enough to cover all the expenses their liable for after
an accident.
With some insurance companies, UM/UIM is written for the same
amount as the Limit of Liability. So, if your client has $50,000
for Bodily Injury, then they also have $50,000 in UM/UIM.
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Heres where it gets trickier: a lot of times, UM/UIM only pays

the excess in liability limits.
Megan is sitting at a red light, when shes rear-ended by another
driver. Megan ends up with $100,000 in medical expenses. The other
driver carries 25/50/10 of Bodily Injury Liability, and Megan also
carries only 25/50/10 for Bodily Injury Liability coverage and UM/UIM
coverage. Because Megans coverage isnt higher than the drivers,
there is no excess coverage, and Megans UM/UIM coverage wont pay
anything over and above what the other drivers policy pays on the
claim. Therefore, Megan can only collect $25,000 from the other
driver, but that leaves her with $75,000 in medical expenses.
If your client asks you why they should carry higher limits of
liability when they dont have a lot of assets to protect, tell them
that the higher the limit of liability, the higher the limit of
UM/UIM coverage. And UM/UIM protects everyones number one
asset: their own health and the health of their family.
Megan is sitting at a red light, when shes rear-ended by another
driver. Megan has $100,000 in medical expenses, but she also carries
100/300 coverage in Liability and UM/UIM coverage. Even though the
motorist who hit her only as 25/50 coverage for Bodily Injury Liability,
Megans UM/UIM coverage pays the excess. Therefore, Megan can
collect $25,000 from the other driver, and then her insurance will pay
an additional $75,000. Megans medical expenses are fully covered.
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UM is included in all Personal Auto Policies, unless the insured

signs a waiver rejecting the coverage. The minimum BI limits
offered have to mirror the minimum liability limits per person
($15,000) and per occurrence ($30,000).
Who is insured under UM / UIM: Uninsured and underinsured
motorist coverage provides coverage for you and all members of your
family who reside in your household, passengers, or people driving
your car with your permission. A typical limit might read $100,000 per
person / $300,000 aggregate. So, if the driver of the other car who
caused an accident has only $30,000 per person / $60,000 aggregate
of coverage, you could stand to collect $70,000 per person from your
own UM / UIM policy up to a maximum of $240,000.
There is also a coverage called Uninsured Motorist Property
Damage (UM/PD). UM/PD pays for damages to your vehicle,
whereas general UM/UIM only pays for medical expenses. The
only property damage limit available for UM coverage is $3500.
6. Automobile DamageCollision and Comprehensive/Other
than Collision Coverages
IMPORTANT:
It is unlawful for any insurance agent or broker, or any insurance
solicitor employed thereby, to receive any financial benefit from an
automobile repair facility or any other form of direct or indirect
consideration from any person for referring insureds to that person
or that person's designee for vehicle repairs covered under the
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automobile comprehensive coverage, property damage coverage, or

automobile collision coverage, of an insurance policy issued through
the insurance agent or broker or by an insurer represented by the
insurance agent.
You may be thinking to yourself, hey, what the heck happened

to D. Automobile DamageCollision and
Comprehensive/Other than Collision Coverage? Well, this
part of the Auto Policy is huge, and we couldnt think of another
way of organizing it that wouldnt end with us jumping out the
nearest window.
Therefore, were giving it its own section, but remember that its
the fourth coverage, right? Right.
The insured can pick Collision and/or Comprehensive/Other than
Collision coverage for each vehicle. Unlike the limits of liability
coverage, each auto doesnt have to carry the same physical
damage coverage. One auto can carry both Collision and
Comprehensive, and a second auto might only carry
Comprehensive.
A. Collision Coverage
Collision Coverage insures a vehicle for damages due to the
following situations:
The car hits another car
The car hits a solid object
The car flips over
The car hits a pedestrian
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Note: In most states, hitting a pedestrian with a vehicle is considered

a collision.
B. Comprehensive/Other than Collision Coverage
Anything else that causes damage to the auto is covered under
Comprehensive/Other than Collision coverage. This
coverage insures against direct and accidental loss caused by
something other than collision (get it?).
Comprehensive covers more common perils that damage
autos, such as:
Wind
Hail
Thrown or falling objects
Note: If you come around a corner and hit a huge boulder on the road,
the auto damage is covered by Collision (hitting a solid object).
However, if the huge boulder was still rolling down the hillside and hits
your car as you come around the corner, the auto damage is covered
under Comprehensive (thrown or falling objects).
Explosion
Earthquake
Water or flood
Note: Water or Flood coverage doesnt cover you if you deliberately

drive your car into the ocean. However, youre covered if your car
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floats away because you forgot the tide was coming in. Its a
Herculean effort to keep from making sarcastic comments.
Riot or civil Unrest
Glass breakage
Damage from striking an animal or bird
Comprehensive basically covers:
Any covered, accident-related damage done to an owned,

or non-owned auto, and its equipment
Note: A non-owned vehicle is an auto the insured has either borrowed

or provided by their work/job. A non-owned vehicle could also apply to
rentals that the insured rents on short vacation, or autos the insured
needs while their primary insured vehicle is being repaired/replaced
due to breakdown, repair, servicing, loss, or destruction.
Additional transportation expenses while the named

insured is replacing or repairing a damaged auto
Comprehensive/Other than Collision doesnt cover losses

due to:
Deterioration including wear and tear
Freezing
Mechanical or electrical breakdown
Road damage to tires
Nuclear fallout
Any kind of war or insurrection
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Other Than Collision coverage is property insurance coverage.

Collision and Comprehensive Coverage will cover losses to
auto electrical equipment:
That is part of the vehicles operations or monitors the

vehicles operations
If it shares the same unit housing sound reproducing

equipment and is permanently installed in an opening for
the radio
Collision and Comprehensive Coverage will not cover losses

to:
Car stereos or equipment unless its factory installed and

listed in the Declarations
Equipment used with car stereos, such as MP3 players
Electronic equipment that sends or receives any kind of

signal (laptops, cell phones, etc.)
Customizing
Radar detectors
Cars involved in racing
An auto thats wrecked or confiscated because the insured

was doing something illegal
Losses to a car that the insured doesnt ownunless the

insured was using the car as a substitute while their
primary vehicle was being repaired/replaced
A camper or trailer that isnt listed in the Declarations
Note: All of the normal Exclusions apply to Comprehensive/Other than

Collision (cars used in a race, cars carrying people for a fee, etc.). The
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one Exclusion you should remember is that campers or trailers are

excluded if they arent listed in the Declarations. However, if the trailer
is being towed behind an insured vehicle, liability coverage does
apply. Weve seen that question on the final exam!
Personal effects like computers, sports gear, etc that are transported
in a vehicle are not covered by a PAP.
C. Covered Autos under Collision/Comprehensive
The following are all covered autos under
Collision/Comprehensive coverage:
Any vehicle listed in the Declarations
Any trailer the named insured owns thats being towed

behind a covered vehicle
Any vehicle the named insured borrows because their

normal vehicle isnt working (rentals, etc.)
A vehicle the named insured purchases to replace a

currently insured vehicle
Note: If the insured buys an auto to replace their current insured auto,
the replacement auto is automatically covered for 14 days from the
day its purchased, for the exact same coverages in the Declarations.
In fact, if the insured has more than one auto insured, with different
coverages on each, the replacement auto is automatically covered with
the very best coverage the insured has on any of the cars.
Any additional vehicles the insured purchases
Alert!
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Heres some numbers to remember:

Again, if the insured buys an additional vehicle, that vehicle is
automatically covered for 14 daysjust like with a replacement
vehicle. If the insured has at least one car covered for Physical
Damage coverage, it doesnt matter if the new car is a replacement or
an additional vehicle. The insured has full coverage, after deductibles,
as long as they request changes or additions to the current coverage
within 14 days.
Now, if the insured doesnt have Physical Damage coverage (only
Liability) on any covered vehicle, the insured has to report the new car
to the producer and request that Physical Damage be added to the
coverage within 4 days.
If the insured doesnt request Physical Damage within 4 days, theres
a chance theyre tooling around without Comprehensive or Collision
coverage. If the insured gets in an accident within those 4 days, a
$500 deductible applies.
Note: We all know how much a car depreciates once we plunk
ourselves into the drivers seat and drive it off the lot. In fact, the
amount paid for the car at the time of sale wont be the cars actual
cash value five minutes later, when you wave goodbye and drive off.
If your car is totaled or damaged, youre still responsible for paying
the remainder of the loan or lease. Gap insurance pays the difference
between the amount the insurer pays for the totaled car, and the
amount the person still owes on the car.
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D. Standard Exclusions
The following Exclusions apply to covered autos:
Theres no coverage if the accident was intentional
Theres no coverage for commercial vehicles
Theres no coverage for vehicles used without permission
Theres no coverage for vehicles with fewer than 4 wheels

(motorcycles, etc)
Theres no coverage for vehicles used in a race
Theres no coverage for vehicles that are used on a regular

basis by the insured, that arent listed in the Auto Policy

Millicent lets her niece, Emily, borrow her extra car to drive regularly
to and from school. If Emily has an accident, Emilys Dads Auto Policy
doesnt cover the damages to Millicents car, nor is there any Liability
coverage because the car was furnished for regular use. The insurance
follows the car, not the personso Millicent needs to have primo
coverage.
The insured cant collect more than one payment for the same
loss under Liability, PIP, or UM/UIM
If someone is driving a borrowed car, their personal insurance

isnt the primary insurance, because the insurance follows the
car not the person

Heres the significance of insurance following the car and not the
person. Most people probably assume that if theyre carrying really
good insurance, theyre fine no matter what car theyre driving. Not
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so. If you borrow your friends car, and you have really high limits of
Liability, but your friend is underinsured, if youre in an accident, its
your friends insurance that applies to the accident. Insurance follows
the car not the person.
E. Transportation Expenses Coverage Under
Collision/Comprehensive
If an insured is involved in a collision, or their car isnt drivable
because of a comprehensive loss, Transportation Expenses
coverage reimburses the insured for a rental, taxi, carpool, or
other temporary transportation.
The Auto Policy provides a limited amount of coverage of $20
per day up to a maximum of $600.
Note: The limits of this coverage vary from state to state, and most
companies give the insured the option of choosing more coverage.
Transportation Expenses coverage can also be referred to as
Loss of Use or Rental Reimbursement coverage. This
coverage is added to the Auto Policy via endorsement. Before
this coverage is applicable, the insured has to have filed a
Collision or Comprehensive claim.
Transportation Expenses coverage also applies if:
The rental or substitute vehicle is stolen. Coverage starts 48

hours after the car is stolen and stops as soon as the car is
found or replaced.
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Any other losses to a substitute vehicle beginning 24 hours

after the named insured stops using the car and ends after a
reasonable period of repairs/servicing/replacement.
F. Motorcycles
Motorcyles are typically NOT covered by Personal Auto Policies and
generally cannot be added as an endorsement. They must be insured
on their own and insurance IS REQUIRED by the State of California . .
. 15/30/5 . . . a minimum of $15,000 liability per person, $30,000
aggregate and $5,000 property damage. Carrying the minimum,
however, may not sufficiently protect your estate, i.e., the decision to
increase coverage limits are the same one would make for an
automobile, although some motorcycle insurers place limitations on
the amount of medical payments and uninsured motorist coverage. If
there is a loan on the motorcycle, the lender may also require
comprehensive and collision coverage, as well. If the owner does not
have health insurance, medical coverage is also desirable.
Collision,
comprehensive and medical are likely to cost more for motorcycles

since the rider and vehicle are more likely to be hurt and damaged in
any accident.
G. Recreational Vehicle Coverage
RVs can be insured on their own or added as an endorsement to most
Personal Auto (PAP) policies. Unlike a car, however, there are
additional things to consider on an RV like coverage for fixtures,
furnishings and appliances. Additional coverage for these items may
be available or a special may be required.
And, the type of coverage
varies by the type of RV . . . motorhomes are motorized vehicles while

fifth wheels and travel trailers are not. There may also be time
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restrictions on parking and traveling. If the RV is a primary residence

then homeowners type coverage is necessary.
ATVs and personal
water crafts vehicles (PWC) can be covered by homeowners

insurance. However, coverage can be limited and even non-existent in
the case of ATVs ridden off the owners property.
Special coverage is
desirable, especially when vehicles are licensed as street legal.

H. Provisions
There are several other Provisions relating to settling claims with
the insurance company for autos damaged due to Collision or
Comprehensive losses:
Claims are settled on a lesser of:

o ACV
o Repair expenses
o Replacing the car with a similar car
Payment of Loss means the insurance company can

choose to pay the covered loss by repairing/replacing the
car, or, if the car is stolen and then recovered, the insured
can have it repaired through their insurance policy
(Comprehensive coverage).
Other Sources of Recovery means if theres more than

one insurance policy insuring the same car, each insurer
pays a pro-rata share in that loss.
Note: In the case of a non-owned vehicle, the insureds coverage

would be considered in excess of any other insurance on the same
vehicle. Since the insurance follows the car, the insurance on the car is
considered Primary and always pays for damages first.
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Appraisal means the insured and the insurance company

cant agree on the value of the loss, and theyll each
choose an appraiser to determine independent values.
No Benefit to Bailee means the insurance policy on the

car wont benefit anyone else.

If the insured has their car in a garage for repair, and the garage is
destroyed in a fire, the garage isnt covered by the insureds Auto
Policy. The garage was acting as bailee and the insured and their
insurance company will be able to recover damages for the car from
the garages Commercial policy.
I. Duties in the Event of a Loss
The Duties in the Event of a Loss provision in the Auto Policy
requires that the insurer be immediately notified of an accident.
The insurer needs to know how, when, and where, plus the
names and addresses of all injured parties and witnesses.
Anyone seeking compensation has to:
Cooperate with the insurer during the

investigation/settlement/trial
Send the insurer any relevant legal documents
Get a physical examination if the insurer requests it
Give the insurer access to medical records or relevant

background information
Submit a Proof of Loss
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If the person makes a claim under Damage to Your Auto

coverage, theyre required to:
Take reasonable steps after the loss to prevent further loss
Immediately notify the police if the car is stolen
Allow the insurer to examine damaged or wrecked

property before the property is repaired or abandoned
J. No-Fault Plans
Pure No-Fault Plans arent used. If two drivers are in an
accident, Modified No-Fault Plans allow the two separate policies
to take care of a percentage of the loss.
No-Fault Liability coverage would provide payment up to a
certain limit. So, if the insureds No-Fault Liability limit is
$15,000, the insurance would pay the first $15,000 in expenses.
Afterwards, any remaining expenses would be taken out of the
at-fault drivers insurance.
Some states have No-Fault Plans, and some dont. California
doesnt have a No-Fault Plan. If the insured lives in a state that
requires No-Fault coverage, then the Personal Auto policy
provides the minimum required benefits.
7. Selected Endorsements
The following endorsements are used to modify a Personal Auto
policy:
Miscellaneous Type Vehicle Endorsement allows the

policy to cover vehicles with less than 4 wheels, and/or less
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than 10,000 pounds like motorcycles, dune buggies, golf

carts, small mobile homes, etc.
Limited Mexico Coverage Endorsement provides limited
excess coverage for autos taken across the Mexico border.
Significant limitations apply. For example, the accident must
occur within 25 miles of the U.S. border and the duration of
the trip must be 10 days or less.
Trust Endorsement specifies that a private passenger auto,
pickup or van is deemed to be owned by a person if title is
transferred to a Trust. This is handy since a lot of people
keep assets in family trusts.
Joint Ownership Endorsement makes coverage available
for vehicles which are owned by individuals other than a
husband and wife who reside in the same household and for
related individuals who live in different households.
Auto Loan / Lease Endorsement (GAP Coverage) pays
any amount unpaid due on a lease or loan for the loss of the
covered vehicle.
Named Nonowner Coverage gives someone coverage who
doesnt own a car, but borrows or rents cars.
Extended Nonowner Coverage for Named Individual
Endorsement removes the exclusions for driving nonowned
autos that are furnished or available for regular use. This
endorsement also removes the business use exclusion that
applies to nonowned trucks and vans.
Additional Transportation Expenses increases the usual
transportation limits of $20 per day up to a maximum of
$600, to $30 per day up to a maximum of $900.
Customizing Equipment Coverage pays for direct and
accidental loss to custom furnishings, special carpeting,
special paint or graphics beyond the $500 coverage typically
provided in standard policies.
Towing and Labor Coverage covers the cost and labor
associated with towing a damaged car.
8. The Good Driver Discount

Youre rewarded for being a good driver. If you qualify for the
Good Driver Discount, youre given a 20% discount. You can
qualify for the Good Driver Discount if you meet the following
requirements:
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Youve been licensed to drive a car in California for at least 3

years
During the last 3 years you havent:

o Had more than one violation point
o Had any driving-related felonies or misdemeanors
o Was the at-fault driver in an accident that resulted in
bodily injuries or someones death
9. California Auto Assigned Risk Plan (CAARP)

Its difficult for insureds who are higher risks to obtain auto
insurance. The California Auto Assigned Risk Plan was set up to
give everyone the chance to get Auto insurance. Coverage is
available for both personal and commercial autos to California
residents; non-residents who own a vehicle registered in California
and members of the military stationed in California.
CAARP provides the following minimum / required limits:
$15,000 / $30,000 for bodily injury and uninsured motorist
$5,000 property damage
$1,000 medical payments
Without the plan, theres the danger of a higher percentage of
people driving without insurance. The problem is that a large
percentage of people drive, and those people are all required to
carry insurance. If their insurance is revoked, and they cant get
insurance, they could resort to driving without insuranceand
thats dangerous for everybody.
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Any agent or broker can place business with CAARP, however coverage
can ONLY bound by CAARP.
The Auto Assigned Risk Plan means that all auto insurance
companies in the state have agreed to share the poor risks. Those
risks are referred to as Assigned Risks. This ensures that everyone
has the opportunity to get Auto insurance, which gives poor risks a
chance to improve their driving history.
A. Non-Standard Physical Damage Coverage
If an insured is a higher risk due to their driving record, age,
etc., they would obtain Non-standard Physical Damage
coverage. This happens when an insured purchases Liability
through CAARP, but they still need physical damage coverage.
The coverage usually requires higher deductibles, and has
stricter limitations about who can drive the car and what kinds of
coverages are available.
10. Low Cost Auto Insurance
In 1999, two bills were put through the California Legislature to
deal with the problem of uninsured drivers in the state. Most
uninsured drivers dont purchase liability insurance because of the
cost. These two bills combined because the California Low Cost
Automobile Insurance Pilot Program, and the law was passed
in October of that year.
In order to qualify for the program, the person has to be a good
driver (licensed in California for 3 years, no driving-related felonies,
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or misdemeanors, and no more than one violation point). Also, the

total family income cant exceed 250% of the federal poverty level:
$25,525 for one person
$34,255 for two people
$51,625 for a family of four
$86,425 for eight or more
In January 1, 2006, the program changed to allow:
The value cap on an insureds vehicle to increase from

$12,000 to $20,000
Up to 2 low cost auto policies per person for households with

more than one generation (older and younger).
Note: All California Counties are now eligible. Premium payments vary
by County and age ranging from $200 to under $400 per year per
vehicle.
A. Liability Limits
The limits of Liability in the low cost program are:
$10,000 for BI or death
$20,000 total for BIs per accident
$3,000 for property damage per accident
B. Cancellations and Nonrenewal

Someones eligibility for the plan is determined the first year by
CAARP. After that, its up to their insurance carrier to determine
ongoing eligibility.
Someone can be refused a renewal if:
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There is a substantial increase in loss exposure or hazards
The person no longer meets the programs eligibility

requirements
Someone buys additional liability outside the program,

which isnt allowed (someone can buy additional nonliability outside the program)
A qualified household needs more than 2 policies (only two

low cost policies are allowed per household)
11. Financial Responsibility Law

Most states require drivers to prove that they can pay for liable
bodily injury or property damage in the event of an auto
accident. The driver satisfies this requirement by buying Auto
insurance for at least the minimum liability required by state
law.
California requires that all licensed drivers with a registered auto
carry a minimum of 15/30/5:
$15,000 per person for bodily injury
$30,000 maximum for bodily injury for all persons involved

in the accident
$5,000 for property damage
California also requires licensed drivers to carry the same limits

($15,000/$30,000) for bodily injury damages caused by
uninsured and underinsured drivers.
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Note: If the car is regularly driven in more than one state, the drivers
insurance has to meet the financial responsibility requirements in each
of those states.
Proof of financial responsibility has to be carried in the vehicle.
This proof can be:
A valid Liability insurance policy (15/30/5)
Documentation if someone is self-insured
A bond of at least $60,000
Cash or securities deposit of at least $60,000
California insurance companies issue Certificates of Insurance to

prove the insureds met their financial responsibility. The
Certificate of Insurance includes:
The policy number
The covered auto(s)
The effective date
The expiration date
If the insured lies to a police officer or falsifies their financial

responsibility, the insured can be convicted of a Class B
misdemeanor. Here are a few examples of this sort of
falsification:
Forging signatures
Forging the actual financial responsibility document
Intentionally giving false information
Denying the insured has coverage
2. Required Coverages
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If youre driving in California, a valid drivers license and valid

insurance is mandatory. If you violate this law, you could be
required to prove financial responsibility for 3 years3 years all
at once. So, if a cop pulls you over, you have to prove that you
can pay for any auto accident related expenses that happen in
the next 3 years.
Anyone who drives the car has to have a valid insurance card. If
a police officer asks to see the insurance card, and the driver
doesnt have it, the driver is committing a Class B traffic
violation. This violation usually results in a fine, but it can also
mean the insured has their car towed and they have to hoof it or
take a cab.
California law requires that all accidents be reported
immediately. Within 72 hours of an auto accident, the driver has
to:
Report the accident to the DMV
Provide a copy of their insurance card that verifies the drivers

liability insurance
Depending on the situation, the driver may also have to file a

report with the city
If the person who owned the car wasnt in the car accident and
learned about the accident after the fact, they also have to file
an accident report with the DMV.
Note: If someone fails to report an accident to the DMV, or they file a
false accident report, theyll be charged with a Class B misdemeanor.
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12. Cancellation of A California Personal Auto Policy

Regardless of what is said in a policy, the Amendatory California
Endorsement provides a uniform method to handle policy
cancellations:
1. Insureds may cancel by returning the policy or giving written
notice of the effective date to cease coverage.
2. Insurance companies may cancel a policy by giving written notice
showing the cancellation date, the reason for cancellation. If the
policy has been in effect for 60 days or less, an insurer may cancel
for any reason with at least 10 days notice. If older than 60 days,
a policy may be cancelled with at least 30 days notice for non
payment of premium, violation of a law, discovery of fraud, discovery
of willful or gross negligence, failure of the insured to exercise
reasonable loss control in the event of an accident, a determination by
the insurance commissioner that continuation of this policy would
threaten the financial solvency of the insurance company or a material
change in the insureds activities.
13. New Developments
In April 2006, a change was suggested for the Auto insurance
industry that complied with the promises of Proposition 103 in
1988namely that Auto insurance prices would be based more
on someones driving record then where they live.
The new regulations are looking for a comfortable middle ground
between insureds, who want to be judged by their driving
records, and insurance companies, who need to determine
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premium rates based on any loss exposure (including where

someone lives).
Additional Standards Applicable To Automobile Insurance
1. If an insurer is responsible to a third party it is unlawful to
recommend the claimant make a claim under his own policy.
2. No shall require or suggest that an automobile be repaired at a
specific repair shop unless a referral is requested. Nor, require a
claimant to travel an unreasonable distance to have his vehicle
inspected, repairs estimated or actual repairs conducted.
3. No insurer shall require the use of non-original parts for
automobile repairs unless they are like kind. Nor shall the
insurer require a claimant to provide his own parts.
4. If the claimant uses his own repair shop, the insurer cannot limit
or discount the reasonable cost of repair.
Repair Shop Recommendation: An insurer can recommend a
specific repair shop to repair a claimants automobile as long as the
following written notice is provided within 5 days of the
recommendation:
"WE ARE PROHIBITED BY LAW FROM REQUIRING THAT REPAIRS BE
DONE AT A SPECIFIC AUTOMOTIVE REPAIR DEALER. YOU ARE
ENTITLED TO SELECT THE AUTO BODY REPAIR SHOP TO REPAIR
DAMAGE COVERED BY US. WE HAVE RECOMMENDED AN
AUTOMOTIVE REPAIR DEALER THAT WILL REPAIR YOUR DAMAGED
VEHICLE. IF YOU AGREE TO USE OUR RECOMMENDED AUTOMOTIVE
REPAIR DEALER, WE WILL CAUSE THE DAMAGED VEHICLE TO BE
RESTORED TO ITS CONDITION PRIOR TO THE LOSS AT NO
ADDITIONAL COST TO YOU OTHER THAN AS STATED IN THE
INSURANCE POLICY OR AS OTHERWISE ALLOWED BY LAW. IF
YOU EXPERIENCE A PROBLEM WITH THE REPAIR OF YOUR VEHICLE,
PLEASE CONTACT US IMMEDIATELY FOR ASSISTANCE."
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Fair Credit Reporting Act

Your clients must be informed if information in their credit report or
other records, such as a Motor Vehicle Reporting detailing driving
history, is used to deny an application for insurance.
Summary
Each part of the Personal Auto Policy has different variations for
complete and individual coverage. You have to make sure your clients
dont end up falling into the category of underinsured motorist.
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Section PC 8
COMMERCIAL COVERAGES
Objectives
This unit delves into the different kinds of commercial coverage.
There are a variety of policy forms and coverages that can be
combined to maximize a business owners protection. Pay close
attention to the types of businesses that are eligible and ineligible for
commercial coverage. Those are just the kind of sneaky questions
that will show up on the final test.
This unit includes:
Commercial Property Insurance
Commercial Package Policy (CPP)
Business Owners Policy (BOP)
Business Owners Liability Form
Selected Endorsements
Farm Insurance
Flood Insurance
Part A: Commercial Property Insurance

1. Commercial Property
Commercial Property Insurance is necessary for business
property and business personal property.
Note: Commercial policies use the following definitions:
You means named insured
Your refers to only the named insured shown in the declaration
We, us and our refer to the insurer providing insurance
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2. Commercial Property Modular Forms

There are 14 forms you can use to maximize the business owners
coverage:
1) Builders Risk Coverage
2) Extra Expense Coverage
3) Business Income Coverage with Extra Expense
4) Business Income Coverage without Extra Expense
5) Leasehold Interest Coverage
6) Legal Liability Coverage
7) Glass Coverage
8) Condominium Association Coverage
9) Condominium Unit Owners Coverage
10) Mortgage Holders Errors and Omissions Coverage
11) Tobacco Sales Warehouse Coverage
12) Standard Property Policy
13) Building and Personal Property Coverage
14) Value Reporting Endorsement
The Standard Property Policy form and the Building and Personal
Property Coverage form are used the most frequently, so well
summate the first 11 and then go into more detail on the last 3.
Heres a closer look at the first 11 coverage forms:
Note: Prior to 9/11, terrorism coverage was routinely included in
commercial insurance policies. Today, most insurers have either
drastically raised their premiums or excluded terrorism coverage
entirely, BOTH in existing and new policies. The Terrorism Risk
Insurance Act of 2002 provides for a sharing of losses between
insurers and the federal government.
A.
Builders Risk Coverage

This form protects property thats under construction. Either the
owner or the contractor can be covered by this form.
Coverage applies to the following, as long as they are on the
premises or within 100 feet of the premises:
Foundations
Temporary structures
Building materials and supplies
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Fixtures
Machinery or equipment
Alert!
The coinsurance requirement for Builders forms is 100% of the
completed value of the property. The insured cant ever purchase less
insurance than the propertys estimated completed worth.
The Builders Risk Coverage Form terminates as soon as:
The building is finished or the builders interest ends

The builder abandons the property
60 days after the building is considered occupied
90 days after construction
The policy expires or is canceled
B. Extra Expense Coverage

Some insureds cant afford to shut down their business. They
can get coverage by adding Extra Expenses Coverage to their
Business Income Coverage Forms. The Extra Expenses
Coverage keeps the insureds business in production while the
business is being repaired or replaced. For example, if a public
utilities station, a newspaper, or a dairy were to shut down, it
could create a lot of difficulties for the customers. It also could
result in the business never being able to recover.
This type of risk requires the Extra Expenses Coverage Form.
Note: Extra Expenses Coverage usually does not cover lost income.
This type of coverage is specifically designed to reimburse the insured
for the cost of keeping the business running.
There are limits placed on this coverage depending on how long
it takes the business to recover. These limits are stated in the
Declarations as 40%, 80%, or 100%. To make this a little
clearer:
30 days or less: 40% of the full amount of insurance is
paid
31-60 days: 80% of the full amount of insurance is paid
Over 60 days: 100% of the full amount of insurance is
paid
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So say the insured has Extra Expenses Coverage of $100,000:

30 days or less: 40% of the full amount is paid. Therefore
the insured is entitled to $40,000
31 to 60 days: 80% of the full amount is paid. Therefore
Over 60 days: 100% of the full amount is paid. Therefore
C. Business Income Coverage with Extra Expense
Business Income refers to earnings and cost. The Business
Income with Extra Expense Coverage Form covers the extra
expense of keeping the business up and running ONLY after a
direct physical loss. There needs to be a complete
suspension of operation for the Business Income to be
triggered.
Note: The Business Income Declaration shows which causes of
loss are covered.
In addition to the Business Income Forms, the insured can
choose extra coverages:
Extended Business Income Coverage covers lost

income up to 30 days after repairs.
Order of Civil Authority Coverage covers the business
owners losses if an order of civil authority forbids entry to
the business. This coverage can last up to 3 weeks.
Putting it Into Context:
A major fire hit Bertrands area, causing extensive damage
to the entire City Center. Bertrand was forced to shut
down his Custom Jewelry store during the fire, and after
the fire was put out, the city declared the entire area
unsafe. Because Bertrand is covered under Order of Civil
Authority Coverage, he can be reimbursed for financial
losses for up to three weeks.
D. Business Income Coverage without Extra Expense
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The Business Income Coverage Form covers the insured

business for lost income during the Period of Restoration. The
period of restoration starts from the time of loss until the
property can be repaired or replaced.
There are Optional Coverages that can be added to the Business
Income Forms:
Agreed Value covers the business owner for the value of

his business. A new form must be completed annually.
Extended Period of Indemnity covers a business
owners income over the initial 30 days of coverage.
Maximum Period of Indemnity covers a business
owners income for up to 120 days after a loss.
Monthly Limit of Indemnity reimburses a business
owner monthly for a specific amount following a loss.
Note: Business Income and Extra Expense coverages are considered
Time Element Consequential Loss Coverage. Within this type of
coverage, the amount of loss is connected to the amount of time it will
take to restore/repair the business.
Non-Time Element Consequential Loss Coverage also has to do
with direct loss, but it covers profits. For example, if a business
owners inventory is valued at $40,000, and they were scheduled to
sell that inventory for profit of $80,000, Non-Time Element
Consequential Loss coverage would reimburse them the $40,000 in
profit that was lost.
E. Leasehold Interest Coverage
This coverage applies to insureds who are leasing spaces for
their commercial business. If an insured is forced to relocate,
this coverage pays any difference between the old rent and the
new rent for the period of the insureds contract.
Say an insured is renting a space for $2,000 a month for 90 months,
and theyve been renting the space for 40 months. If that space is
destroyed by a covered cause of loss, and the insured is forced to
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relocate, the new rent could be substantially higher. If the new rent is
$3,000 a month, then Leasehold Interest coverage would pay the
difference for the rest of the insureds contract. Therefore, the
insurance would pay the extra $1,000 for the next 50 months
F. Legal Liability Coverage
Legal Liability pays for third-party damages, either direct or
indirect. This also applies to third-party property thats in the
insureds control or custody.
G. Glass Coverage
This coverage expands the type of glass coverage offered by the
Commercial Property policy. The Commercial Property policy
does cover glass under the Special Causes of Loss form, but it
excludes vandalism, theft, or accident perils. The Glass Coverage
form offers more complete coverage for glass.
Coverage is limited to:
$100 per pane/plate
$500 per occurrence
The covered perils are:
Glass breakage
Chemical damage
Note: There are no limits placed on claims due to glass breakage or

chemical damage.
The additional coverages are:
Frames
Temporary Plates
Debris Removal
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Removal of Obstruction
The excluded perils are:
Fire
Nuclear Hazard
Anything to do with war
H. Condominium Association Coverage

This coverage covers everyone who lives in the condominium
units. All the unit owners belong to the association, and pay a
monthly rate in order to handle any future claims.
Coverage applies to:
The building and facilities

Halls
Stairways
Grounds
Permanent fixtures
I. Condominium Unit Owners Coverage

This coverage form insures the condo owners business
personal property, and applies to:
Business personal property
Permanent fixtures
Any improvements the condo owner has paid for
J. Mortgage Holders Errors and Omissions Coverage
This coverage protects against any losses from a mortgage
holders mistake. There are 4 different coverages available under
this form:
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1)
2)
3)
4)
Coverage
Coverage
Coverage
Coverage
AMortgage Holders Interest

BProperty Owned or Held in Trust
CMortgage Holders Liability
DReal Estate Tax Liability
K. Tobacco Sales Warehouse Coverage

This coverage form protects tobacco products and materials
being stored at a warehouse. This coverage applies if the
tobacco actually belongs to someone else, but its in the custody
of the insured.
3. The Standard Property Policy and the Building and Personal
Property Coverage form
The Standard Property Policy form and the Building and Personal
Property Coverage form get their own section, because theyre
used the most frequently.
A. The Standard Property Policy
The Standard Property policy is a basic version of the
Commercial Building and Personal Property form. An insured
might not be able to get approval for more extensive coverage
due to risk exposure or loss history, and so theyd purchase a
Standard Property policy.
Perils covered by the Standard Property policy are:
Fire
Lightening
Explosion
There are very limited optional peril coverages that can be added
to the Standard Property policy, but only using Basic form perils.
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The following endorsements wouldnt apply to the Standard

Property policy:
Replacement
Agreed Value
Inflation Guard
B. Commercial Building and Personal Property Form

Commercial Building and Personal Property Insurance
covers the premises and the business owners personal property.
The personal property of others is covered if that property is in
the insureds custody.
Building Coverage insures the described building and other
structures on the premises, as well as the following:
Additions or alterations to the premises

Indoor and outdoor fixtures
Fixed machinery and equipment
Outdoor furniture
Personal property used to repair or protect the premises
Business Personal Property includes any of the following, as

long as the items are within 100 feet of the building:
Furniture, fixtures and betterments

Inventory
Leased property
Machinery and equipment
Personal property used for the business
If someones personal property is damaged on the premises, the

commercial owners insurance pays to replace or repair the
property. The following items are excluded from coverage:
Non-commercial animals
Antennas and satellite dishes
Any kind of major mode of transportation: planes, boats,
and automobiles.
Contraband
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Outdoor fences
Land and water
Money
Outdoor plants of any kind
Detached signs
Note: Contraband is a term for illegal items. Cocaine would be an

example of contraband, so no matter how much that drug-lord client is
willing to pay for premiums, we do not insure his/her shipment of
cocaine. Well let you break the bad news.
The Commercial Business and Property Form offers the
following Additional Coverages:
Debris Removal pays up to 25% of the amount paid for
losses to property, minus the deductible. If the insured
wants Debris Removal, the insured must report the claim
within 180 days of the loss.
Preservation of Property pays for property that needs
to be removed from an insured location to prevent further
damage to that property. This coverage also pays for the
property to be temporarily stored at another location.
Coverage only applies after 30 days.
Fire Department Service Charge pays up to $1,000 for
charges related to a service provided by the fire
department, as long as that service had something to do
with a covered cause of loss.
Pollutant Clean-up and Removal pays up to $10,000
to remove or clean up pollutants on the premises. All
expenses have to be reported in 180 days.
Most of these Coverage Extensions can be added without the
insured needing to pay a higher premium, because the
coverages are considered incidental.
Note: There is only one Coverage Extension that results in a
higher premium, and thats Newly Acquired or Constructed
Property.
The following Coverage Extensions are only available if the
insured has met their 80% coinsurance requirement:
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Accounts Receivable reimburses the business for

financial losses if a business cant collect payments from
customers due to damaged data or lost information.
Accounts Receivable pays up to $10,000 for incidents
occurring on insured premises and $5,000 for incidents
occurring off insured premises.
Business Personal Property Off Premises insures
valuable business personal property that is frequently
away from insured premises. Business Personal Property
Off Premises pays up to $10,000 for business property,
not including money or valuable papers.
Newly Acquired or Constructed Property pays up to
$250,000 for the insureds new property or constructed
property. This includes $100,000 coverage per any
additional buildings.
Outdoor Property pays up to $1,000 (only $250 for any
one tree, shrub, or plant) for loss of declared outdoor
property.
Personal Effects and Property of Others pays up to
$2,500 for personal property belonging to the insured or
their associates.
Valuable Papers and Records pays up to $2,500 to
replace lost and damaged information.
C. Value Reporting Endorsement Form
This form provides coverage for a business whose inventory has
fluctuating values during the year. The amount of insurance is
adjusted monthly, quarterly, or annual to reflect the changing
monetary value of the inventory. The ability to adjust coverage
helps solve the problem of overinsurance as well as
underinsurance.
Know This: The Value Reporting Endorsement may be used to
modify insurance provided by the Building and Personal
Property Coverage Form. If required reports of value are not
provided to the insurer the most that will be paid in event of loss
is 75%.
4. General Commercial Property Conditions
There are 9 general Commercial property conditions you should
memorize for the final exam. For the most part, youll run into a
variation of these conditions in Commercial lines:
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1) Concealment and Fraud applies only to property

coverage and states that if the insured intentionally
concealed something material or committed fraud, their
coverage would revoked.
2) Control of Property means that if someone else
committed a negligent act that damaged the insureds
property, coverage still applies. Basically, this condition
recognizes that the insured doesnt always have control of
their property, and mishaps can happen involving other
people or situations.
3) Duplicate Coverage means that if there is a loss, and
there are two or more coverages in the insureds policy
that apply to that loss, the insurance company will only
pay the amount of the loss. Therefore, if the loss is
$10,000, and its covered under two different coverages,
the insured wont receive $20,000.
4) Legal Action means the insured can sue the insurer
within 2 years of the date of the loss if the insured
followed all of the conditions of their policy.
5) Liberalization Clause means that any policy changes
that benefit the insured and dont require a higher
premium apply immediately to the policy without the need
for endorsements or writing an entirely new policy. The
changes have to be made during the policy period or
within 45 days of the policys effective date.
6) No Benefit to Bailee means no one else can benefit from
insurance other than the insured. This applies if someone
leaves their property with a bailee for maintenance or
repairs. If the property is damaged, the bailee isnt
covered by the insurance, and theyll need to pay for the
damages themselves.
7) Other Insurance means if the insured has two policies
covering the same peril, the companies will each pay a
percentage of any losses. The insured cant collect the full
amount of the loss twice. Usually, in the event of a loss, if
the coverages offer the same limits of liability, the insurers
will split the expenses 50/50.
8) Policy Period and Coverage Territory means that
coverage only applies during the policys effective date and
within the coverage territory (which includes the US,
Canada, US territories, and Puerto Rico).
9) Transfer of Rights of Recovery (Subrogation) means
that the insured cant collect insurance and then go after
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an at-fault party for damages. Theyve transferred the

right of recovery to the insurance company.
A. Loss Conditions
In the event of a loss, the insured has to follow the conditions of
their policy for coverage to apply.
The Duties in the Event of Loss condition states that the

insured must perform a list of duties after a loss:
o
o
o
o
o
o
o
o
Immediately notify the police if anything is stolen

or any law was broken.
Notify the insurer of the loss, including the how,
what, where, when, and why.
Protect property from further loss.
Prepare a written inventory of lost property.
Keep records of all expenses relating to the loss.
Give the insurer access to any necessary records
and information.
Allow the insurer to inspect the damaged property.
Submit the Proof of Loss within 60 days
Remember that the insurer must always inspect damaged property

before that property is repaired, replaced, or thrown out. This keeps
the insured from collecting more money than they should. Under no
circumstances is the insured allowed to report on damages, appraise
damages, or settle the value of damaged property: that is always
determined by the insurer.
The Loss Payment condition states that the insurance
company has to reach a settlement decision and inform
the insured of the decision within 30 days.
The Valuation condition details how the settlement will
be paid.
The Tenancy of Vacancy definition states that a building
is considered vacant if 70% or more of the total square
footage in the building isnt being used. If the building has
been vacant for more than 60 consecutive days, certain
perils wont be covered, for example:
o
o
Vandalism
Theft/attempted theft
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o
o
o
Glass breakage
Leaky sprinklers
Water damage
Any other covered perils would be covered, but with an

automatic 15% reduction in coverage.
Vacancy Permit Endorsement? Consent from a fire underwriter for an
insured to maintain coverage on a building that has been vacant or
unoccupied beyond the limitation period specified in a policy. Of
course, vacancies of any building occur at the peril of vandalism, theft,
leaks and glass breakage. On the other hand, an insurer who issues a
vacancy permit endorsement may waive the vacancy condition above.
B. Mortgage Holders Rights
If a mortgagor has a vested financial interest in a property, they
can collect the insurance if that property is damaged and the
primary insured hasnt been keeping up their end of the bargain.
Usually, this happens when an insured stops making premium
payments. If the mortgagor pays all missed/late premiums, and
files a Proof of Loss within 60 days (when the insured fails to do
so), even though the insured cant collect, the mortgagor can
collect.
5. Causes of Loss Forms
There are 3 Causes of Loss Forms:
1) Basic
2) Broad
3) Special
Note:
Note:
Note:
Cause
Most exclusions are included in the Cause of Loss Form(s).

Other coverages may not be covered under all three forms.
Windstorm is a covered peril under the Basic, Broad and Special
of Loss Form
Causes of Loss Forms

Basic
Includes
Excludes
Law, governmental action,
Fire, lightning, explosion,
windstorm, hail, smoke,
earthquake, nuclear hazard,
power failure, war or military
aircraft, vehicles, riot or civil
commotion, vandalism, leaky
action, artificially generated
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sprinklers, sinkhole collapse,

volcanic action
Broad
Includes
All perils in basic coverage,
falling objects, weight of snow
ice or sleet, accidental water
discharge, glass breakage, and
collapse
Special
Includes
Open peril coverage
electricity, damaged water

pipes, steam discharge,
mechanical breakdown
Excludes
Neon tubing, leakage of water
or steam for longer than 14
days
Excludes
Wear and tear, rust,
deterioration, smog, pollutants,
settling, cracking, insect or
animal damage, mechanical
breakdown, explosion, criminal
acts, fraud, loss from failure to
act, collapse, faulty planning or
design
There are 3 endorsements that are automatically excluded, unless
the insured adds them via endorsement:
1)
Ordinance or Law Coverage
2)
Earth Movement
3)
Water
Heres a closer look at those 3:

A. Ordinance or Law Coverage
This endorsement adds coverage to a commercial property policy
to protect against any future changes in ordinance or law. If a
new law required renovations, repairs, or upgrades, this
endorsement would help cover those costs.
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In 1992, the Americans with Disabilities Act (ADA) took

effect, which has had an enormous impact on public spaces. If a
commercial structure was built before the ADA, its technically
exempt. However, as soon as that structure needs to be
rebuilt/repaired, it will need to go through the necessary
modifications to meet state requirements. Adding the Ordinance
or Law Coverage would pay for these modifications.
B. Earth Movement
Theres no coverage for earth movement-related losses,
such as:
Earthquake
Volcanic earth tremors
Landslide
The insured would need to add a Commercial Property
Earthquake Endorsement to obtain coverage. However, in
Commercial lines, every earthquake/tremor that happens in a
168-hour period is considered 1 occurrence.
If an earthquake hits on Sunday, there could be serious aftershocks
for the next few days. Basically, for the next 168-hours (7 days), any
aftershock or even another earthquake counts as 1 occurrence.
Therefore, a business couldnt report more than 1 claim during the
next 7 days, no matter how many earthquakes/aftershocks occurred.
Alert!
In Personal lines, any earthquake damages within a 72-hour period
are considered 1 occurrence.
In Commercial lines, any earthquake damages within a 168-hour
period are considered 1 occurrence.
That has enormous final exam potential, so memorize that factoid.
C. Water
Theres no coverage for:
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Flood
Tidal wave
Mudslide
Sewage/drain backup
Etc.
The final exam loves to ask about the sewage backup exclusion. Not
only did we answer several practice questions quizzing us about
whether or not sewage backup was covered, but we also bumped into
that question on the licensure exam. Someone can buy Flood
insurance, depending on their location, but even then, Flood insurance
wouldnt cover sewage/drain backup.
7. More Selected Endorsements
We wanted to draw special attention to the above three exclusions,
because theyre very common and significant. Meaning, they could
really affect someones Commercial coverage, and the final exam
will probably ask oodles of questions about them.
However, here are some other endorsements that are also
important to know:
A. Peak Season
This endorsement increases insurance limits on personal
property during peak season, which might have an increase in
loss exposures.
B. Value Reporting Form
This endorsement covers the types of businesses that have
stock/inventories with increasing/decreasing values. The
business can cover these fluctuations in value by adjusting the
reporting period. This keeps the business owner from paying way
too much for insurance, or for paying too little and ending up
underinsured for a covered cause of loss.
The insurance is based on the reported inventory. The policy
limit is based on the highest projected value during the policy
period, and the final premium is based on the insureds actual
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coverage during the policy period. A Value Reporting Form is

used to modify insurance.
If the insured doesnt report their values on time, they could end
up being penalized if they do suffer a loss. They have to report
their values within 30 days of the reporting period. The reporting
period can be weekly, monthly, quarterly, or annually.
If the insured doesnt report their values on time, and they
suffer a covered cause of loss, the most the insurance company
will pay is 75% of coverage.
C. Business Income from Dependent Properties
This endorsement protects businesses that are dependent on
other businesses in order to operate. This endorsement covers
the following losses of income:
Contributing Location protects an insured if they depend
solely on another company for inventory or materials. If
that business is affected by a covered cause of loss, the
insured can also claim a financial loss.
Recipient Location protects an insured if they depend
solely on one company for business. If that business is
affected by a covered cause of loss, the insured can also
claim a financial loss.
Manufacturing Location protects an insured if they
depend solely on one company for transportation or
shipment of products. If that business is affected by a
covered cause of loss, the insured can also claim a
financial loss.
Leader Location protects an insured if they depend
heavily on another company to attract customers. If that
company is affected by a covered cause of loss, the
insured can also claim a financial loss.
D. Blanket Insurance Endorsement
Blanket insurance is a single dollar amount insurance limit that
applies to all insured property, or more than one property, or
personal property located at more than one property. This
contrasts with Schedule Insurance where a list or schedule of
buildings and contents with specific amounts of insurance
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applied to each. Agreed Value is when the underwriter agrees

with the insured to the amount of insurance and co-insurance.
So, if an insured owns two buildings with a Blanket limit of
$600,000, that limit applies to an occurrence that happens at
either building. This gives an insured the flexibility of applying a
larger limit to covered losses.
Part B: Commercial Package Policy
1. Commercial Package Policy (CPP)
The Commercial Package Policy provides coverage to profit and
nonprofit organizations, including schools, retailers, and apartment
building owners. This policy isas we call it in the insurance bizan
all that and a bag of chips policy: the policy is simple and easy to
understand, it covers almost all commercial risks, and it provides
almost any commercial insurance someone would need. This policy
sells itself, people, so hurry up and get licensed.
Note: Ocean Marine and Aviation Insurance are not included in
the CPP.
A Commercial Package Policy (CPP) consists of:
A. Common Policy Declarations
You will find the following in the Common Policy Declarations:
Name and address of the named insured

Policy period
Premium payments
Description of the covered business
A list of coverage parts
B. Common Policy Conditions

The Common Policy Conditions apply to all the coverage parts
in the CPP. These include:
Changes in the insureds policy can only be made by the
insurer with the insureds consent.
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Examination of your books and records means the

insurer has the right audit the insureds books and records
relating to the policy. The audit can take place anytime
and up to 3 years after the policy period. This can happen
if the audit relates to an investigation or legality.
Inspections and surveys means the insured or service
contracted by the insured can inspect and survey the
covered property at any time. If the inspection is going to
mean a change in premium rates, the insured will receive
a report on the recommended changes.
Note: Inspections and surveys condition is only used to establish

the propertys insurability. The inspection isnt related to health or
safety regulations.
Premiums means the insured is responsible for premium
payments.
Transfer of your rights and duties under this policy
usually applies to an insured who dies. Basically the
insureds rights and duties transfer to whomever is
representing the insureds estate.
Cancellation means either the insured or the insurer can
cancel a policy. Cancellation procedures may vary from
state to state.
C. Endorsements
Attached documents that change the insurance policy are called
Endorsements. Endorsements might be added by the insurance
company or be required by law.
Interline Endorsements can also be included in the Common
Policy Conditions. These endorsements modify two or more lines
of insurance. Some endorsements are mandatory, and some are
optional.
D. Two or more coverage parts
These provide the actual insurance coverage. A Coverage Part
consists of:
Declarations for that specific part.

Conditions for that specific part.
Coverage forms.
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Endorsements relating to that specific part.
The insured can select one or more coverage parts, including:
Boiler and Machinery Coverage

Commercial Auto Coverage
Commercial Crime Coverage
Commercial General Liability Coverage
Commercial Inland Marine Coverage
Commercial Property Coverage
Employment Practices Liability Coverage
Farm Coverage
Professional Liability Coverage
Note: A Mono-line Policy refers to only one selected coverage part. A

Multi-line Policy refers to more than one selected coverage part.
NOTE: General Liability refers to liability resulting from injury or
property damage for the insureds premises, operations, products or
completed operations.
2. Boiler and Machinery (Equipment Breakdown) Coverage
In this section we will deal with Boiler and Machinery Coverage aka
equipment breakdown coverage. Its important to note the
following about boiler and machinery coverage:
Businesses depend on the Boiler and Machinery Coverage
Form to protect against mechanical breakdowns. This
coverage is generally not available under other insurance
policies, and it protects against catastrophes such as damage
from an exploding steam boiler, or expensive mechanical
failures.
Boiler and Machinery Coverage covers the premises and
property in the insureds custody.
When damaged property is repaired or replaced within 18
months after an accident, the settlement is based on the cost
to directly replace the damaged property. After 18 months,
the settlement is the less expensive of the ACV or projected
repair costs.
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Why Buy Boiler & Machinery Insurance? Typical commercial

property insurance excludes breakdown of machinery and steam
explosions or if covered pays only AFTER an accident. The premium
for boiler and machinery insurance includes an inspection charge to
help avoid explosions.
Thus, it is proactive.
Note: Just to reiterate: an Accident is defined as the sudden and

accidental loss of an object or a part of the object. It does not
include:
Wear and tear
Leaks
Breakdown of a vacuum tube or brush, electronic computer or

data processing equipment, or a structure or foundation
supporting an object or its parts
Malfunctioning safety or protective devices

Selected Object Definitions Form lists the insured items
and property in the Declarations. The Declarations has to
include at least one of the following object definitions forms:
Pressure and Refrigeration objects
Mechanical objects
Turbine objects
Comprehensive coverage (including all insurable boiler
and machinery objects but excluding production
machinery)
o Comprehensive coverage (including all insurable boiler
and machinery objects and including production
machinery)
o
o
o
o
Boiler and Machinery Coverage

Includes:
Within the policy limit, $25,000
for:
Expediting expenses
Water damage
Excludes:
Accidents:
To electronic equipment
To objects being tested
Caused by a windstorm,
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Ammonia contamination
Hazardous substances
damage, contamination or
pollution
Automatic coverage for accidents

that occur at a newly acquired site
(for up to 90 days)
Defense (cost of defending or
settling a claim for liability of
damage to the property of others
located on the insureds premises)
hail, or freezing
Caused by lightning, weight
of snow (ice or sleet also),
vehicles, aircraft, sinkhole
collapse, smoke, sprinkler
leakage
Earthquake or flood
Ordinance or law
War, military action, or nuclear
hazard
Lack of utility services
Indirect losses
Fire or damage resulting from
efforts to extinguish a fire,
explosion
Supplementary payments for

defensive purposes
A smaller business can use the Small Business Boiler and

Machinery Form (Basic or Broad). The Small Business
Boiler and Machinery Form covers milder boiler and
machinery problems. Coverage is 80% of replacement cost.
Business interruption and extra expense is also included
with a limit of 25% of the property damage limit. The object
definitions are automatically in this form, so you wont need
an object definitions form.
Remember: Business interruption coverage insurance
compensates you for lost income if your company has to vacate
premises due to a disaster. Extra Expense insurance reimburses
your company for money spent, above normal operating expenses, to
avoid having to shut down during the restoration period after a
disaster. In some cases, extra expense insurance alone may provide
sufficient coverage without the need for business interruption
coverage.
There are 2 Small Business Boiler and Machinery Forms:
1) The Basic Form protects against direct loss, business
interruption, and extra expenses due to mechanical
failure. Coverage for heating/cooling equipment is
optional.
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2) The Broad Form covers a larger range of businesses

and items.
A.
Equipment Breakdown Form

The Equipment Breakdown Form protects against boiler and
machinery breakdown.
Covered equipment includes:
Internal pressure or vacuum equipment.
Mechanical or electrical equipment.
Communications and computer equipment.
Note: A Breakdown is defined as an equipment failure. If the

equipment is functioning, but not functioning well or correctly, its not
considered a breakdown.
The form covers:
A breakdown that causes direct damage to the insureds
property or any property in the custody of the insured
New property
Any loss from new ordinances or laws at the time of or
after the breakdown
Any loss of business income and the extra expense of
keeping the business running for a maximum of 5 days
Any loss of business income and the extra expense of
keeping the business running, if the breakdown causes
problems with the utilities
If the breakdown causes refrigeration or storage facilities
to lose power, and products or materials are ruined or
spoiled as a result
The expense of making temporary repairs as quickly as
possible
Coverage also includes $25,000 for each of the following:
Reimbursing expenses faster

Water damage
Ammonia contamination
Dangerous substance contamination
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The Equipment Breakdown Form excludes:
Fire or explosion
Water, even if it was used to put out a fire
Ordinance or law
Any kind of war
Nuclear hazard
Earthquake
Interrupted utility services
Wear and tear
Accidents to electronic equipment
Damage to equipment undergoing testing
Breakdowns caused by windstorm, hail, or freezing
Breakdowns caused by lightning, vehicles, aircraft,
sinkhole collapse, smoke, riot, civil commotion or
vandalism; weight of snow, ice, or sleet
A negligent insured
Indirect losses
B. Selected Endorsements
The following selected endorsements can be added to the
equipment breakdown protection coverage available under boiler
and machinery:
Actual Cash Value

This endorsement replaces the property damage valuation
condition in the breakdown coverage form. This
endorsement stipulates that any property damaged by a
breakdown will be repaired/replaced based on the lesser
of:
Cost to repair/replace the property with similar
property (quality, etc.)
o
ACV of the damaged property
o
Part C: BOP & Business Owners Liability Form

1. Business Owners Policy (BOP)
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The Business Owners Policy (BOP) is a commercial package

policy that provides property and liability insurance to certain types
of small businesses. While the Commercial Package Policy (CPP)
allows the insured to pick and choose coverages, the Business
Owners Policy (BOP) is a pre-packaged, mandatory group of
coverages.
Major differences between the BOP and Commercial Property
Policies include:
BOPs loss of earnings is limited to 12 months. CPPs can be

longer.
BOPs eligible buildings are insured on a replacement cost basis.
BOPs have a standard deductible of $250
Otherwise, coverage and exclusions are similar to that provided by

coverages A, B, C of the CGL form.
Eligibility for BOP is stricter than the CPP. The BOP has rules about
the size and type of eligible businesses. An ideal BOP business is
smaller, not part of a chain, and has predictable coverage needs.
Youll need to remember the specific kinds of businesses that are
eligible and ineligible. Remember: the ideal BOP business is smaller,
not part of a chain, and has predictable coverage needs.
A. Eligible Buildings
Eligible buildings for the BOP are:
Apartment Buildings
Office Buildings that are occupied principally for office
purposes. These buildings can be no more than six stories
high and 100,000 sq. ft. The building can use space for
non-commercial purposes (such as living quarters), but the
non-commercial space cant exceed 25,000 total sq. ft.
Other Buildings used for commercial purposes, but the
buildings cant exceed 25,000 total sq. ft.
B. Ineligible Businesses
The following businesses are ineligible for the BOP:
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Ineligible Businesses
Auto repair or service stations
Auto, motor home, mobile home,
and motorcycle dealers
Banks, building and loan assoc.,

savings and loan assoc., credit
unions, stock brokers, and similar
financial institutions
Bars, grills, and most restaurants
Buildings occupied wholly or
partially for manufacturing or
processing unless the occupancy
is an eligible processing business
Condominium assoc. other than
office or residential
Household personal property

Insureds whose business
operations involve one or more
locations that are used for
manufacturing, processing, or
servicing, except for eligible
processing or service businesses
One or two-family dwellings
Parking lots or garages

Places of amusement, such as
theaters and arcades
Wholesalers that are ineligible
wholesale businesses
C. Eligible Restaurants
Some fast food restaurants and smaller restaurants are eligible
for the BOP. The smaller restaurant has to be considered a
limited-cooking restaurant. This means the food is prepared
using non-exhaust producing equipment, such as: microwave
ovens, electric warmers, household type ranges or ovens, and
toasters.
Note: Fast food restaurants are ineligible if they use open-broiling and
solid fuel, like charcoal or hardwood. Fast food restaurants are allowed
to seat a maximum of 150 people.
Here are some other eligibility requirements of fast food and
small restaurants:
No more than 7,500 sq. ft. of floor area

Maximum seating capacity of 75
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Liquor cant be sold, and beer and wine sales cant exceed
more than 25% of overall sales
Catering services cant exceed 10% of total sales
Businesses that seasonally close for 30 consecutive days
are automatically ineligible
Eligible Restaurants
Cafs
Cafeteria style buffets
Coffee shops
Concession stands
Delicatessens/sandwich shops
Doughnut shops
Drive-ins
Drugstores
Hot dog or hamburger stands
Ice cream/yogurt shops
Oriental or ethnic restaurants
Pizza shops
Salad bars
Take-out only restaurants
Note: Some convenience food/gasoline stores are also eligible. The

business cant include any other service besides gas (e.g. repairs or a
caf) and gas sales cant be more than 50% of total sales.
The following kinds of contractors are eligible for a BOP:
Eligible Contractors
Appliances and accessories
Carpentry
Carpet and furniture cleaning
Masonry
Metal ceiling or wall installation
Metal door, window, or assembled
millwork installation
Painting
Paper hanging
Concrete construction
Decorative or artistic metal
erection
Driveway, parking area, or
sidewalk paving
Electrical work inside buildings
Fencing
Floor covering installation
Furniture or fixtures installation
Glass and glazing
Heating and/or air conditioning
systems
Interior decorating
Plastering or stucco work

Plumbing (not industrial)
Refrigeration systems
Roofing
Septic tank cleaning
Siding installation
Sign painting
Tile or stone work (interior)
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Landscape gardening
Window cleaning (three or fewer

stories high)
Lawn sprinkler installation

The following factors make a contractor ineligible for coverage:
Ineligibility Factors for Contractors

Repair, installation, or service of
boilers, burglar alarm systems,
automatic fire extinguishing
systems, elevators, escalators, or
computers
Repairing or painting ships
Sales, service, or installation of
automatic opening door or garage
doors
Sales unrelated to installation,
service, or repair exceed 25% of
annual sales
Annual payroll over $300,000

Annual sales over $3 million
Demolition, blasting, wrecking,
high pressure boiler, or liquid
petroleum gas work
General contracting
Hazardous material or pollution
abatement operations, such as
asbestos, lead and radon
Heavy construction, such as
building bridges, installing, or
rigging cranes, pipeline
construction, and sandblasting
Installation work
Installing or dealing in hot tubs,
swimming pools, or wood/coal
stoves
Lawn chemical spraying, except
for landscape gardeners in
compliance with applicable law
Manufacture or sale of products
under the contractors name
Rent or lease equipment to others
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Shop only carpentry or sheet

metal work
Subcontracted work exceed 10%
of sales
Tree service or removal
Use cranes in business operations
Waterproofing
Work at height over three stories
D. BOP Coverage Forms

The BOP consists of the following coverage forms:
Business Owners Declarations

Business Owners Common Policy Conditions Form
One of two available Business Owners Property Forms
Business Owners Liability Form
The Business Owners Common Policy Conditions Form

contains the following conditions:
Cancellation
Changes
Concealment, misrepresentation, or fraud
Examination of records
Inspections and surveys
Insurance under two or more coverages
Other insurance
Liberalization
Premiums
Transfer of rights of recovery against others to the
insurance company
Transfer of rights and duties under the policy
E. Additional BOP Coverages
The following is a list of additional BOP Coverages:
Debris Removal pays up to 25% of the amount paid for

losses of property to remove debris.
Preservation of Property pays for property that needs to
be removed from an insured location to prevent further
damage to that property. This coverage also pays for the
property to be temporarily stored at another location.
Coverage only applies after 30 days.
Fire Department Service Charge pays up to $1,000 for
charges related to a service provided by the fire
department, as long as that service had something to do
with a covered cause of loss.
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Pollutant Clean-up and Removal pays up to $10,000

to remove or clean up pollutants on the premises. All
expenses have to be reported in 180 days.
The BOP also covers:
Increased Cost of Construction pays up to $10,000 per

building.
Electronic Media pays a maximum of $2,500 per loss.
Collapse
Water Damage covers the cost to remove the damaged
sections, repair the damage, and replace any destroyed
items.
Expense to Temporarily Replace Glass
Money Orders and Counterfeit Currency pays up to
$1,000 per loss.
Forgery and Alteration pays up to $2,500 per loss.
Business Income pays normal expenses up to 60 days
after the loss. Other losses are covered up to 12
consecutive months during the restoration period.
Extended Business Income is included for up to 30 days.
Note: The restoration period almost always begins 72 hours after a

loss occurs.
Extra Expense covers any extra expense for up to 12
months after the date of the loss and doesnt have any
limits of insurance.
Civil Authority lasts for up to 3 consecutive weeks, which
starts 72 hours after a civil authority closes the premises.
Business Income from Dependent Properties pays up
to $5,000 if the insured suffers loss of income because a
customer or supplier has suffered a covered cause of loss.
Fire Extinguisher Systems Recharge Expense pays up
to $5,000 to renew or recharge the systems, and for any
damages caused by a discharged or leaking extinguisher.
F. Coverage Extensions
Coverage Extensions extend the coverage and come with their
own limits:
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Newly Acquired or Constructed Property pays up to

$250,000 for damages to new buildings on or off
premises. Newly Acquired or Constructed Property also
covers business personal property in/at new buildings on
or off premises.
Note: Newly Acquired or Constructed Property coverage lasts until the

earliest of any of the following:
The policy expires
30 days after the new acquisition
New values are reported to the insurer
Business Personal Property off Premises pays up to

$5,000 for damage to Business Personal Property while
its being moved, or while its being stored off premises.
This excludes money or valuable papers.
Outdoor Property pays a maximum of $2,500 for
damages to outdoor property, however it does not pay
more than $500 per damaged item (plants included).
Covered causes of loss are fire, lightning, riot or civil
commotion, or aircraft.
Personal Effects pays a maximum of $2,500 for
damages to business personal property owned by the
named insured and others connected to the business. This
does not apply to items used for the business or any loss
due to theft.
Valuable Papers and Records pays up to $10,000 per
occurrence on premises and $5,000 off premises to
research, replace, or restore lost and damaged records.
Accounts Receivable pays up to $10,000 per occurrence
on premises and $5,000 off-premises for any loss of
money due to damaged or lost accounts receivable
records.
G. Limits
Here are some important limits to the insurance:
There is a sub-limit of $1,000 for any losses to attached
outdoor signs, unless the insured wants optional sign
coverage.
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Coverage Extensions and Additional Coverages (fire

department service charge and pollution clean-up and
removal) limits are in addition to normal policy limits.
A Building Limit protects against inflation by
automatically increasing building coverage by the annual
percentage listed in the declarations. The limit is pro-rated
and based on the number of days from the start of the
policy year.
A Building Personal Property Limit automatically
increases the business personal property limit by 25% to
account for stock fluctuation.
Note: While Business Owner Policies include more types of coverage
than CGL policies, the fixed, lower limits of liability in a BOP plan
can be insufficient. Larger businesses, or those with special needs
should consider added liability insurance as a separate policy to their
BOP, or purchase a CGL plan.
H. Deductibles
There is no deductible for coverages for:
Business income
Extra expense
Civil authority
Fire department service charges
Fire extinguisher system recharge expense
Note: For all other property coverage the deductible is standard

usually $250. The insured can opt to pay higher deductibles to lower
their premiums for building and personal property.
I. Loss Valuation
Losses are settled by:
1. Replacement cost (subject to 80% coinsurance)
Buildings
Business personal property
Tenants improvements
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Coverage for glass
2. Actual Cash value
Secondhand merchandise that is for sale or being

stored
Property of others
Household contents
Manuscripts
Art, antiques, or rare objects
Valuable papers and records at the cost of blank
materials and labor
Money at face value and securities at their value the
day the loss occurred
Accounts receivable
J. Optional Property Coverages

The following Optional Property Coverages can be added by
Endorsement with an additional premium:
Outdoor Signs is open peril coverage for all outdoor signs

owned by or in the custody of the insured.
Employee Dishonesty covers loss or damage to business
personal property by employees. The coverage lasts for up
to 1 year after the damage is discovered, even if the
policy has expired. Employee Dishonesty doesnt cover
loss or damages from the insureds business misconduct.
Needless to say, ENRON will have a heck of a time
collecting insurance from Employee Dishonesty. Coverage
is on a blanket basis.
Mechanical Breakdown covers direct damage to covered
property resulting from accidental breakdowns.
Money and Securities covers theft, disappearance, or
destruction of money and securities in any context.
The following endorsements can be added to a BOP for broader
coverage:
A. Hired Auto and Non-Owned Auto Liability
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This endorsement can be added for an additional premium, and

can include either:
Hired Auto Liability, which adds hired auto liability

coverage for third party bodily injury or property damage
resulting from the insureds use of a
hired/borrowed/leased auto.
Non-Owned Auto Liability, which adds liability coverage
to the insured arising out of the insureds use of a nonowned auto.
Part D: Farm Insurance

1. Farm Insurance
Farmers need their own unique insurance because their business
and their home are often at the same location. They need insurance
that will cover them both personally and commercially.
The Farm Coverage Part can be written as a mono-line policy or
included in the CPP.
Alert!
You may find that question on the final exam: What kind of
commercial policy can you add a Farm Coverage Part to? Remember
its the CPP.
The Farm Coverage Part includes several Farm Property
Coverage forms to cover the farmers personal and business
property. This also includes a Farm Liability Coverage form to
protect the farmer against personal or professional liability.
A. Farm Property Coverage Forms
Farm Property Coverage forms cover physical losses to different
kinds of property. The insured can choose between 3 forms:
1. Farm Dwellings, Appurtenant Structures, and
Household personal Property Form
Farm Dwellings, Appurtenant Structures, and Household
Personal Property Form is similar to Section 1 of the HOP. The
form consists of Coverages A-D:
232
o
o
o
o
Coverage
Coverage
Coverage
Coverage
A covers the dwellings

B covers appurtenant structures
C covers personal property
D covers loss of use
2. Farm Personal Property Coverage Form

This form covers farm property, either scheduled or
unscheduled. The form consists of Coverages E-G:
o Coverage E covers scheduled personal property.
Examples of property that can be covered under
Coverage E are grain, livestock, machinery, and
vehicles used on the farm.
o Coverage F covers unscheduled personal property on
and off premises on a blanket basis.
o Coverage G/Barns, Outbuildings, and Other Farm
Structures Coverage Form covers silos, barns,
fences, and other farm buildings/structures that arent
dwellings.
3. Farm Liability Coverage Form
This form covers any liability resulting from farming
operations or activities. The form consists of Coverages H-J:
o Coverage H covers bodily injury and property damage
liability
o Coverage I covers personal and advertising injury
liability
o Coverage J covers medical payments
2. The Main causes of Loss Forms in Farm Insurance
Like in other lines of insurance, Farm insurance has 3 main causes
of loss forms: Basic, Broad, and Special.
A. The Basic Form
In Farm Insurance, the Basic form covers:
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Fire
Lightening
Windstorm/hail
Riot/civil commotion
Explosion
Aircraft
Earthquake loss to livestock
Flood loss to livestock
Vehicles
Smoke
Vandalism
Theft
Volcanic activity
Sinkhole collapse
B. The Broad Form

In Farm insurance, the Broad form covers:
Electrocution of covered livestock
Wild animal attacks on covered livestock
Drowning of covered livestock
Loading or unloading accidents
Accidentally shooting covered livestock
C. The Special Form

In Farm insurance, the Special form covers:
All perils except those specifically excluded in the policy
D. Special Form Exclusions

Here are a few Special form exclusions:
Pollutants/contaminants
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Criminal/dishonest acts
Unauthorized transfers of property
Voluntary transfers of property
Failure to preserve/save property from loss or further

damages
3. Specialized Coverage Farm Insurance Forms

If a farmer wants to insure certain items/properties separately,
he/she can choose their own Specialized Coverage form, such as:
A. Mobile Agricultural Machinery and Equipment Coverage
form
This form covers mobile agricultural machinery and equipment
separately.
B. Livestock Coverage Form
This form covers livestock separately.
4. Farm Liability Coverage Forms
This form provides Coverages H-J:
Coverage H provides bodily injury and property damage

liability
Coverage I provides personal and advertising injury liability
Coverage J provides third-party medical payments
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A. Farm Liability Exclusions

The following are generally excluded from Farm Liability
coverage:
Farm employee injuries
Aircraft spraying
Pollutants
Motor vehicles that arent described in the policy
Poor performance
The insureds own goods/products
5. Federal Government Crop Insurance

Crop insurance protects against losses to growing crops. Crop
insurance is necessary because most Property policies exclude crop
damage. How Crop insurance works, is it covers the amount lost, or
the reduced yield. So, if 80% of a harvest was saleable, Crop
insurance would cover the 20% that wasnt saleable.
The Federal Government is involved in crop insurance through the
sale of FCIC (Federal Crop Insurance Corporation) (sold through
special agents) as well as a reinsurer of policies issued by the
private sector.
Note: Crop insurance usually only covers the harvest, and not the
plants. So, if an apple farmer had Crop insurance, the insurance
would cover the apples, not the apple trees.
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PART E: COMMERCIAL FLOOD INSURANCE

Flood insurance for commercial businesses is available through the
National Flood Insurance Program (NFIP), an agency of the federal
government administered by FEMA. Any licensed agent or broker
may submit business to the NFIP after taking a special 3-Hour
Training Course. There is no binding authority and there is a
waiting period of 30 days before coverage becomes effective.
A flood is defined by the NFIP as an excess of water on land that
is normally dry.
Commercial flood policies cover the following perils:
Mudslides
Inland or tide water overflows
Exclusions to commercial NFIP policies include:
Business income and extra expense

Landscaping and fencing
Accounts and cash
Aircraft
Mold
Excess Flood Insurance may be available under a separate policy

if the amount of the primary flood insurance is not enough to cover
the value of your property.
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Section PC 9
COMMERCIAL GENERAL
LIABILITY &
PROFESSIONAL LIABILITY
Objectives
This unit discusses the utmost importance of Commercial General
Liability (CGL) and Professional Liability. Nowadays, lawsuits are
extremely common, and its important to know what types of
insurance the business owner can choose to protect themselves
against potential litigation.
This unit includes:
Commercial General Liability (CGL)

Professional Liability
Part A: Commercial General Liability

1. Commercial General Liability: What is CGL?
CGL is designed to protect business owners against lawsuits. The
CGL covers businesses from such hazards as:
Third-party lawsuits due to any bodily injuries suffered on

covered premises
Third-party lawsuits due to any bodily injuries during business

operations
Third-party lawsuits due to slander or liable
238
The CGL can be written separately or included in the Commercial

Package Policy (CPP). The CGL includes:
Common Policy Declarations
Common Policy Conditions
CGL Declarations
CGL Coverage Form
Any necessary Endorsements
The CGL Declaration Page lists six different Limits of Insurance.

Payment of damages on one limit will also affect another limit.
Aggregate Limits: The most an insurer will pay during the policy
period
Products-Completed Limit: Injury and property damage that occur
away from the insureds premises from the insured products or
completed work.
Personal and Advertising Injury Limits: : For offenses arising out
of the business of the insured. Personal injury might be wrongly
detaining a customer for shoplifting or expelling a customer from
premises wrongfully, wrongful entry, copyright infringement, stealing
ideas. Advertising injury might apply to defamation, false statements,
intrusion of privacy, public disclosure of private facts, misappropriation
of a persons likeness or name.
Each Occurrence limit: The most an insurer will pay for the sum of
ALL damages
Premises Damage Limit: Pays for damages by fire to premises
rented to the insured.
Medical Expense Limits: Pays reasonable medical expenses for
bodily injury caused by an accident without regard to fault.
Here is how these limits might appear in a policy:
ABC Company Limits of Insurance

$2,000,000
General Aggregate Limit (Other Than Products-Completed Operations)
$2,000,000
Products-Completed Operations Aggregate Limit
$1,000,000
Personal and Advertising Injury LimitAny One Person or Organization
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$1,000,000
each occurrence limit
$50,000
Coverage for damage to premises rented to you LimitAny One Premises
$5,000
Medical ExpenseAny One Person
A. Basic Hazards & Terms

Basic Liability Hazards include:
Who is an insured? An insured, under most CGL

policies, means any person qualifying as an Insured under
Who Is Insured in the Declaration Page, e.g., a director
of the company is an Insured while acting within the
proper scope of their official duties and powers with the
company.
Premises and Operations Hazard covers on-premises
accidents and damage to someone elses personal
property.
Productions and Completed Operations covers bodily
injury and property damage caused by commercial goods
off the premises. This doesnt cover the actual damage to
the product.
Completed Operations Coverage covers completed
products. Damages or injuries are covered if the person
was using the product the way its supposed to be used.
Under this coverage, damages to the actual product are
only covered if a contractor was installing it.
Covered Territory might be defined in the policy as the
USA, its territories and possessions, or product coverage
worldwide, etc
Automobile and mobile equipment. Very tricky. For
example, a truck with a drill mounted on the back might
be considered mobile equipment until it is moved. Then it
needs to be on the business auto policy. Vehicles that
need to be licensed to operate may not be mobile
equipment and need to come under your auto policy as
well.
Leased employee. Definitions may vary. Some policies
say an employee includes a leased worker but not a
temporary worker (someone furnished to meet seasonal or
short-term work).
Employee. Whether employees of a company are covered
under a CGL policy depends on the relationship to the
employer, state law and the policy language.
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A contractor was in the process of installing an air conditioning unit
into a home. During the installation, the unit caught fire and caused a
great deal of damage to the living room. Because the contractor was in
the process of installing the unit, Premises and Operations
Coverage covers the damage. If the contractor had finished the
installation, Completed Operations Coverage would cover the
damages. Since a contractor was completing the work, the damaged
air conditioning unit would also be covered.
Damages from Work Done by an Independent

Contractor covers any damages from work done by an
independent contractorallow myself to
introducemyself
Contractual Liability means the insured accepts liability
from another party via contract.

The Great Western Railroad Company has tracks that run through a
small portion of Emmas property. Great Western wants Emma to
assume the liability if anyone is injured on the tracks. If Emma agrees
and a child is hurt on the tracks, Emmas insurance would have to pay
under the Contractual Liability clause.
B. Hold Harmless Provision
Most of the time, businesses dont want to assume someone
elses liability (really no one does now that we think about itwe
sure as heck wouldnt).
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The way around contractual liability is called a Hold Harmless

provision, which is an agreement between the insured and the
other party, stating that the insured cant be held liable. The
Hold Harmless provision can be added to the CGL, though an
insured contract may also be required.
Which brings us to
C. Insured Contracts
An insured contract is an agreement pertaining to the covered
business. This can include a number of types of businesses, but
there are specific kinds of insured contracts that cover particular
situations, such as:
Agreements to Insure a City or Town is an insured

contract that is usually required by the government.
Commercial Contracts means the insured assumes

liability for third-party bodily injuries and property
damage.
Note: Commercial Contracts excludes architects, engineers, and

medical and fire personnel. Like everything else, this could end up on
the test. Weve seen a couple questions relating to Commercial
Contract exclusions.
Easement Agreements means the leaseholder assumes

liability, not the real estate owner.
Note: Easement Agreements excludes construction, demolition, and

railroads.
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Easement or License Agreements of Private Railroad

Crossings is essentially the same as a normal Easement
Agreementthe leaseholder of the private railroad
crossings assumes the liability, not the real estate owner.
Elevator Maintenance Agreements states that the

owner is responsible for any bodily injuries or damages
due to a malfunctioning elevator.
Commercial Premises Lease is the agreement between

the landlord and the tenant.
Sidetrack Agreements refer to the responsibility a

business owner accepts from the use of railroad sidetracks.
A sidetrack is a railroad track that runs alongside
commercial properties.
2. SECTION I -- CGL Coverage Forms

There are 4 possible CGL Coverage forms, including:
1) Coverage A: Bodily injury and property damage liability
2) Coverage B: Personal injury and advertising injury
3) Coverage C: Medical payments
4) Coverage D: Supplementary payments A and B
A. Coverage A Insuring Agreement: Bodily Injury and
Property Damage Liability
Coverage A covers bodily injury and damages that occur while
the insured is conducting his/her business. This coverage applies
whether the injuries happened on or off insured premises.
Coverage A exclusions:
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The use of any kind of vehicle (land, sea, air, space,

mammalian, reptilian), unless specifically noted in the
policy
Contractual liability unless its an insured contract
Any recall of goods, work, or electronic data
Damages to the insureds goods, work, or electronic data
Injuries that are covered by Workers Compensation
Intentional injury
Contractual liability
Pollution liability
Note: Workers compensation is considered a primary coverage, that is,

it takes precedent over other coverages. Youll find that people who
are primarily covered by Workers Compensation are often excluded
from other coverages.
Liquor liability, except for Host Liquor liability
Personal and advertising injury
Pollution
War
B. Coverage B Insuring Agreement: Personal Injury and

Advertising Injury
Coverage B applies when the insured suffers a personal and/or
advertising injury through his/her business. We put together a
rather nifty graph to explain the differences between a personal
injury and an advertising injury.
Nifty Graph
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Personal Injuries include:
Advertising Injuries Include:
False arrest, detention,
Stealing (borrowing) someone
imprisonment, or malicious
elses advertising ideas
prosecution
Wrongful entry or eviction of
Violating a copyright or an
someone on the insureds
advertising slogan
premises
Oral or written material thats
slanderous, or says nasty things
about another persons goods or
services
Violating anothers right of privacy
The following are Personal and Advertising Injury exclusions:
The insured intentionally violating someone elses rights
Any contractual liability
Intentional injuries caused by the insureds advertising,

broadcasting, publishing, and webcasting
Injury due to:

o The insureds criminal acts
o Any violations of contract
o If the insureds goods, products, or advertised services
arent up to snuff
o If the advertised price is wrong
If the insured intentionally gave false information either in

writing or orally
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C. Coverage C Insuring Agreement: Medical Payments

Coverage C covers any medical expenses for bodily injuries
occurring on the premises, no matter who is at fault. All claims
have to happen within coverage territory (US, US territories,
Canada), and filed within 1 year of the actual injury date. Under
Coverage C the insured can have a particular doctor examine the
injured person. Coverage C covers the following necessary
expenses:
Ambulance fees, hospital fees, and funeral services
Medical, surgical, and dental services
First aid
Coverage C excludes:
The named insured
Servants or hired hands
Renters
Anyone covered primarily by Workers Compensation or

disability benefits
Injuries during athletic training or events
D. Coverage D: Supplementary Payments A and B

The insurer has to pay supplementary payments if a claim or
lawsuit is made against the insured. Supplementary payments
are in addition to normal payments, and dont affect policy
coverage. The insurer has the right to investigate, defend, or
settle any claims.
Coverage D includes:
All reasonable expenses
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Lost income up to $100 per day
Bail bonds (up to $250) or any other necessary bonds
Any interest before and after a judgment
CGL Exclusions: The CGL Policy is the first line of defense

against many common claims, but, it does not cover certain losses,
like professional liability, are not covered by CGL because the loss is
not a bodily injury, property damage or advertising injury. Following
are occupations and special forms commonly not insured by CGL;
therefore requiring separate policy coverage . . .
Professional Liability Protects accountants, attorneys, insurance
agents, etc from professional judgments, recommendations and
advice. Not covered by CGL Policies because CGLs do not cover
financial losses for claims outside of bodily injury, property damage,
personal injury and advertising.
Liquor Liability Businesses selling/serving/distributing liquor need a
special policy. An endorsement called Host Liquor Liability may be
available for business who hold open houses or parties where liquor is
served.
Workers Compensation Policies for injuries suffered by employees.
Pollution Claims from toxic damage to an insureds premises or
property
Automobile Business autos are covered by separate Business Auto
coverage.
Care, Custody and Control Refers to damage of property temporarily
in control of an insured.
3. Occurrence Forms versus Claims Made Forms

CGL can be written using 2 kinds of forms:
1) Occurrence Forms focuses on whether or not the injury
occurred during the policy period no matter when the claim
was filed.
2) Claims Made Forms focus on claims made during the policy
period only.
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Sid was severely injured when the tire on his new motorcycle suddenly
fell off. Eighteen months after the accident, he finally filed a claim
against the manufacturer. Fortunately for the manufacturer, they had
CGL coverage under the Occurrence Form at the time of the injury,
even though the policy had expired at the time of the claim.
Back in the day, most policies were written on an Occurrence
form basis. What necessitated the development of the Claims
Made forms was the spike in occupational diseases, that didnt
emerge until decades after the exposure.
From 1900-1980, safety procedures were pretty rudimentary and
people didnt know how toxic certain chemicals or substances were.
People routinely worked with asbestos, lead-based paint, and a
variety of substances we now know to be highly toxic/carcinogenic.
The thing about occupational diseases was they could remain
dormant for several decades. Insurance companies suddenly found
themselves paying huge sums of money for asbestos-related
illnesses that dated back 30 or 40 years.
The Occurrence form offered the client a lot of protection, but
actually made the insurance companies much more vulnerable.
Insurance companies base their policies and rates on complex
calculations regarding potential risk and risk classifications. It
became obvious that Occurrence forms had the potential to cripple
their system of analysis, which would drive insurance rates up for
everyone.
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Insurance companies didnt waver from honoring their commitment

to the victims of industrial carcinogens and asbestos, but it was
clear the insurance companies needed more protection. The Claims
Made form was born.
Note: Claims Made form coverage differs between Coverages A-C.
Coverage A and Coverage B covers a claim made during the policy
period or an Extended Reporting Period (ERPs), but doesnt
cover any occurrences before the retroactive date. If a person files
both Coverage A and B claims, the date of the first claim is
documented. Coverage C covers an injury that occurred during the
policy period, regardless of when the claim is filed.
Note: Retroactive date is defined as the earliest date coverage is
provided by a Claims Made form. Usually, the retroactive date is the
effective date of the first year the policy form was given to the
insured.
4. Extra Protection Through ERPs
Extended Reporting Periods (ERPs or Tails) protect the insured
against gaps in coverage. Businesses have Tail coverage for any
and all future claims.
ERPs differ from the retroactive date, because ERPs not only
provide coverage during the policy period, but they cover any
future claims as well.
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Margarets washer manufacturing business closed its doors after 23

years. She purchased Tail coverage in case a claim was brought
against her in the future, due to any defects in the washers she
manufactured in the past.
A. The Types of ERPs
ERPs include the following:
Basic Extended Reporting Period (Basic Tail) covers

injuries that occur during the policy period and
automatically applies to all ERPs. This includes:
o Mini-tail (60 day Basic Tail) covers claims no more
than 60 days after the policy expires.
o Midi-tail (5 year Basic Tail) covers claims within 5
years that occurred within 60 days after the policy
expired.
Supplemental Extended Reporting Period (Maxi-tail)

covers unlimited claims that occurred within the 60-day
period after the policy expired. Supplemental ERPs can be
added via endorsement.
5. Who is a CGL insured?

The following people/entities are considered to be the insured in
CGLs:
Any person(s) who own a commercial business
Someone using the insureds vehicle (such as the company

car)
Employees on the job
Company lawyers
Real estate managers
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Any new organizations for up to 90 days
6. Limits
Limits refer to the maximum a policy will pay per occurrence or
policy year. No matter how many payments were made the
previous year, the limit starts over again during the next policy
year.
Here are some standard CGL limits:
A. Each Occurrence Limit
This is the maximum paid for bodily injury, medical expenses,
and property damage under Coverages A and C.
B. Damage to Premises You Rent Limit
This is the maximum Coverage A will pay for fire damage to a
rental property the insured is occupying.
C. Medical Expense Limit
This is the maximum paid for injuries under Coverage C.
D. General Aggregate Limit
This is the maximum paid for Coverages A-C per year.
E. Personal and Advertising Injury Limit
This is the maximum paid for Coverage B injuries. Even if the
General Aggregate limit hasnt been exhausted, after this limit is
exhausted, payments stop.
F. Products-Completed Operations Aggregate Limit
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This is the maximum paid for injuries or damages from defective

products. This limit is found under Coverage A.
7. Conditions
The insurer and insured are obligated to follow certain rules and
accomplish certain duties. These are policy conditions that apply to
any future CGL clients.
A. Bankruptcy Condition
This means that even a bankrupt insurer has to defend any
lawsuits or pay any claims.
B. Insureds Duties in the Event of Occurrence, Claim, or Suit
Condition
This means that if the insurer knows there are possible claims or
lawsuits in the insureds future, the insurer has to let the insured
know as soon as possible. Afterwards the insureds duties are:
Cooperate with the insurer regarding any claim or lawsuit
Authorize the insurer to collect any necessary information
Immediately send the insurer any/all legal documents
C. Legal Action Against Us Condition

This means the insured isnt allowed to sue their insurer while
their insurer is providing coverage.
D. Other Insurance Condition
This means if the insured has CGL and other relevant insurance
coverage, both policies will help cover the loss either by using
Contribution by Limits or Contribution by Equal Shares.
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Note: Contribution by Limits means the insurers cover the loss until
applicable policy limits are exhausted. Contribution by Equal Shares
means the insurers cover the loss equally.
E. Premium Audit Condition
This means the insurer determines and adjusts the premiums.
The insured keeps necessary documents to help the insurer
determine the premium amount at the end of a policy cycle.
F. Representations Condition
This means the insured agrees to all the information in the
policys declarations.
G. Separation of Insured/Severability Condition
This means that no matter how many names appear on the
policy, the insurance company treats them as one insured.
Note: If theres a claim, the individuals named on the policy are
treated separately.
H. Transfer of Rights of Recovery Against Others to Us
(Subrogation) Condition
This means the insurance company has the right to collect from
the responsible party after paying any claims.
I. When We Do Not Renew Condition
This means that if the insurer wont renew the policy, the insurer
has to notify the insured within 30 days of the expiration date.
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J. Your Right to Claim and Occurrence Information Condition

This means the insured has the right to receive information
regarding occurrences or claims made against the insured for the
past 3 years. The insured has to request this information within
60 days of the expiration date, or 30 days before terminating
the policy. Afterwards, the insurer will provide the requested
information within 45 days.
The claim history includes:
Records of each occurrence
Summaries of payments made and amounts reserved

under the General Aggregate limits and ProductsCompleted Operations Aggregate limits
8. Owners and Contractors Protective Liability

The Owners and Contractors Protective Liability Policy
protects business owners against any injuries or damage caused by
hired contractors. Coverage is on an Occurrence basis.
Part B: Professional Liability Insurance
1. What is Special Liability/Professional Liability Insurance?
Special Liability/Professional Liability insurance provides
coverage for liability that arises from the insureds, or employees
of the insured, malpractice and errors.
Professional Liability Insurance is extremely important: it pays any
expenses the insured is liable to pay as a result of failing to provide
professional services.
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Note: CGL policies provide coverage for premises and operations, and
specifically excludes professional liability which is coverage for claims
based on professional services fault. CGL covers losses from bodily
injury, property damage, personal injury, or advertising injury that
occur from a companys ordinary activities.
Note: Professional liability coverage defenses differ from CGL
defenses in that they are centered around claims against a companys
professional acts through its directors, officers, past or future
employees, affiliated companies (names) and even independent
contractors under certain situations acting in their capacity . Ordinary
acts by employees are excluded, as are acts of intentional dishonesty,
fraud or those having criminal or malicious intent. Employment
practice liabilities (wrongful termination, harassment, discrimination,
etc) are also excluded as are fiduciary liabilities.
A. Errors and Omissions
Professionals could be liable for damages resulting from the
failure to do a service, or a failure to do the service correctly.
Professionals such as accountants, architects, insurance and real
estate agents, attorneys, and consultants use a form of
Professional Liability insurance called Errors and Omissions
insurance. This coverage protects them if theyre responsible
for any mistakes, or the mistakes of their employees.
B. Malpractice Insurance
Medical professionals such as physicians, nurses, dentists,
physical therapists, and veterinarians carry a Professional
Liability called Malpractice insurance.
C. Directors and Officers (D&O)
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Directors and Officers liability (D&O) Insurance protects

the directors and officers of a company in case theyre sued by
shareholders, creditors, competitors, and/or stockholders.
Know that there are 3 common D&O insuring agreements:
Insuring Agreement A: Directors and Officers Individual Coverage
Insuring Agreement B: Company Indemnification Coverage
Insuring Agreement C: Company Securities Claim liability
The D&O policy provides coverage for claims made against an
insured while acting as a director or officer. This coverage
has protection for:
Exclusions
Misrepresentation
Violation of trust
Other negligent acts
Omissions or acts of negligence
Acts outside their authority
Failure to perform their duties
Misstatements
Wrongful trading
Reimbursement for expenses as a result of a liability
lawsuit filed against them
to coverage include:
Fraud
Willful violation of the law
Improper personal profit
Bodily injury and property damage losses
Disputes with other directors
Prior litigation
Employment Practices Liability (discrimination, sexual harassment,

etc) is a special area of insurance that may require a separate policy
or a special endorsement. As an agent advising your client you need
to know who is not covered and what losses are excluded. Coverage
in this area might involve:
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Claims for monetary relief, e.g., pay each employee $1,000 or nonmonetary relief, e.g., mandatory sexual harassment training; OR
the claim may lead to administrative / regulatory investigation by
the Equal Employment Opporunity Commission, etc.
Claims where an employee secures a pre- or post-judgment interest
(pre= interest from the time it is owed; post=interest form the point
the judgment is awarded) punitive or exemplary damages (above
and beyond actual damages meant to reform or deter future
violations); multiplied damages (normal damages times two or
three) up to the limit of liability.
Claims involving wrongful acts, including death, discrimination,
harassment, wrongful demotion, failure to hire or promote, hostile
work environment, wrongful termination or retaliation.
Claims where bodily injury exclusion includes a carve-out for
emotional distress, defamation, invasion of privacy or humiliation,
i.e., while bodily injury may be excluded from the claim, the insurer
may pay (carve-out) payment for certain issues.
Understand that there is NO exclusion for fraudulent or intentional
acts.
D. Fiduciary Liability
This type of liability covers fiduciariesindividuals in charge of
trust funds or in a position of power over someone elses
finances/investmentsagainst breaches of fiduciary duties, such
as:
Misleading statements
Misstatements
Errors and Omissions
E. Liquor Liability
This type of liability covers insureds that supply, sell, or provide
alcohol. If an inebriated person leaves the premises and causes
bodily injuries or damages, the company that provided the
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alcohol could be held liable. Liquor liability protects restaurant

owners/bar owners/etc. against this possibility.
F. Employment Practices Liability
This is a relatively new type of Professional Liability. It protects
the business against the actions of the employees.
Someone at Junes company keeps leaving pornographic material on
her desk and on her coworkers desks. At first she dismissed it, but
now its becoming impossible to ignore. She and her coworkers decide
to band together and sue the company for creating a hostile work
environment. If the company has Employment Practices liability,
they are covered for the actions of whoever is responsible for the
harassment.
2. Other Professional Liability Policies
In addition to the coverages above, Other Professional Liability
policies might include the following:
Hospital Liability policy
Druggists Liability policy
Completed Operations Insurance policy

If a plumber is negligent while working in someones home, and after
he/she leaves the water heater explodes as a result, any injuries are
covered if the plumber has Completed Operations Liability
insurance.
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Professional Liability Triggers

The occurrence policy coverage trigger is tied to the date of the
event or accident giving rise to the claim. The actual claim may arise
years after the policy expired.
The claims-made policy coverage trigger is the date the insured
first became aware and notified the insurer of a potential claim. The
claim must be made during the policy period, it must be reported to
the insurer during the policy period, it must have happened after a
prior acts or retroactive date and insured must state he had no
knowledge of the claim on the date the policy was purchased. Normal
policies require reporting during the policy period. Reporting
extensions can be granted or endorsed.
Summary
Those in the professional world need coverage thats specific to their
needs. This could include CGL to protect their premises, and
Professional Liability insurance to protect against any litigation arising
from errors. Basically, theres a coverage designed for any possible
professional in any possible situation to afford complete protection.
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Section PC 10
BONDING & CRIME
Objectives
Many business pursuits wouldnt be possible without the use of Bonds.
Well explain how bonding works to guarantee that a professional
obligation is completed, and the insurance companys role in the
process. Youll also learn vital crime definitions and the necessary
coverages that go along with crime insurance.
This unit includes:
General Definitions
Surety Bonds
Crime Insurance
Loss Sustained versus Discovery Forms
1. General Definitions
You probably know all these definitions, but we need to stress
the importance of wording in insurance or legal definitions.
These definitions are formulated very carefully to prevent
misinterpretation or abuse of the systemeven if some of them
seem a little obvious.
A. Burglary
This means illegally removing property after forcefully obtaining
entry to the premises.
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B. Robbery
This means illegally removing property from another person by
threatening and/or using force or violence.
C. Theft
This is a general term for stealing.
Alert!
Weve pointed this out before, but just one more time
Burglary is a person breaking in and stealing from a location.
Robbery is a person stealing from another person using threats or
force.
D. Coverage Trigger
This refers to the event that causes the need for coverage,
therefore, whatever triggers the need for coverage. In Crime
insurance, the 2 main coverage forms depend on the trigger.
The 2 main coverage forms are:
1) Discovery Forms compensate businesses for any loss
discovered during the policy period, no matter when the
loss actually occurred (this is akin to Occurrence forms).
2) Loss Sustained Forms only compensate businesses for
losses that occurred during the policy period (this is akin to
Claims Made forms).
Part A: Bonding
1. Bonding
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Bonding is a special type of protection in which the Surety (party

A) guarantees the performance (Surety Bond) or the honesty
(Fidelity Bond) of the Principal (party B) to the Obligee (party
C). The Surety (party A) will pay the Obligee (party C) if the
Obligee loses money as a result of the poor
performance/dishonesty of the Principal (party B).
A. Surety Bonds
A Surety bond is a contract involving 3 parties. No, not that kind
of partytake off that ridiculous hat and put down that
noisemaker. Sheesh.
The Surety bond is issued by the first party, the Surety, and
that guarantees that a second party, the Principal, will perform
a specific obligation or duty. The Surety pays the third part, the
Obligee, for any losses if the Principal doesnt do a good job or
fulfill his/her obligation.
The surety is a person/company guaranteeing the conduct/quality of a
second party to a third party. If the second party fails to complete the
work, or the work is sub-par, the Surety will pay all related damages.
The Principal fulfills the duty or obligation (sometimes referred to as
an obligor). The Principal has to purchase the bond, in order get the
contract.
The Obligee is the insured. The bond covers damages to the Obligee
if the Principal fails to fulfill his/her obligations.
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B. The Big 3 Cs
The Surety guarantees the Principal using certain criteria, which
well refer to as the big 3 Cs:
1) Character
Does the Principal have a reputation for honesty, fairness,
and a good, sturdy character? Is the Principal the kind of
trustworthy go-getter who will fulfill the obligations
guaranteed by the bond?
2) Capacity
Does the Principal have essential knowledge and
experience to do a good job? Does he/she have a record of
successful projects?
3) Capital
Does the Principals financial statements show stability and
adequate assets?
Note: Principals who cant secure bonds from Sureties may not be able
to obtain the necessary license to do business in a city or county. Nor
will a Principal be able to compete for jobs when a bond is a
prerequisite to submitting a bid. Some examples of common Principals
could include plumbers, electricians, building contractors, etc.
2. Surety Bonds and Insurance Policies
There are a few key differences between Surety bonds and
Insurance policies. Weve put together a totally righteous graph
to outline these differences:
Totally Righteous Graph
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Insurance Policies
Surety Bonds
The insured doesnt have to
The Principal has to reimburse the
reimburse the insurance
Surety if payments have to be made to
company for claim
the Obligee.
payments.
The insurance policy
The surety bond protects the Obligee
protects the Insuredthe
the third party.
second party.
An insured can cancel an
A surety bond cant be canceled until
Insurance policy at any
the obligation or job is fulfilled.
time.
Insurance policies have
The premium for a surety bond is more
premium payments that the
like a service fee, which gives the
Insured pays in exchange
Principal use of that Suretys good
for coverage.
name, credibility, and financial strength.
3. Types of Surety Bonds

The following list gives you an idea of the variety of Surety bonds:
A. Contract Bonds
Contract bonds are used in the construction business to
guarantee that the Principal fulfills the obligation. These bonds
include:
Bid Bonds promise that once the contractor has been

awarded the contract, the contractor will accept that
contract and supply a Performance bond.
Performance Bonds are a promise that the work will be

completed. This is one of the most important contract
bonds since the Surety guarantees the work will be
completed according to contract specifications.
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Payment (Labor and Materials) Bonds guarantee that

the Principal will pay for all labor and materials.
Completion Bonds guarantee that a supplier will furnish

all necessary supplies.
Maintenance Bonds guarantee the correction of all faulty

work or materials.
B. Commercial Surety Bonds

The following bond is an important type of Commercial Surety
bond:
License and Permit Bonds are Occupational bonds that

guarantee that the licensee (the contractor) will pay any
damages and fees if they fail to fulfill their
duties/obligations.
C. Judicial Bonds
Judicial bonds relate to legal proceedings. These bonds are
required by various courts to guarantee that someone will
complete court-related jobs. For example: many times the court
will require that an administrator or executor of an estate post a
bond. This guarantees that the executor will do his/her job of
distributing assets, liquidating assets, and paying taxes with
competence and honesty.
The following are different kinds of Judicial bonds:
Fiduciary Bonds guarantee that someone handling

someone elses legal affairs will act in an honest and
responsible manner. This applies to guardians, trustees,
executors, etc.
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Litigation (Court) Bonds guarantee that the Principal

will pay if he/she loses a lawsuit.
Appeal Bonds guarantee that the Principal will pay if

he/she loses an appeal.
Attachment Bonds guarantee that if the court rules

against the Principal, he/she will pay damages resulting
from a court order that blocks the use/sale of the property.
Cost Bonds guarantee payment of court costs.
Injunction Bonds guarantees payment of damages if an

injunction isnt granted.
Note: An injunction is when a court issues an order prohibiting

someone from some sort of action.
Replevin Bonds are a security given by someone asking the

court for recovery of goods that have been wrongfully taken or
detained. The person will agree to return the goods if so ordered
by the court.
Bail Bonds guarantee a Principals appearance in court.
Note: You really need to memorize the different kinds of bonds and
their function. We recommend giving each bond its own personal
context. For example, to us, Replevin sounds like an evil sorcerer
bent on world domination, so we never forget it. And yes, its entirely
possible that we watch too many movies.
D. Public Official and Miscellaneous Bonds
A state or local treasurer might be required to carry a Public or
Official bond, since they manage public funds. Tax collectors,
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auditors, and sheriffs may also need to post a bond to guarantee

their performance.
4. Fidelity Bonds
Fidelity bonds are more like Insurance than Surety bonds.
Employers buy Fidelity bonds to protect themselves against any
dishonest acts from their employees. The Surety guarantees the
Principals/employees honesty and reimburses the
Obligee/employer for any loss.
Fidelity bonds cover employee dishonesty, such as:
Larceny
Theft
Forgery
Embezzlement
Misappropriation of monies
Financial institutions, such as banks, savings and loans

associations, and credit unions frequently purchase Fidelity bonds,
because so many of their employees have access to valuables.
Note: Business firms and educational institutions generally purchase
Commercial Fidelity bonds instead of Fidelity bonds, because money
and valuables dont play a significant role in the businesss daily
operations.
Part B: Crime Insurance
1. Crime Insurance
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Its natural to go from Fidelity bonds to discussing Crime

insurance. A Fidelity bond covers the losses to a business due
to a dishonest employee, whereas Crime insurance covers
losses to someone outside the business.
Crime insurance covers:
Burglary
Robbery
Theft
Crime insurance can be purchased individually or as part of the

CPP. The insured selects the desired coverages and chooses any
endorsements.
A. Loss Sustained versus Discovery Forms
Loss Sustained and Discovery forms are provisions in Crime
insurance containing their own conditions and exclusions.
For example:
Loss Sustained Forms cover losses that happened during

the policy period. The loss can be discovered either during
the policy period or up to 1 year later. Losses discovered
during the current policy period that occurred in a previous
policy period are also covered.
Discovery Forms cover losses discovered during the

policy period and up to 60 days after the policy expires.
Exclusions: The most important crime insurance exclusion

relates to any losses that occur because the Insured was
dishonest.
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Important: You should know that certain people may not be

covered under the policy, including officers, employees and
independent contractors.
B. Covered Perils
Crime insurance covers the following more common perils:
Theft, Disappearance, and Destruction provides

coverage for loss of money or securities on or off covered
premises due to theft, disappearance, or destruction.
Theft can be perpetrated either by an employee or

someone outside the company. It can occur inside or
outside the business premises. Theft is defined as any act
of stealing and includes:
o Robbery
o Burglary
o Embezzlement
o Forgery
Mysterious Disappearance means property disappears

and no one knows for certain how. Its assumed the
disappearance was the result of theft, but if theft cant be
absolutely determined, its referred to as mysterious
disappearance.
Robbery and Safe Burglary covers personal property on

the premises, and personal property kept in a locked safe
or vault.
C. Coverage D
Robbery and Safe Burglary (Coverage D) insures any losses
a business could sustain. Coverage D consists of several forms
that can be purchased separately, or together, including:
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Robbery of a Custodian covers the losses when a

security guard or janitor is robbed, or the premises are
robbed while the custodian is incapacitated.
Robbery Outside of the Premises covers property

(excluding money) stolen off the premises from an
armored car or a business messenger.
Safe Burglary covers property (excluding money) stolen

from a safe. There have to be signs of forced entry for this
coverage to apply.
Premises Burglary occurs when property is taken from

inside the premises.
Custodian Coverage covers the Insureds partners or

employees if the Insureds property is stolen from them.
Messenger Coverage covers losses if a messenger is

robbed off the premises.
Guard or Watchperson covers any theft or damages to

property in the care of a guard or watchperson.
Computer Fraud covers loss of money or securities when

someone uses a computer to make illegal transfers.
Kidnapping, Ransom, and Extortion covers losses for

ransom demands paid in exchange for people or property.
Forgery covers losses from any alteration of documents.
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Section PC 11
COMMERCIAL AUTO
Objectives
Businesses need liability and physical damage coverage for their
vehicles.
So now were going to focus on the kind of auto insurance
specifically designed for the business world.

This unit includes:
Commercial Auto Policy

Business Auto Policy (BAP)
o Section 1: Covered Autos
o Section 2: Liability
o Section 3: Physical Damage Coverage
o Section 4: Policy Conditions
Garage Coverage Form & Garage Keepers Insurance
Other Commercial Auto
o Truckers Coverage
o Trailer Interchange Insurance
o Motor Carriers Form
General Business Auto Coverage Endorsements
1. The Commercial Auto Policy

The Commercial Auto Policy can be written separately or
included in a Commercial Package Policy (CPP).
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Private or commercial auto?: A commercial vehicle is used for the

transportation of persons for hire, compensation or profit, or for the
transportation of property. Private passenger automobiles are not.
RVs (including those as large as 6 wheels) are generally both
designed as and used as private passenger vehicles, not commercial
vehicles. Once an RV is added to a private auto policy, the existing
coverage of the policy is extended to the RV.
The Commercial Auto Policy is comprised of:
Declarations
Conditions
One of five possible coverage forms:

1) Business Auto
2) Business Auto physical damage
3) Garage
4) Truckers
5) Motor Carrier
Declarations for the selected coverage form
2. Business Auto Policy (BAP)

The Business Auto Policy Form (BAP)
The Business Auto Coverage Form insures private passenger and
commercial autos used by a business. This form is comprised of 4
sections:
1) Covered Autos
2) Liability
3) Physical Damage Coverage
4) Policy Conditions
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A. BAP Section 1. Covered Autos

Here is a quick overview of the kinds of autos youll find in
Section 1:
Owned Auto means any auto owned or acquired while the

policy is in effect.
Hired Auto means any auto the insured hired, rented, or

borrowed. For example, a limo hired to pick important
clients up at the airport would be considered a hired auto.
Non-owned Auto protects the insured for accidents

arising from a vehicle not owned, borrowed, or leased.

Jane uses her own vehicle to drive to the bank to make deposits for
her boss who owns Snappy Auto Repair. One day she has an accident.
The attorney involved sues Jane and Snappy Auto Repair because the
accident happened in the course of her employment. Snappy Auto
Repair is protected under the Non-owned Auto Policy coverage.
Temporary Substitute Auto means an auto the insured

is using while his/her/their primary auto is being repaired
or replaced.
Private Passenger Auto means an auto used specifically

to transport people in connection with the company or
business.
Section 1 uses a numerical system to designate insurable autos.

The insured chooses the kinds of autos he/she/they want to
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insure by putting 1-9 next to the desired coverage. This takes

place on the declarations page.
1-9 Covered Autos

1 Any kind of auto
o Any auto owned, leased, or

borrowed
o Liability only
2 Owned autos
only
3 Owned private
passenger autos
only
4 Owned autos that
o Any auto the insured owns

o Liability and other coverages
o Any private passenger auto the
insured owns
o Any coverage under the BAP form
o Other kinds of autos the insured
are not private
owns: motorcycles, trucks, trailers,
passenger autos
etc.
o Any coverage under the BAP form
5 Owned autos
o 12 states and Puerto Rico have
subject to no-
different varieties of mandatory no-
fault benefits
fault laws: Florida, Michigan, New Jersey, New

York, Pennsylvania, Hawaii, Kansas, Kentucky,
Massachusetts, Minnesota, North Dakota, and Utah
6 Owned autos in
states that
o Most states require uninsured

motorist coverage
require uninsured
motorist
7 Specific autos
o The business may want to cover a

particular car, which would be
specifically listed in the declarations
8 Hired autos only
o This coverage is for any autos
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leased, borrowed, or rented by the

insured.
o Physical Damage and/or Liability
only
9 Non-owned autos
o This coverage is for autos used in

the course of business that are not
leased, borrowed, or rented
o Liability only
B. BAP Section 2. Liability

Section II deals with liability for:
Bodily injury and property damage
Pollution damages caused by a covered auto
What would be an example of pollution damages? Pollution damage
could be caused by a company truck parked by a body of water. If that
truck leaks oil into the water, the company is responsible for pollution
damages.
The liability limits may be split limits. You may have seen split
limits written as such: 50,000/100,000/50,000. This insured
has a liability limit of $50,000 per person, $100,000 per accident,
and $50,000 in property damage.
Split limits are common in Personal Lines Auto Insurance, but
most commercial policies utilize the Combined Single Limit.
Combined Single Limit is the maximum amount the insurance
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company will pay for Bodily Injury and Property damage in any
one accident.
Who is insured ?
The insured
Anyone using a company car with permission
Anyone liable for the conduct of the insured
Who isnt covered?
Someone driving a family members or employees car
Anyone who works in auto-related businesses
Non-employees moving property to or from a covered auto
The people who own the hired or borrowed auto
Important: The fellow employee exclusion in commercial

auto policies means that an insurer does not have to pay for the
losses or injuries of one employee caused by another employee
(e.g., bad driving, falling asleep at the wheel, etc) other than to
pay the statutory minimum liability coverage required by the
State. This liability, say insurers, is more the responsibility of
workers compensation insurance. An fellow employee
endorsement can be added, however, to provide employee
protections not covered by workers compensation.
Who and what else is excluded under 2?
Anyone who hurts themselves intentionally
Anyone who assumes liability under contractual liability
Anyone who has primary coverage through workers

compensation
Damages to property owned by the insured or in the

insureds care
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Damages to property being moved by a mechanical device

that is not attached to a covered auto (e.g. forklifts,
cranes, etc.)
Damages resulting from the operation of mobile equipment

(devices used to raise or lower workers, such as telephone
wire repairmen)
Anything that falls under completed operations
Pollution damages other than covered pollution damages
Any car being used for any kind of racing activity
War
C. BAP Section 3. Physical Damage Coverage
The BAP Section 3 has 3 coverages for losses to the auto or its
equipment:
1) Collision covers any losses to the auto other than those
resulting from collision or the auto flipping over (upset).
2) Comprehensive covers any losses to an auto for reasons
other than flipping over or collision. Including:
o Glass breakage
o Hitting an animal
o Falling objects
o Thrown objects or missiles
3) Specified Cause of Loss (named perils) covers
particular losses that are specific risks for that auto. This
allows the insured to pay a lower premium, because it
covers less perils than comprehensive. Covered perils
include:
o Fire
o Lightening
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o Explosion
o Theft
o Windstorm
o Hail
o Earthquake
o Flood
o Vandalism or Mischief
o Sinking
o Burning
o Collision

Kevin doesnt want to pay a higher premium for more commercial auto
coverage, when all he really needs is protection against vandalism or
mischief. The company car has been vandalized three times in the past
year. Therefore, Kevin is going to opt for Specified Causes of Loss
under his BAP Section 3, so he doesnt have to pay for more
insurance than he thinks he needs.
Coverage Extensions
For private passenger autos there is automatic coverage for:
Temporary Transportation Expenses Due to Theft

provides up to $20 a day up to $600 starting 48 hours
after a covered auto is stolen. This coverage only applies
to an auto covered by comprehensive or theft in
specified causes of loss coverage.
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Towing provides up to whatever limit is specified in the

declarations per disablement. This varies from policy to
policy.
BAP Section 3Physical Damage Exclusions

Like any other policy, the BAP Section 3 has certain
exclusions. These exclusions are:
Sound systems
Wear and tear
Mechanical or electrical breakdown
Freezing
Damage to tires
Autos used in a race
CB radios that are not necessary for the business
Nuclear hazards
War
And finally
D. BAP Section 4. Policy Conditions
The conditions in the BAP Section 4 are similar to other
insurance contract conditions, so you may notice some
repetition. Conditions include:
Settling Claims refers to how the insurer will choose to

settle a claim. Usually this means repairing or replacing. In
the case of theft, it can also mean paying for recovery of
the auto, paying for any damages, or simply replacing the
stolen auto.
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Legal Action Against Us means the insured cant sue the

insurer UNLESS the insured fully complied with all the
terms of the policy and the lawsuit is brought within 2
years of the claim.
Other Insurance means that the BAP form is the primary

coverage for the insureds owned autos.
Two or More Policies From the Same Insurer means

each insurer pays a pro-rata share of the loss.
3. Garage Coverage Form & Garagekeepers Insurance

The Garage Coverage Form covers auto dealers and auto-related
businesses, many of which are usually excluded by other forms of
General Liability insurance. Such businesses could include car
dealers, repair shops, service stations, and public garages. This
form is comprised of 4 sections:
1) Covered Autos
2) Garage Liability Coverage
3) Garagekeepers Coverage
4) Physical Damage Coverage
A. Garage Section 1. Covered Autos
The Garage Section 1 allows the insured to choose what kind
of auto gets what kind of insurancesimilar to the BAP Section
1. The Numerical system is 21-31, with 21-28 identical to 1-8
of the BAP covered autos. So, well only worry about 29-31:
29-31 Covered Autos under Garage
29 Non-owned autos used by the named insured for the named
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insureds garage-related business.

30 Autos that the named insured is in charge of servicing,
storing, repairing, or restoring.
31 Dealers autos and other autos being held for sale.
B. Garage Section 2. Garage Liability Coverage
The Garage Section 2 provides auto and business liability that
could result from:
Ownership, servicing, or use of a covered automobile
General Garage Operations
Note: The definition of garage operations includes use, maintenance,

and ownership. These general operations apply to any business that
has to do with autos: repair, sale, parking, etc.
Who is an Insured under Garage Section 2?
The insured
Employees
Business partners
Shareholders while acting within the scope of professional

duties
Anyone using a covered auto with permission
Anyone using a covered auto while selling, servicing, or

parking the auto
Customers who DO NOT have their own liability insurance
Note: Customers that dont have their own liability are covered by
Garage, but only minimally. The insured can add coverage that
protects customers to the full limits of the policy.
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Any supplementary payments are the same as in the BAP.

Similarly, all the BAP exclusions apply, with a few exclusions
unique to Garage:
Leased autos unless rented to a customer
Defective products
Damage to the insureds products because of defective

products
Watercraft
Aircraft
Financial losses due to the insured not completing

promised repairs
Losses from a recall
Liquor liability
C. Garage Section 3. Garagekeepers Coverage
This coverage is optional, but still a doozey. Well explain: the

garage coverage form excludes liability for any damages to the
property of others while in the care, custody or control of the
insured. So this means that customers are not covered while
they are in the garage being repaired.
The way to add coverage to those vehicles being held for repair
is to add garage keepers coverage. So for most people that
own car-related businesses or perform car-related services, this
coverage is really, really important to have.
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Otherwise, the insured will be paying out of pocket for damages

to their customers cars.
Garage keepers offers the same 3 coverages offered by the
BAP:
1. Comprehensive
2. Collision
3. Specified cause of loss
The insured can also choose coverage between:
Legal liability Covers damage to a customers car when

the insured is legally liable, .e.g., a mechanic damages a
car during a test drive.
Direct damage Covers damage regardless of whether

the insured or customer is at fault.
Garagekeepers exclusions are:
Contractual liability
Theft by the named insured or an employee of the named

insured
Defective parts, products, materials
Sub-par performance by the insured or employees of the

insured
Loss to any equipment other than the auto or equipment

that was installed by the manufacturer, such as:
o Sound systems
o Radar detectors
o XM radio
o CB Radio
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D. Section 4. Physical Damage Coverage

Physical Damage Coverage primarily covers anyone who
holds cars for sale, either dealers or non-dealers.
Physical Damage Coverage does NOT cover customers
automobiles.
Exclusions are similar to the BAP, plus:
False Pretense which means false representation of facts

or circumstances in order to mislead. Basically, any
sneaky, illegal action the insured could take involving cars
trying to make a few extra bucks falls under false
pretense.
An unexpected loss in dealership profits
Collision damage to automobiles being removed from the

point of purchase or distribution if the destination is more
than fifty miles away
4. Other Commercial Auto

The commercial auto policy has to take the type of business into
consideration in order to provide the best possible coverage. Along
those lines, there are many different commercial areas dependent
on automobiles either for sale or transportation.
A. The Truckers Coverage Form
The Truckers Coverage Form is a modified version of the BAP
that covers businesses that specialize in transportation or
hauling for hire. The Truckers Coverage Form is designed to
fit an industry with unique operations and regulations.
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Covered Autos
The numerical system is similar to the one found in the BAP, but
the numbers are different. Dont stress too much about
memorizing the numbers, because its highly unlikely theyll end
up on the exam. The only numbers you may want to keep in
mind with regards to the Truckers Coverage Form, relate to
Trailer Interchange Coverage.
Covered Autos 48-49
48
49
Any trailer the insured has borrowed or leased

Any trailer the insured has accepted liability for
losses under a trailer interchange agreement
Coverage is Comprehensive, Collision, or Specified
Causes of Loss
Any trailer the insured owns or rents while that
trailer is in someone elses custody under a trailer
interchange agreement
The Truckers Coverage Form includes 3 coverages:

1) Liability
2) Physical Damage
3) Trailer Interchange Insurance which means borrowed
or Rented Trailers
The liability and physical damages are similar to the BAP.
The third coverage, however, is unique to the Truckers
Coverage Form.
B. Section 3. Trailer Interchange Insurance
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A lot of times truckers borrow or rent trailers from other trucking

companies. Under a normal BAP, any damages to borrowed
trailers wouldnt be covered. Trailer Interchange Insurance
covers damages or loss to a borrowed or rented trailer if:
The loss results from a covered peril
The trucker accepts liability in a written interchange

agreement
C. Motor Carrier Coverage Form

The Motor Carrier Coverage Form is similar to Truckers
Coverage. Both forms can include people who haul for a living,
but heres where it gets tricky: the main difference between the
Truckers Coverage Form and the Motor Carriers Coverage
Form is a matter of regulation versus contract. The Truckers
Coverage Form refers to the insureds business as a trucker
and to the insureds operating rights. The Motor Carrier
Coverage Form doesnt refer to the business or the operating
rights, focusing on the contractual relationship between the
insured and his/her clients.
Lets try to simplify that: Truckers Coverage protects the
business, whereas Motor Carrier Coverage protects the
contractual relationship between the insured and the clients.
Obviously, theres some natural overlapping between these two
contracts, and its possible for truckers to be insured by both.
D. The Motor Carrier Act of 1980
The Motor Carrier Act of 1980 requires truckers to file proof
of financial responsibility to pay for any third-party BI or
286
property damages. These limits are higher than normal to meet

the states financial responsibility requirements:
$750,000 when transporting nonhazardous materials
$1 million when transporting oil and other hazardous

materials
$5 million when transporting explosives, radioactive

materials, or poisonous gasses
5. General Business Auto Coverage Endorsements

The following endorsements can be added to Commercial Auto
Coverage Forms:
Drive Other Car (DOC) Endorsement extends coverage

to include autos that are not owned, rented, or borrowed
by the insured, while the auto is being used by the person
named in the endorsement. So if theres some chance the
insured or someone connected with the insured is going to
be driving any other car, they can insure that car under
the DOC Endorsement.
Broadened Named Insured Endorsement extends

commercial auto coverage to the insureds immediate
family members. This provides coverage to any family
members who may use a non-owned auto similar to
Personal Auto Policy Coverage.
Changes in Commercial Auto Coverage Endorsement

is a required endorsement that is used with all
Commercial Auto Coverage Forms. It gives the insured
coverage for rented autos. Coverage is limited to $15 per
day with a MAXIMUM of $450.
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Medical Payments Endorsement provides coverage for

the insureds personal medical or funeral expenses, not for
third party expenses (liability). Coverage is limited to
expenses within 3 years from the date of the accident.
There is a single Limit of Liability that applies to all
injured parties involved in one accident.
Uninsured Motorist Endorsement protects the insured if

the insured is involved in an auto accident involving an
uninsured motorist.
Underinsured Motorist Endorsement protects the

insured if the insured is involved in an auto accident, the
other motorist is at fault, and the other motorist does not
have sufficient insurance to cover the insureds medical
and damage expenses.
Additional InsuredLessor Endorsement extends

coverage to leased vehicles.
Mobile Equipment Endorsement extends coverage to

mobile equipment.
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Section PC 12
WORKERS COMPENSATION
EMPLOYERS LIABILITY
Objectives
Injuries during the course of employment do occur, and when they do,
both the injured party and the commercial owner/manager need
protection from potential financial instability.
This unit includes:
The Workers Compensation

Employers Liability
Sections 3-6
The Components of Workers Compensation and Employers
Liability
Federal Regulations and Self-Insurers
Noteworthy Aspects of Californias Workers Compensation
Part A: The Workers Compensation and Employers Liability Contract

1. The Workers Compensation Contract
There are 6 sections to a Workers Compensation and
Employers Liability contract:
1) Workers Compensation
2) Employers Liability
3) Other States Insurance
289
4) Your Duties if Injury Occurs

5) Premiums
6) Conditions
A. Section 1: Workers Compensation Insurance
In California, Workers Compensation coverage is mandatory. In
some states, employers are exempt from this requirement if
they have a minimum number of employees. In California, even
if the employer only has one employee, the employer still has to
provide Workers Compensation benefits.
Workers Compensation reimburses people and their family for
injury, disability, occupational diseases, or death that happens
during employment. Workers Compensation is a trade-off
between employers and employees: the employer will pay for all
work-related injuries, and in return, the employee cant sue.
Prior to the enactment of Workers Compensation laws, a worker
had to sue their employer and prove the employers negligence
to be reimbursed for a work-related injury.
A major landmark that changed all this was the Occupational
Safety and Health Act (OSHA) of 1970. The act helped to
establish minimum standards for safety regulations. The act was
specifically designed to protect workers from unsafe working
conditions.
Now Workers Compensation laws are designed to protect
employees against work-related injuries, including occupational
290
diseases. The laws assume that the cost of most work-related

injuries and occupational diseases are the employers
responsibility, regardless of fault. In turn, the cost is passed on
to the consumer as part of the cost of production.
The benefits in Workers Compensation laws are the only means
employees have to be reimbursed for work-related injuries.
Employees cantafter collecting Workers Compensationsue
their employees for additional compensation. This is referred to
as exclusive remedy.
Workers Compensation covers an employers Absolute Liability.
Absolute Liability means the employer is always liable, no matter
who was at fault. Workers Compensation insurance covers the
injured employee for:
Accidental Bodily Injury
Occupational Diseasesdiseases caused by or made worse

by the job
NOTE: In the insurance world, there are workers

compensation policies sold to employers by agents. In
addition, companies can also establish their own self-funded or
self-insured workers compensation plans for their employees.
The terms aggregate excess and aggregate stop-loss refer to
specially allowed limits on unpredictable losses for self-insured
or self-funded workers compensation plans operated by
employers. THESE FEATURES ARE ONLY FOUND IN SELF-FUNDED
PLANS. As such, it is a misdemeanor for agents to sell, advise
or promote the availability of these features in conventional
workers compensation policies.
291
B. Workers Compensation Benefits

The types of benefits that are provided under Workers
Compensation are:
Medical benefits are provided without limiting the time or

dollar amount for all necessary medical/surgical expenses.
Alert!
There are no limits for Workers Compensation for covered medical
benefits either for time or dollar amount. Physical therapy and
chiropractic services, however, are now limited to 24 treatments per
claim.
Disability benefits are provided for employees whove

suffered work-related disabilities. There is a 3-day
elimination period, and if the disability continues for 14
days, Workers Compensation benefits are then paid. The
benefits are paid retroactively to cover the waiting period
as well. For permanent total or temporary total disabilities,
the maximum weekly benefit is 66 2/3% of the workers
weekly income.
Death benefits include burial expenses and these benefits

provide income for the surviving dependents in 2 possible
ways:
1) Lump Sum Burial Allowancethis method is
determined by the number of dependents and how
financially dependent they were on the deceased.
2) Weekly Income Benefitthe maximum weekly
benefit is 66 2/3% of the deceaseds weekly
income.
292
Supplemental Job Benefitsthis method helps to

rehabilitate or retrain a disabled person to allow them to
return to work as quickly as possible. This could include
paying the expense of altering their lifestyle to incorporate
the disability, or it could include vocational training, which
trains the disabled person for a completely new job.
C. Workers Compensation Endorsements

The following endorsements can be added to Workers
Compensation, so that it can fit circumstances that might
otherwise be excluded from most Workers Compensation
policies:
Voluntary Compensation Endorsementthis

endorsement is for employees who are exempted from
state law. If coverage isnt required, an employer still
might offer this endorsement to avoid any potential
lawsuits.
Longshoremen and Harbor Workers Endorsement

this endorsement covers anyone who loads, unloads,
repairs, or constructs ships. Federal laws provide higher
benefits to workers in this category, so adding this
endorsement to a Workers Compensation policy would
make sure the person is properly covered.
Maritime Coverage Endorsementunder the

Jones/Merchant Marine Act, the crews of ocean-going ships
are allowed to sue their employer if theyre injured on the
job. The Maritime Coverage Endorsement offers more
protection for the employer, by limiting the insurance and
adding more exclusions.
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Foreign Voluntary Compensation Endorsementthis

endorsement extends the coverage from the 8 hour a day,
5-day work-week, to 24-7 coverage. This endorsement
also adds diseases one could pick up in foreign countries,
to the definition of occupational disease. This
endorsement also gives the insured the option to get
Repatriation coverage.
Note: Repatriation coverage would pay the expenses of bringing a

sick/injured person back to their home country. A lot of commercial
airlines wont allow a sick/injured passenger on the flight, which
means that person would have to charter a flight in order to get home.
Repatriation coverage covers those expenses.
D. Workers Compensation Exclusions
The following exclusions apply to Workers Compensation:
Intentional injuries, either self-inflicted, via prank, or

otherwise
Injuries resulting from intoxication
Injuries resulting from the employees failure to use

provided safety equipment
Pain and suffering
E. Workers Compensation Policy Cancellation

The insurer can only cancel a Workers Compensation policy for
the following reasons:
Nonpayment of premium
The insured/policyowner fails to follow the rules and

conditions of the policy
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The insured/policyowner fails to follow state or federal

regulations
There is increased loss exposure
Serious misrepresentation
F. California Workers Compensation Inspection Rating Bureau

A Licensed rating organization and the designated statistical agent
of the CA Insurance Commissioner this organization provides:
(a) Reliable statistics and rating information with respect to
workers' compensation insurance and employer's liability insurance
(b) The collection and tabulation of information and statistics for
the purpose of developing pure premium rates to be submitted to
the commissioner for issuance or approval.
(c) Formulate rules and regulations in connection with pure
premium rates and the administration of classifications and rating
systems.
(d) Inspection of risks for classification or rate purposes and to
furnish to the insurer and upon request of the employer and after
notice to the insurer, to furnish to the employer full information
concerning the rates applicable to the employer's insurance.
(e) Examination of policies, daily reports, endorsements or other
evidences of insurance for the purpose of ascertaining whether they
comply with the provisions of law and to make reasonable rules
governing their submission.
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2. Section 2: Employers Liability

Workers Compensation doesnt cover all job categories, leaving
some employers open to litigationthats where Employers Liability
comes in.
Employers Liability protects the employers when their employees
arent eligible for Workers Compensation. In this instance, the
employer could end up with an expensive lawsuit if the employee
incurs an injury. A minimum amount of $100,000 per accident
applies.
Employers Liability insurance covers damages owed to an employee
under the Dual Capacity Concept. The Dual Capacity Concept
means the employer has liability coverage as both an employer and
a product manufacturer.
A. Common Law Duties
However, even employers who provide Workers Compensation to
their employees can leave themselves open to lawsuits if they
violate any of their Common Law Duties to their employees,
such as:
The employer has to provide a safe workplace.
The employer has to hire competent/trained workers.
The employer has to warn the employees if there are any

dangers or hazards.
The employer has to implement safety procedures.
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Employers Liability protects employers against the possibility

of expensive lawsuits. The following coverage is provided:
Lawsuits brought by injured employees
Lawsuits brought by the family/dependents of injured

employees
Legal defense expenses
Employees who arent eligible for Workers Compensation
Other supplemental benefits
B. Common Law Defenses

If an employer is found to be negligent regarding one of their
Common Law Duties, they can use one of the following Common
Law Defenses to try to prove they arent liable:
Fellow Servant/Employee Rule states that if one of the

injured workers fellow worker directly caused the injury,
then the worker is liable, and not the employer.
Contributory Negligence means if the injured worker

was even a tiny bit responsible for the injury, the employer
cant be held liable.
Assumption of Risk means that the injured worker knew

the rules or the possible dangers, and went ahead and did
it anyway. Therefore, the injured worker is liable for their
own injuries.
Note: Remember, under Strict Liabilityas opposed to Absolute

Liabilitythe employer is automatically liable for any employee
injuries, no matter who was at fault. However, the employer is allowed
to defend themselves and try to prove that they werent liable.
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The following Exclusions apply to Employers Liability:
Contractual Liability
Anything thats covered under Workers Compensation,

Unemployment Compensation, or Disability
If the employer intentionally caused the injuries
If the injury happened outside the boundaries of the US,

US territories, or Canada
If a violation of employment laws caused the damages
Any lawsuits brought by injured employees who were hired

illegally
Work-related injuries to an employee who was knowingly

hired illegally
3. Section 3-6: Other States Insurance and Insureds Duties if

Injury Occurs
A. Other States Insurance (Section 3)
Other States Insurance applies to someone who has transferred
to a new job in a new state. That persons Declaration page
specifies which states their Workers Compensation covers them
in, and Other States Insurance provides temporary coverage in
the new state. The insured has to let the insurer know that the
policy and the premium need to be updated within 30 days.
B. Insureds Duties if Injury Occurs (Section 4)
In the case of an injury, the insured is required to:
Provide immediate medical/first aid required by law
Provide the insurer with the names/addresses of anyone

who was injured, and any witnesses
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Provide notices of any legal action
Cooperate with the insurer to the fullest degree
Allow the insurer to recover payment from a third-party
Not make any payments out of pocket
E. Premiums (Section 5)
Premium determination is based on:
The type of job/job classification
The size of the business
The total payroll
F. Conditions (Section 6)
The following Conditions apply to the Workers Compensation
and Employers Liability Contract:
The insurer has the right to inspect the workplace for

potential risk exposures at any time.
The insureds rights and duties under the contract cant be

transferred unless the insured gives their written consent.
The insured can cancel the policy at any time by giving

written consent to the insurer.
The insurer can cancel the policy after providing written

notice to the insured 10 days in advance.
The first named insured assumes all the policy

responsibilities, such as changes, premiums, and notice of
cancellation.
G. Extra Information
Heres a few facts about Workers Compensation and Employers
Liability insurance thats just good to know:
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The National Council on Compensation Insurance

develops and regulates the rates for work classifications.
Total remuneration (payroll, etc.) is used to determine

premiums because its considered the best way to measure
an employers exposure to risk.
Premiums for work classifications are determined by

multiplying the rate by the total remuneration. An insured
with a good loss record pays less in premiums than an
insured with a poor loss record.
The very first premium is an estimate. The final premium

is determined at the end of the policy term by taking into
account total remuneration, and any other relevant
situations that may have happened during the policy
period.
Retrospective Rating is a plan thats available to

operations with a large premium volume. Its used in
conjunction with the experience rating. It adjusts the
insureds premium after the policy expires, depending on
whether or not there were any losses during the policy
period. This plan is designed to charge a premium that
reflects the actual cost of a specific companys risk, and
the cost of insuring that specific company.
Participation/Dividend Plans are used to provide

dividends to insureds whose losses are lower than
anticipated. As the loss ratio declines and premiums
increase, the dividend amounts increase.
Part B: The Components of Workers Compensation and Employers

Liability
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1. Eligibility
Most jobs are eligible for Workers Compensation.
A. Ineligibility
Its simpler to put it this way: here are the people that
arent eligible for Workers Compensation:
Public sector clerks/deputies who dont receive an

income for their duties
Domestic employees who:

o Earn less than $100 in the past 90 days
o Worked less than 52 hours in the past 90 days
Amateur athletes, or students participating

in sporting events
Volunteer/charity workers working at

locations operated by nonprofit
organizations.
Note: Even if a job category is considered exempt from

Workers Compensation, its still recommended that the
employer carry Employers Liability in case of lawsuits.
B. Ineligible Groups
The following groups are excluded from receiving Workers
Compensation benefits:
Independent contractors and their employees
Captains or seamen on vessels that deal with

interstate or foreign commerce (see the Merchant
Marine Act/Jones Act)
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Someones whose employment isnt in the usual

course and scope of the employers business
Anyone doing something illegallike diamond

smugglers (for example)
2. Definitions
Here are some terms and concepts relevant to Workers
Compensation and Employers Liability:
A. Occupational Disease
An occupational disease is a medical condition someone
gets from their job. For example, people who work with
dangerous chemicals are exposed to potentially lethal
toxins. If they arent properly protected, they can end up
with cancer, and/or other degenerative diseases. Such
diseases would be considered occupational diseases.
Note: The burden of proving an occupational disease is on the
person requesting the benefits.
B. Subsequent/Second Injury Fund (SIF)
The SIF was originally set up after World War 2 to
encourage employers to hire veterans suffering from
permanent disabilities.
The SIF makes 2 types of payments:
1) Payments to injured workers who qualify for lifelong benefits
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2) Reimbursements to insurance carriers whove been

making Workers Compensation payments, but now
the case is being amended or disputed
The SIF is funded by unclaimed death benefits. If
someone dies and they dont have any beneficiaries, that
money goes into the SIF.
C. Exclusive Remedy
This means that Workers Compensation is the only way
someone can be compensated for work-related injuries (if
theyre covered by Workers Compensation, that is). They
cant collect their Workers Compensation payment and
then sue.
The only time a lawsuit could happen is if the injury
and/or work-related death happened because the
employer did something very wrong: either did something
intentionally, or made a major mistake. The term for this
is Gross Negligence.
D. Elimination Period
Workers Compensation doesnt start until someone has
been disabled by a work-related injury for more than 3
days. After the employee has been disabled by the injury
for more than 14 days, they start receiving Workers
Compensation retroactively: that is, they are
compensated for the elimination period.
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E. Filing a Claim
Once an employee or employer files a claim for Workers
Compensation, the administrator has 30 days to respond
to that claim. Within those 30 days, the administrator has
to make contact with the injured party to inform them of
their rights and benefits.
F. Employees First Notice of Injury
After an employee suffers an injury, they have 30 days to
report the injury. This should be done in a couple of
different ways:
1) The employee should give their employer oral or
written notice of the injury ASAP.
2) The employee should go to a physician for an
examination ASAP.
If the employee fails to report the injury within 30 days,
its concluded that the injury is non-work-related, and the
employee is no longer eligible for Workers Compensation
benefits.
Note: If a person waits longer than 30 days to report the injury, they
can still refute the claim or conclusion that their injury is non-workrelated. At that point, however, they have to provide a lot of evidence
that they should still be eligible for Workers Compensation.
G. Claim Payments
After the employer receives the first notice of injury, and
if the injury isnt disputed, payments have to start within
20 days.
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H. Subrogation
Once the insurer pays a Workers Compensation claim, the
insurer can go after the responsible party for recovery of
payment.
Note: Youve run into subrogation before. Just dont be surprised if it
crops up in a few Workers Compensation questions.
J. Work-Related versus Non-Work-Related
Work-Related injuries are injuries that happen while the
employee is:
Working on the premises
Taking a scheduled break
In transit between job sites
Non-Work-Related injuries are injuries that happen while

the employee is:
Not working
Loafing around
Driving to and from work
3. Styles
Workers Compensation is always either:
Compulsory/Mandatory, meaning its required by law
Elective, meaning the company can choose whether or

not to have Workers Compensation coverage
A. Types of Workers Compensation Coverage
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There are 3 ways an employer can obtain Workers

Compensation coverage:
1) Obtain Workers Compensation from a private
company
2) Obtain Workers Compensation from a state fund
Note: The California State Compensation Insurance Fund, which is
also referred to as the State Fund, is an insurer run by the
state. The state fund competes with private insurers within the
insurance marketplace, for Workers Compensation business.
Sometimes, if someone cant obtain Workers Compensation
insurance through private sources, theyll go to the state fund
as a last resort. Despite that, the state fund is still considered
competitive with the private insurers.
Workers compensation
through the State Fund can be purchased direct or through an

agent/broker that has an established business relationship
with State Fund.
3) Self-insurance
4. Benefit Categories
There are specific rules about how much an injured party
will get and for what kind of situation. There are 4 benefit
categories that Workers Compensation covers:
1) Total Disability means the employeedue to workrelated injury or diseasewill never be able to return
to their normal job.
2) Temporary Partial Disability means the employee can do
most of their usual duties because the injury isnt that
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serious. Compensation pays the difference between the

employees pre-injury and post-injury wages.
3) Permanent Partial Disability means the injuries dont
result in an inability to do the work, but the injuries
arent temporary. This includes loss of hearing, sight,
or a limb.
4) Temporary Total Disability means the injured person cant
work at all for a limited period of time. Lost wages are
paid on a scheduled basis.
Part C: Federal Regulations and Self-Insurers
1. Federal Workers Compensation Laws
The following laws are significant because theyve either
changed or affected Workers Compensation and
Employers Liability:
A. Federal Employers Liability Act (FELA) [45 USC 51-60]
FELA protects employees of interstate railroads.
The act allows injured railway workers to sue their
employers for negligence, and employers arent allowed
to use certain Common Law Defenses. In fact, the
Supreme Court ruled that applying Common Law Defenses
to situations involving injured railway workers was an act
of judicial hostility.
Contributory Negligence was completely abandoned in
favor of Comparative Negligence, meaning the
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percentages of fault are taken into account when

assessing damages.
FELA also made it difficult for railway employers to claim
the Fellow Servant/Employee Rule, because railway work
was considered so inherently dangerous. If the railway
employed incompetent people, or had people working
dangerously long shifts, the railway was ultimately
responsible for any resultant injuries.
Even though the law was passed in 1908, railroad
employees still favor the law over Workers Compensation
benefits, because the benefits offered under FELA are
substantially better.
B. US Longshore and Harbor Workers Compensation Act [33 USC
904]
This act covers employees who build, repair, load or
unload vessels. The US Longshore and Harbor Workers
Compensation Act provides better protection to injured
workers than state law.
If an employer is eligible for the US Longshore and Harbor
Workers Compensation, the employer can add an
endorsement to the state Workers Compensation policy to
comply with federal law.
C. The Merchant Marine Act/Jones Act [46 USC 688]
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The Merchant Marine Act/Jones Act protects captains and

crews of ocean-going ships.
This act allows an injured seaman to sue their employer
for damages and to have a jury trial. The injured worker is
also entitled to the following benefits:
Wages
Transportation
Maintenance
Cure
This is very similar to normal Workers Compensation

benefits, except with the Merchant Marine/Jones Act
there arent any caps put on maximum wage loss.
Insurance can be obtained by attaching a Maritime
Coverage endorsement to the Employers Liability
coverage.
2. Self-Insurers
Sometimes with Workers Compensation, companies
decide to insure themselves instead of going through an
insurance company. The company decides it would rather
retain the risk than pay premiums.
In order to be self-insured, the company has to get
permission from the state. In order to get permission, the
company has to:
Prove its financially capable of retaining the risk
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Adopt required safety features and procedures
A. The Necessary Elements of Self-Insurance

For self-insurance to be a possible option, these 2
elements have to be present:
1) The exposures have to be large enough for accurate
loss prediction
2) Losses have to be pre-funded, based on that
prediction
B. Stop-Gap Insurance
Sometimes a company will also have to purchase StopGap insurance if theyre going to be self-insured. StopGap insurance covers any losses that are above what the
company can handle. This keeps the company from being
crippled by any catastrophic losses.
3. Noteworthy Aspects of California Workers Compensation
There are several significant aspects to the California
code regarding Workers Compensation, that you should
know:
A. Twenty-Four Hour Coverage
This coverage combines Workers Compensation with
Health insurance to cut back on the administrative costs
and paperwork required for an employer to have two
separate policies. Twenty-Four Hour coverage has been
around since 1995, but the insurance industry is still
working out the kinks: there have been some problems
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with overlapping coverages and coordinating deductibles,

copayments, etc.
B. The California Open Rating System
January 1, 1995, the Workers Compensation market was
deregulated in California. This means that insurers can
determine their own premium rates as long as they notify
the California Department of Insurance.
C. Experience Modification Rating System
This means an insurer could raise or lower Workers
Compensation premiums based on a companys loss
experience. If the company has more losses, their
premiums may go up. If a company has less losses that
are less than what was predicted for the year, their
premiums will go down.
D. Misrepresenting Payroll Amounts
If an employer misrepresents their payroll, it means the
premium amount has been incorrect for however long the
Workers Compensation has been in effect. The penalty for
this could be up to 10 x the difference between the lower
premium and the correct premium.
Exclusions: Workers compensation coverage does not cover
federal workers compensation or employer liability issues
related to legislation such as the Jones Act, USL&H and the
Defense Base Act. For the most part, these laws require
employers to provide liability protection for employees in nontraditional workplaces like the open sea or overseas (see
Chapter 6).
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Summary
Workers Compensation and Employers Liability is very significant.
Work-related injuries are so common, and people need the financial
protection to keep an injury from destabilizing the finances of an
employees family or a company. This insurance is designed to protect
anyone who is at all affected by the commercial world (employers,
employees, dependents)and thats just about everybody.
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Section PC 13
HOMEOWNERS INSURANCE
VALUATION
Objectives
Agents selling homeowners insurance in California must take
specific 3-Hour training (Homeowners Insurance Valuation)
BEFORE soliciting ANY homeowner insurance business. This
training was deemed necessary after the recent fires in California
found many homeowners grossly underinsured. The Department
of Insurance, now requires that agents have an understanding of
home values in order to better help clients establish reasonable
replacement cost coverage. This unit gives you some of the
general concepts in homeowner insurance valuation, including:
Introduction to Homeowners Valuation

AB 2022
Homeowner vs Dwelling Policies & Coverages
Concepts of Property Valuation
Californias Residential Property Disclosure Form
Loss Mitigation
Property Valuation Tools
INTRODUCTION
A home often represents the largest investment its owner will ever
make. Its contents include the most important possessions of its
residents. Within these two reasons alone is enough motivation for
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most people to purchase insurance to protect their home and property.

Add to these motivating factors that most mortgage arrangements
require some form of homeowners coverage and the result is that
homeowners insurance is one of the most common forms of insurance
purchased.
In assisting applicants and insureds in this decision, agents are
charged with advising on the type and limits of this insurance
coverage. One of the most controversial elements in this coverage in
recent years has been replacement cost endorsements. The term
itself may have led to many consumers believing they were fully
covered when, in fact, the values of their home have been
underinsured.
This was demonstrated during one of Californias worst fire seasons . .
. between 2007 and 2008 . . . where nearly one million people were
forced to evacuate their homes. Approximately 1,500 homes were
destroyed statewide. Many were grossly underinsured. In fact, a
Marshall & Swift/Boeckhs 2008 survey reported that 64 percent of
U.S. homes are undervalued for insurance purposes, with the average
homeowner having enough insurance to rebuild only about 81 percent
of his dwelling. For most families, this is a major problem.
A Word On Underinsurance In California & AB 2022

The sheer volume of underinsured homes after the California fires has
led to the crafting and passage of AB 2022 . . . effective 7/1/11 . . .
which revises the California Residential Property Disclosure Form
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(see sample language below), making it more accurate and easier for
consumers to read and understand their coverage by laying out a
checklist of major variables in their policy as well as improved and
more responsive claims handling practices. Applicants and insureds
choose from among actual cash value, replacement cost and
guaranteed replacement cost forms of coverage.
Agents or insurers
must indicate on the disclosure form which category of coverage the

applicant or insured has selected or purchased.
AB 2022 also simplified and revised the California Residential

Property Insurance Bill of Rights (see sample language below)
which explains the legal rights a consumer has when a loss has
occurred.
The law mandates that the Disclosure and Bill of Rights be sent out
with every newly-issued residential property insurance policy and on
an every-other-year basis upon renewal. The goal of both this new
legislation is to reduce underinsurance by providing consumers reliable
estimates of what it might cost to completely rebuild a destroyed
home. Until now, such estimates were previously unregulated.
AB 2022 also requires:
All California resident fire and casualty broker-agents and personal
lines broker-agents who have not already done so to satisfactorily
complete one, three-hour training course on homeowners insurance
valuation (this course) prior to estimating the replacement value of
structures in connection with, or explaining the various levels of
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coverage under a homeowners insurance policy. Agents need to

take this course on or before 6/30/11 before discussing (soliciting)
dwelling fire or homeowners insurance.
Insurers, agents and brokers that provide replacement cost
estimates to applicants and insureds must document who created
the estimate and the sources or methods used to calculate the
replacement cost estimate. Note: CCR 2695.183 does not require
agents to conduct their own replacement cost estimates. A
company provided system or outside sources like appraisers can be
utilized to satisfy the replacement cost requirement.
All replacement cost estimates communicated to applicants or
insureds be complete, based upon specifically enumerated
standards.
Records must be kept on the name, job title, address, phone and
license number, if applicable, of the person providing the estimate of
replacement cost or construction costs or the source of the
estimate, e.g., an online replacement cost calculator, contractors
estimate, appraisal, etc.
Agents who provide the estimate of replacement cost must give the
insured a copy at the time the policy limit is set and maintain
records of this estimate for the entire term of the insurance policy
PLUS five years thereafter. Any changes or updates to the
replacement cost estimate must be provided to the applicant or
insured within 60 days from the time it is generated. If an estimate
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was made but a policy never issued, estimate records must be kept
for three years. (CCR 2695.182)
Replacement cost estimates MUST NOT include a cost associated
with demand surge . . . where the construction costs can
dramatically increase after a major catastrophe. Agents should
disclose to potential insureds that this demand cost has not been
and legally cannot be taken into account in the estimate of
replacement cost (CCR 2695.183). Agents can, however, apprise
customers that additional coverage may be obtained to protect for
this contingency (extended guaranteed replacement cost).
Licensees who provide estimates of replacement cost or rely on
estimates of others in regard to a recommended homeowner
insurance policy MUST be sure the estimate includes all expenses
that would reasonable by incurred to rebuild the insured structure in
its entirety, including, but not limited to (CCR 2695.183):
Type of foundation
Type of frame
Roofing materials and type of roof
Siding materials and type of siding
Whether structure is on a slope
Geographic location of property
Number of stories
Materials used in, and types of, interior features and finishes
Cost of demolition and debris removal
Architects plans
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Age of structure
Higher costs associated with replacing a single home versus
multiple dwellings
The replacement estimate should not:
Be based on resale value of the land or the outstanding balance
of any loan
Include a deduction for physical depreciation
An agent that provides an applicant or insured a copy of a
replacement cost estimate that does not meet the above standards
shall explain exactly what elements above it does not address and
why.
When an insurer requires an agent utilize a specific source or tool to
create an estimate of replacement cost or construction costs the
following must be followed:
9 The insurer shall prescribe procedures to be followed when they
use the source or tool
9 The insurer will provide the agent training to properly use the
tools or source
9 The insurer and not the agent will be responsible for any
noncompliance
Many of these issues are discussed in greater detail throughout this

course.
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Underinsurance and Agents / Insurers

In a perfect world, every replacement cost estimate you do will be
accurate and result in all your insureds being fully covered in a major
disaster. Of course, this doesnt always happen.
What happens if your estimate is wrong and, more specifically, the
homeowner is found to be underinsured in a major loss?
Before AB 2022, the general rule was that an insured is responsible for
the establishment of their policy limit and an insurance agent or broker
did not have a duty to volunteer that an insured should procure
additional or different insurance coverage (Fitzpatrick v. Hayes, (1997)
57 Cal.App.4th 916 [67 Cal.Rptr.2d 445].)
Exceptions to this rule evolved over time:
Jones v. Grewe (1987)
In Jones, the court determined that an insurance agent could not be
held liable for failing to obtain sufficient limits on a third-party liability
policy. The Jones court reasoned that an agent could not accurately
forecast the upper limit of liability insurance that the insured would
need and further noted that extending liability to agents for not
obtaining sufficient liability limits would effectively transform the agent
into an excess insurer.
Free v. Republic Insurance Co (1992)
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In this case, the insured asked his broker whether the policy limits
would be sufficient to cover his home in the event of a total fire loss,
and the broker represented that he was fully insured to value. When
the insured was determined to be underinsured after a loss, the broker
was held liable. In so ruling, the Free court made a distinction between
misrepresentations about limits on first-party property coverage as
opposed to misrepresentations on third-party liability coverage as was
involved in Jones. The Free court reasoned that in a first-party setting,
an agent or broker can objectively determine the amount of coverage
necessary to replace a dwelling after a total loss which was the basis it
distinguished itself from Jones, which as stated above dealt with third
party liability limits.
Desai v. Farmers (1996)
Here, the insured advised his agent that he wanted 100 percent
coverage for his dwelling in the event of a total loss. However, the
policy that was delivered to the insured only provided for coverage up
to $150,000, and there was no Guaranteed Replacement Cost benefit.
After the Northridge Earthquake, the cost to repair the insured
dwelling was $546,757. The Court held that the agent could be held
liable because the agent negligently represented that the policy in
fact provided the 100 percent replacement cost coverage that
[plaintiff] demanded ... This is not a failure to recommend more
coverage case; it is a failure to deliver the agreed-upon coverage
case (Id. at 1119 (Emphasis added).)
Fitzpatrick v. Hayes (1997)
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In this case, the court analyzed the history of authorities dealing with
liability of agents and brokers for under-insurance as reflected, among
other cases, in Jones, Free, and Desai. The Fitzpatrick case then
summarized and set forth the three recognized exceptions under
California law to the general rule of no liability of agents and brokers
for under-insurance as follows: As a general proposition, an insurance
agent does not have a duty to volunteer to an insured that the latter
should procure additional or different insurance coverage.The rule
changes, however, when - but only when - one of the following three
things happens:
a) The agent misrepresents the nature, extent or scope of the
coverage being offered or provided;
b) There is a request or inquiry by the insured for a particular type
or extent of coverage; or
c) The agent assumes an additional duty by either express
agreement or by holding himself out as having expertise in a
given field of insurance being sought by the insured.
Agents & Home Values In The Real World . . .

In all of these cases, the focus was generally on whether the agent
represented to the insured that the limits were sufficient; whether
the insured specifically asked about the sufficiency of the limits;
and/or whether the insured requested that he/she be fully covered and
protected, etc.
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So the issue is not whether the agent guaranteed that the estimate
was sufficient, but rather, whether through interaction with the insured
the agent misrepresented the adequacy of the limits or failed to deliver
upon the full protection requested. There are also cases where the
insured never spoke with the agent or broker about the policy limits.
Because, in some cases, insureds blindly rely upon the agent to set
sufficient limits without ever questioning or discussing it. Here, an
attorney might attempt to prove the insured relied on the agent or
perhaps the agent held himself out to be an expert in homeowners
insurance.
What about new computer programs and tools to estimate value?
They may help protect the agent / insurer because they are reliable
third party sources, but if the homeowner still asks will it provide full
protection and the agent affirms adequate coverage, liability
continues with the agent / insurer under Fitzpatrick even where the
agent never guaranteed that the limit would be sufficient and that
any proposal they made about the policy limit was just an estimate.
Plaintiff attorneys will also likely attempt to poke holes in the quality of
the valuation tools (estimates way off track, faulty calculations, etc) or
use agent language that praised the tools as accurate or backed by
millions of dollars of research to pursue an underinsurance claim.
There could also be language in the actual policy that implicates
liability of the insurer. Here is one such example:
The limit of liability shown on the Policy Declarations for Coverage A
Dwelling Protection will be revised at each policy anniversary to reflect
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the rate of change in the replacement cost of your dwelling as

identified in the Policy Declarations.
This carrier has contractually obligated itself to increase the policy limit
to keep pace with the rate of change in the replacement cost of the
dwelling. This could be yet another basis for liability in an underinsurance case.
Everett v. State Farm (2008)
In a reversal of many of the above cases, in Everett the court held that
the homeowner, rather than the property insurer, had the duty to
maintain insurance policy limits equal to replacement costs. In
reaching this conclusion, the court relied on the current version of the
residential property disclosure which places the burden of determining
whether a higher policy limit is needed on the homeowner.
The passage of AB 2022, however, appears to effectively nullify
Everett.
Pending new litigation, it looks like the liability ball is back
in the agent-insurer court. Agents / insurers must determine

replacement cost value.
HOMEOWNERS VS. DWELLING POLICIES
To understand how new valuation rules apply, we need to differentiate
between homeowner and dwelling policies.
Under California Insurance Law (10087) a policy of residential
property insurance (homeowners policy) shall mean a policy
insuring individually owned residential structures of not more
than four dwelling units, individually owned condominium units, or
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individually owned mobilehomes, and their contents, located in this

state and used exclusively for residential purposes or a tenant's policy
insuring personal contents of a residential unit located in this state.
A policy of residential property insurance, as defined, shall not include
insurance for real property or its contents if used for any commercial,
industrial or business purpose, except a structure of not more than
four dwelling units rented for individual residential purposes. A policy
that does not include any of the perils insured against in a standard
fire policy shall not be included in the definition of "policy of residential
property insurance."
Dwelling policies differ from homeowners in that they typically do
not cover liability, medical payments or contents. They are designed
for a residence owned by an insured that he or she does not occupy.
HOMEOWNERS VS. DWELLING COVERAGE
Homeowners Coverage
Homeowners need protection from 3 major risks:
4) Damage or destruction to the house
5) Damage or destruction to personal property
6) Liability (and any lawsuits)
Homeowner policies (HOPs) are designed to protect a person or family
against the 3 above risks. Whether an insured owns or rents a home,
a HOP provides valuable and necessary protection.
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Most insurance companies offer Homeowners Package Policies that

provide coverage for all the risks. Besides combining coverages for the
dwelling, personal property, and personal liability, the HOPs also
include fire, theft, and vandalism, along with other extended and
additional coverages.
HOPs cover any and all common problems associated with owning or
renting a home. The HOP is also more complete and convenient than
the dwelling policy (DP), which is why Homeowners Package Policies
are more popular. The coverage definitions and policy contract terms
are similar between the HOP and the DP.
Not only do HOPs offer one-stop shopping coverages, the packages
are often priced more competitively than the DPs. In order to protect
competitive pricing, insurance companies look for clients who are
better-than-average risks, e.g., clients who show pride of ownership
and live in preferred dwellings.
A client must meet the following eligibility guidelines for an HOP:
The house has to be occupied by the owner with a maximum of 2family units (remember the DP allows up to 4-family units)
The home has to be inspected to make sure heating, plumbing, and
electrical systems meet state codes, and are installed properly.
The owner has to be checked for his/her loss historythe number
and type of insurance claims he/she has filed in the past.
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Property is inspected for Pride of Ownershipis the house in good

condition? Is the house well-constructed? Is the landscape wellkept? Are there any uninsurable risks on the premises?
The house is a residential property, and is never used for
commercial purposes.
Dwelling Coverage
Dwelling insurance is used more frequently for landlord (tenant)
properties and homes that dont qualify for standard or preferred
homeowners insurance policies.
Dwelling policies are similar to homeowners policies. Both provide
property insurance for:
Residential dwellings and contents
Appurtenant structures/other structures on covered premises
Loss or damage to the dwelling
Eligible and/or ideal Dwelling policy properties are:
Rental properties (1-4 units or apartments)
Older and/or lower-valued homes
Homes with minor cosmetic problems
Homes with a market value thats below replacement cost
Customers with credit and/or loss problems
Dwellings under construction, vacation homes, or rentals
Permanent mobile homesa mobile home that isnt on wheels
Offices, studios, or storage facilities
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Under certain circumstances, an insured could prefer a Dwelling policy

(DP) over a Homeowners policy (HOP). Such as:
The property is vacant
The insured isnt living in the dwelling, but could be renting it
Up to five roomers or boarders occupy the dwelling
The dwelling is rated poor to good based on condition, value, and
age
The insured is required to only carry coverage protecting the
dwelling
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BASIC CONCEPTS OF PROPERTY VALUATION

Loss Settlement Provisions & Underinsurance
Loss settlement provisions in homeowner policies define the
method that will be used to determine the amount of money the
insured will receive for a claim.
Usually this provision stipulates that claims will be paid on an actual
cash value (ACV) or replacement basis. This provision also determines
how claims will be paid per item, per loss, e.g., items A, B, and C are
all covered on an ACV basis, but items X, Y, and Z are covered on a
replacement basis.
Here is how a typically replacement cost loss settlement provision
might read:
If, at the time of loss, the amount of insurance in this policy on the
damaged building is 80% or more of the full replacement cost of the
building immediately before the loss, we will pay the cost to repair or
replace, after application of any deductible and without deduction for
depreciation, but not more than the least of the following amounts:
1) The limit of liability under this policy that applies to the building;
2) The replacement cost of that part of the building damaged with
material of like kind and quality and for like use; or
3) The necessary amount actually spent to repair or replace the
damaged building.
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How Do Loss Settlement Provisions Apply?

In the homeowners form, the loss settlement provision cited above is
used specifically to determine whether the insured gets full
replacement cost (RC) for the loss. If the proper amount of coverage is
carried, the insured gets a full RC settlement up to policy limits. If
coverage is not sufficient, the policy provision goes on to state that the
insured will either receive a proportionate amount of the RC or the full
ACV, whichever is greater.
Unlike commercial "coinsurance," the HO program has no "penalty."
The insured, assuming adequate limits to cover the amount of loss,
always gets a minimum of the full ACV, with a maximum of full RC.
So our question above is not about penalties, but simply whether the
insured can expect a full RC settlement of his "other structure" loss (or
losses). Let's take the policy language exactly as written and walk
through a possible scenario.
The insured has $300,000 of Coverage A. He has three "other
structures" covered by his policy: a $27,000 detached garage, a
$5,000 gazebo and a $20,000 swimming pool. (There are a myriad of
other possibilities, such as mailboxes, satellite dishes and kid's
playground equipment, but we don't want to get bogged down in a
debate over whether some consider those Coverage C instead of
Coverage B.)
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If the garage is damaged by a covered peril, how should the policy loss
settlement provision be applied?
The key wording is "If, at the time of loss, the amount of insurance in
this policy on the damaged building is 80% or more of the full
replacement cost of the building immediately before the loss...".
Assuming that "building" is to be read, for Coverage B purposes, as
"structure", the clear language states that the limits of insurance are
to be applied to the specific structure (singular) damaged. So the
question becomes, "Is $30,000 (the coverage B limit provided by
$300,000 Coverage A) at least 80% of the value of the garage? Yes, it
is. The insured gets a full RC settlement for the garage damage.
Since no policy language states or implies that for purposes of the
settlement clause the values of all the other structures must be added
together to calculate the compliance with the 80% provision, the clear
language must be taken as is. The amount of insurance available on
the damaged structure is the route to take.
Does it make a difference whether multiple "other structures" were
damaged? Although it can be argued that the situation would then be
less clear, we don't think so. The policy language appears to allow the
settlement provision to be applied similar to a "separation of insureds"
clause-to each damaged structure as if the others didn't exist. So if all
three other structures in our example were damaged, the insured
could argue that each is in full compliance with the loss settlement
provision, since the $30,000 Coverage B limit is more than adequate
to meet the 80% test for each structure.
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If such an analysis seems overly generous to the insured, keep two

things in mind: First, we aren't arguing coverage, only whether the
insured gets an RC settlement or ACV for a covered claim. Second, as
in the "separation of insureds," this doesn't increase the carrier's
liability. It is still limited to a total of $30,000, no matter how many
damaged structures the insured adds to the claim.
Does it make any difference if the insured increases Coverage B, either
in blanket fashion or by specific coverage for certain structures by
endorsement?
Barring specific language in the endorsements
modifying the basic policy loss settlement provision, no. Adjust each
structure separately and let the RC limits fall where they may.
Underinsurance and Settlements
The obvious result of underinsuring a home is the inability to replace
it. At actual cash value, the homeowner receives less when
depreciation is factored. Even if the homeowner purchased
replacement cost coverage, all may not be well at settlement time. As
we discussed above, replacement cost policies typically contain a coinsurance clause. The coinsurance clause may require a homeowner
to insure the property in question for at least 80% of its replacement
cost. Replacement costs can fluctuate over the course of an insurance
policy. So, for a $300,000 home, one would be required to carry at
least $240,000 in coverage for the dwelling.
If a homeowner insured his home for only $150,000 because thats all
he owed on the mortgage, and suffered a total loss, he would incur a
financial penalty for having it underinsured. The penalty usually
consists of having to cover a certain percentage of the underinsured
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potion of the home value. However, the settlement it is never less

than actual cash value. This clause protects the insurance company
from issuing replacement cost policies where the home is insured for
much less than it would cost to rebuild.
Some insurers offer an endorsement (extra addition) to their
homeowners insurance policy that add an additional 25% to 50%
replacement cost coverage in the event its necessary. This is often
referred to as extended replacement cost. Applied to the case
above, the $300,000 home would qualify for an additional $75,000 in
replacement cost coverage if one chose the 25% extended coverage.
So if it costs $350,000 to rebuild this home exactly the way it was, this
homeowner would be covered. Of course, this option costs a little
more.
Actual Cash Value vs. Replacement Cost Value
The terms replacement cost and actual cash value (ACV), are loss
valuation methods insurance companies use to determine how much
money they will pay out in the event of a covered cause of loss (claim)
after any deductible is applied.
NOTE: Replacement cost for a home and for the contents of your
home are two different policy endorsements. If one wants personal
items to be replaced at their cost to purchase new, he must request
that separately.
The best way to discuss replacement cost and actual cash value is by a
settlement example. Lets say the cost to build a home is $400,000.
Unfortunately, it burns down as a result of an electrical fire caused by
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a clothes dryer. How the homeowner is reimbursed differs by the loss

settlement method he agreed to and paid for:
Actual Cash Value Settlement
If the homeowner purchased ACV coverage, he (and the lender if he
had a mortgage) would be paid the actual cash value of the home at
the time of the loss. ACV is calculated as the replacement cost of the
home minus depreciation. Depreciation is the loss in value of a piece
of property over time.
$400,000 replacement cost $100,000 in depreciation =
$300,000 ACV
He would receive a check for $300,000. Of course, the lender gets
their share of the money first. You can easily see how the homeowner
would not receive enough money to rebuild his $400,000 home. In
fact, hed be exactly $100,000 (how much his home depreciated since
its purchase) short. This is not a good position to be in.
Likewise, if the ACV was $300,000, and he owed $350,000 on the
mortgage, he would be stuck with a $50,000 bill owed to the lender.
This is why mortgage lenders often require replacement cost coverage
on a mortgaged home.
A home typically costs quite a bit more to rebuild than it did when one
originally purchased or built it. Likewise, homes are often built in large
numbers in certain developments, which drives down the construction
costs. So, having to rebuild only one home is likely to cost more. For
this and other reasons, homeowners purchase a replacement cost
policy.
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Replacement Cost Value Settlement

Had the above homeowner purchased replacement cost coverage, he
would receive the entire $400,000 in the event his home burned down.
The depreciated value of the home is not a factor in the settlement
received from your insurer.
California Residential Disclosure
The new disclosure form, drafted in plain and simple language,
improves the current form and makes understandable the differences
in residential insurance coverages available to California insurance
consumers. The changes, however, are much more than stylistic.
Residential Property Insurance Disclosure Statements

Starting in July 1993, every residential property insurance policy must
provide the insured a copy of the California Residential Property
Insurance Disclosure Statement and a California residential Property
Insurance Bill of Rights. In July 2011, AB 2022 modified these forms
to reflect new homeowner insurance valuation requirements. It is
important to note that these disclosure forms must accompany policies
you deliver to your clients.
The regulations establish standards for accurate replacement cost

estimating, broker agent training on replacement cost estimating, and
new record keeping requirements. The Proposed Regulations place the
burden of accurately estimating replacement value of a home squarely
with the insurer and agent. The new disclosure form, the first step
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towards this regulatory reform, removes critical language found in the

current disclosure form that obligates the consumer to determine and
maintain the proper policy limits on their home.
PART 1
California Residential Property Disclosure Form . . . Effective
July 1, 2011
Effective July 1, 2011, insurance companies must use the new
disclosure form. The new form eliminates legalese and presents the
different coverage levels in a reader friendly manner. The new form
calls specific attention to the fact that actual cash value coverage is
the most limited level of coverage listed, while guaranteed
replacement cost coverage is the broadest level of coverage.
The
new coverage definitions are as follows:

ACTUAL CASH VALUE COVERAGE pays the costs to repair the
damaged dwelling minus a deduction for physical depreciation. If

the dwelling is completely destroyed, this coverage pays the fair
market value of the dwelling at the time of loss. In either case,
coverage only pays for costs up to the limits specified in your
policy.
REPLACEMENT COST COVERAGE is intended to provide for the
cost to repair or replace the damaged or destroyed dwelling,

without a deduction for physical depreciation. Many policies pay
only the dwellings actual cash value until the insured has
actually begun or completed repairs or reconstruction on the
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dwelling. Coverage only pays for replacement costs up to the

limits specified in your policy.
EXTENDED REPLACEMENT COST COVERAGE is intended to
provide for the cost to repair or replace the damaged or

destroyed dwelling without a deduction for physical
depreciation. Many policies pay only the dwellings actual cash
value until the insured has actually begun or completed repairs or
reconstruction on the dwelling. Extended Replacement Cost
provides additional coverage above the dwelling limits up to a
stated percentage or specific dollar amount. See your policy for
the additional coverage that applies.
GUARANTEED REPLACEMENT COST COVERAGE covers the
full cost to repair or replace the damaged or destroyed dwelling

for a covered peril regardless of the dwelling limits shown on the
policy declarations page.
BUILDING CODE UPGRADE COVERAGE, also called Ordinance
and Law coverage, is an important option that covers additional

costs to repair or replace a dwelling to comply with the building
codes and zoning laws in effect at the time of loss or
rebuilding. These costs may otherwise be excluded by your
policy. Meeting current building code requirements can add
significant costs to rebuilding your home. Refer to your policy or
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endorsement for the specific coverage provided and coverage

limits that apply.
The new disclosure form also removes the following statements from
the replacement cost coverage definitions in the current disclosure
form:
To be eligible for [this coverage], you must insure the dwelling to its
full replacement cost at the time the policy is issued, with possible
periodic increases in the amount of coverage to adjust for inflation and
increases in building costs; you must permit inspections of the
dwelling by the insurance company; and you must notify the insurance
company about any alterations that increase the value of the insured
dwelling by a certain amount (see your policy for that amount).
To be eligible to recover this benefit, you must insure the dwelling to
[company shall denote percentage] [ ] percent of its replacement cost
at the time of loss.
The agent or insurer shall indicate on the disclosure form which
category of coverage the applicant or insured as selected or purchased
(CIC 10102).
California Residential Property Insurance Bill of Rights . . .
Effective 7/1/11
The revised bill of rights that must accompany the new disclosure form
eliminates the first 16 lines of the current disclosure form. The omitted
lines include statements concerning the applicants/policyholders
burden to determine and maintain proper policy limits such as: Take
time to determine the cost to rebuild or replace your property in
todays market. Once the policy is in force, contact your agent or
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insurance company immediately if you believe your policy limits may

be inadequate.
Depreciation and Claims
As previously discussed, actual cash value is replacement cost less
depreciation. The entity responsible for determining the depreciation
is ultimately the insurance company. They decide the amount of
depreciation and will subtract that amount from the cost to repair the
property. The rate will stand as they decide unless a homeowner
challenges their calculations . . . some do.
The way these rates are determined is through published depreciation
tables. These tables list the useful life and depreciation of a wide
variety of properties. Such depreciation tables can be accessed
through most insurers and may even be found online. More often than
not, home insurance adjusters, and their claims departments, have
computer software that has the insurance depreciation tables factored
in. Such software makes figuring depreciation very easy and almost
error free. The insurance adjuster simply fills in the type of property,
its condition and its age and the software figures the depreciation
automatically.
California Claims
California law is very specific on the handling of dwelling claims:
California Insurance Code 2051.5
Under an open policy that requires payment of the replacement cost
for a loss, the measure of indemnity is the amount that it would cost
the insured to repair, rebuild, or replace the thing lost or injured,
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without a deduction for physical depreciation, or the policy limit,

whichever is less.
If the policy requires the insured to repair, rebuild,
or replace the damaged property in order to collect the full

replacement cost, the insurer shall pay the actual cash value of the
damaged property, as defined in Section 2051, until the damaged
property is repaired, rebuilt, or replaced. Once the property is
repaired, rebuilt, or replaced, the insurer shall pay the difference
between the actual cash value payment made and the full replacement
cost reasonably paid to replace the damaged property, up to the limits
stated in the policy.
The process of retaining a portion of the claim until work is down is
called depreciation holdback. It is a fairly standard practice in
replacement cost policies. The concept is relatively simple: Policies
obligate insurers and they are liable for such costs until repair or
replacement had been completed. To be sure this is done, the insurer
will holdback an amount until repairs are made. The amount held
back is typically the difference between actual cash value and the
replacement cost. In essence, they holdback the amount of the
depreciation, thus it is called the depreciation holdback. Homeowners
are often frustrated in learning this as they are now charged with the
task of completing repairs without the full amount needed to make
them. However, most contractors understand the holdback concept
and will work with homeowners to finish repairs and wait for their full
payment until the homeowner has received the holdback amount.
Again, the values we are discussing with regard to claim valuations is
replacement cost and actual cash value not market value. The market
value of a property may be completely different than replacement cost
or ACV.
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LOSS MITIGATION
Loss mitigation is the process of reducing insurance claims before they
happen. This can be accomplished in a number of ways as you will
learn below.
Insurance Agents & Loss Mitigation

Insurance agents practice loss mitigation when they provide tips to
their clients on ways to avoid claims. It is important to know,
however, that an agent must never use language or strategies
designed to talk a client out of filing a claim, .e.g, if you file a claim
your rates will increase or you will be cancelled. Under the law,
insureds must be free to file claims at will.
Loss of life, property, and resources due to California Wildland Urban

Interface (WUI) land fires can be reduced if planners, developers, fire
agencies, and homeowners work together to define, enforce, and
maintain reasonable fire safety standards. Reducing or removing fire
hazards in the WUI requires an assessment of potential risks,
programs and standards for fire safety, and fuel management. These
three sets of activities may be conducted at national, state, local or
individual levels.
Risk and Hazards
Despite the availability of programs and options for reducing hazards,
there are many barriers to fire mitigation. Even in areas prone to
wildfires, many residents prefer to wait for the event to occur and then
respond, rather than take precautions to minimize risk. WUI residents
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may even deny that a wildfire is likely to occur or discount its potential
impact. Some people feel that WUI fires are inherently uncontrollable
and the resulting damage is essentially random, resulting in little
support for investments in firefighting infrastructure and steps to
safeguard their properties. If a home is destroyed, insurance spreads
the costs among a large group of people, encouraging continued
residence in high-risk areas. Several insurance companies are
beginning to withdraw coverage if high risk factors are not corrected.
It is unfortunate that actually experiencing a wildfire may be the only
modifier of risky behavior.
Some of the more widely know risks include:
Topography
Hills, brush, wetlands, rocks and more inhibit the ability of fire
responders and rescue. These are the same issues that make
properties difficult to maintain and escalate replacement costs.
Fuel Management
Fuel management modifies the hazard posed by vegetation and
structures by:
Reducing the available fuel (dead and living) in broad areas using
prescribed fire or other methods .
Creating defensible space by converting the vegetation to a lessflammable type and distribution that is less hazardous
Fuel reduction techniques are used to decrease hazardous fuels
(i.e., flammable vegetation). Fuel management is especially critical in
forest ecosystems located adjacent to residential areas because of the
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increased risks to people and property, enhanced resource values, and

the increased difficulty of fire control and suppression. Fuel
modifications may be broadcast across large areas, applied to small
selected lots, or designed as strips of various widths to impede fire
spread into a developed area such as:
Prescribed burning is the careful application of fire to achieve
land management goals. Fire is a natural component of most
ecosystems that encourages the growth of some native plants and
enhances wildlife habitat in addition to reducing accumulated
fuels. Prescribed fire can usually be completed at comparatively
low-cost. Disadvantages to using prescribed fire include smoke
management and public health issues, limitations on the number
of acres that can feasibly be burned each year, the necessity for
repeat treatments as vegetation grows back, and the risk of fire
escapes. Smoke problems from a prescribed burn in the wildland
urban interface are minimized by burning during favorable,
daytime, smoke dispersal conditions.
Herbicides have longer lasting effects on the vegetation than
other methods, and they may be the only treatment for invasive
exotic species. Herbicides do not modify the soil structure, nor do
they enhance the regeneration of most fire dependent organisms
unless chemical treatments are combined with prescribed burning.
Herbicides do not reduce dead biomass accumulations; in fact,
they temporarily increase dead fuels and the potential fire danger
for one to three years. Herbicides have comparatively moderate
costs and generally low public acceptance.
Mechanical fuel treatments such as mowing, disking, roller
chopping, and hand removal are generally risk free, have a high
level of public acceptance, and are the only methods that modify
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or disturb soil, if that is needed. Disadvantages to using

mechanical treatments include the necessity of repeat treatments,
moderate to high costs, limitations on wet sites and steep slopes,
follow-up burning is often required, and personal safety concerns
associated with the use of hand tools such as machetes and
chainsaws.
Defensible Space
Defensible space is the area of modified vegetation between
wildland fuels and structures that can reduce the intensity of fires
close to structures, provide firefighters the chance to stop a wildfire
quickly and efficiently, and reduce a structure fire when firefighting
personnel and equipment are not immediately available to help.
Homeowners need to take proactive, preventative actions to reduce
the wildfire risk to their property by modifying structures and creating
a defensible space. Materials for roofing, siding, decks, and vents,
plant selection, landscape design, and maintenance are the most
critical elements for a fire-safe home. Defensible space can be a 30foot clearing with tree islands or a greenbelt surrounding a planned
community. A study in Florida showed that structures with less than
10 feet of brush clearance were 60% more likely to burn during a
wildfire than homes with at least 30 feet of cleared brush. Homes with
non-flammable roof coverings (asphalt shingles, metal, tile) that are
surrounded by 30 to 60 feet of modified vegetation are over 85%
more likely to survive a wildfire than homes with flammable roofs and
no vegetative clearance. Defensible space can include firewise plants
and native species that are low in flammability.
Firewise plants have a high moisture content in the leaves and
branches, broad and thick leaves, open and loose branching patterns,
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deciduousness, low amounts of dead materials, and low amounts of

resin. Some less flammable plants are dogwood, viburnum, redbud,
sycamore, magnolia, oaks, red maple, wild azalea, sweetgum, winged
elm, black cherry, persimmon, wild plum, and ferns. Fire-prone plants
to avoid near structures are junipers, young pine trees, cedars,
palmetto, wax myrtle, rhododedendron, mountain laurel, tall
ornamental grasses and yaupon holly. Landscaping tips for mitigating
fire hazard and creating defensible space include:
Space plants carefully - use shrub islands or patches of perennials
rather than continuous beds or plantings.

Prune plants regularly - thin trees so branches do not touch each
other.
Remove all ladder fuels - trim lower branches up to 10 feet on tall
trees, remove vines from trees and keep shrubbery away from
pine trees so a fire in surface fuels cannot climb up these ladder
fuels to the treetops.
Remove dead leaves and other litter from around trees, shrubs
and vines, and from a 3-5 foot strip next to the structure.
Provide the landscape with sufficient moisture when fires are
imminent
Fire resistant construction tips

Structural modifications to improve fire resistance include:
Metal, asphalt shingle, or tile roof
Balconies and decks constructed of materials approved for 1-hour
fire resistance in accordance with the American Society of Testing

Materials Standard E 119
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Attic vents, soffit vents, foundation openings and other such
openings covered with 1/8" mesh noncombustible corrosionresistant metal screen

Street address clearly posted on the main street
Dual or triple pane thermal or tempered glass windows and glass
doors, or fireproof shutters for windows

Sprinkler systems installed on roof or around eaves.
Multiple Analysis Approach

In any fire mitigation program it is important to mention that there is
more than one tool in the tool box. A complete fire protection plan
recognizes all of the elements above to reduce fire hazards in high risk
areas. Where available, replacement cost coverage in such areas is
very desirable and should include options for Ordinance and law and
additional living expenses (ALE). In very remote areas where the time
to reconstruct could linger beyond normal, it might be wise for
applicants or insureds to extend ALE beyond 12 months.
PROPERTY VALUATION TOOLS
Whether you use long established companies like Marshal Swift, or
newer companies like 360Value, there are many competent sources of
proprietary valuation tools available to agents.
Cost estimates from these companies are determined by daily research
on material and labor costs needed to rebuild a particular structure,
down to the screws and nails (according to company brochures),
and/or analysis of damage repair estimates for claims. Most are
component-based property replacement estimates meaning they break
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results down to the integral parts of construction such as foundation,

framing, appliance, trim, finishes and more.
Replacement costs can be estimated during quoting and underwriting,
updated for renewals, and recalculated periodically. Estimates can be
calculated through the web-based user interface or desktop reference
books.
Nearly all localize costs down to zip code level.
Appraisals
The cost of using an appraiser to determine replacement cost coverage
for an applicant or insured may be more costly than using an online
service, however it is allowable as long as the appraiser uses the
component approach illustrated above and in compliance with
2695.183.
Insurance Company Valuation Software
More likely than not, most agents will be using software or valuation
systems made available by their main carriers. As stated above, when
an insurer requires an agent utilize a specific source or tool to create
an estimate of replacement cost or construction costs the following
must be followed:
The insurer shall prescribe procedures to be followed when they

use the source or tool
The insurer will provide the agent training to properly use the
tools or source
The insurer and not the agent will be responsible for any
noncompliance
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In addition, this software must use the component approach detailed

in 2685.183 above.
Contractor / Expert Opinion
Local and knowledgeable contractors are great sources of replacement
cost as they are in the trenches rebuilding and repairing houses on a
daily basis. As good as they are, it is unlikely they will provide an
agent detailed component bids on an ongoing basis for free or less
than the cost of online software.
Cost Per Square Foot
For years, the insurance industry has relied on cost per square foot
estimates to value the replacement cost of homes. It is determined by
using known construction costs and dividing by the homes square
footage. However, there are too many factors such as demolition,
building codes, quality of construction and more that limit the cost per
square foot estimate as a back-up or second opinion course. Further,
using a cost per square foot does not comply with the component
requirement that all replacement cost estimates must pass.
Insureds Opinion
When the law placed the responsibility of establishing a replacement
vale on the homeowner, his opinion was as good as any. However,
this has changed with AB 2022. Most insureds do not have a realistic
grasp on construction costs to reasonable estimate the cost to
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reconstruct an entire home. Further, they are more likely to confuse

replacement cost with market value which, depending on current
times, could be below the actual cost to replace the same home. An
insureds opinion is just that . . . an opinion. It cannot be used by the
agent to estimate replacement cost.
Custom Home Elements
Given the trend in the renovation of older homes and the popularity of
upscale homes, replacement cost valuation methods need to adapt to
special elements of custom home replacement in the event of a loss.
This can mean replacement cost valuation of such things as:
Full dimensional lumber, original wood flooring, lath and plaster
walls and ceilings, heavy rafters and sheathing, stone foundations,
extensive use of solid wood trim and doors, crown moldings, etc.
Impacts of requiring updating to building codes, environmental
issues, such as lead paint, asbestos and fire code upgrades which
have to be
remediated
(particularly older homes).
Demolition and debris removal costs.

Higher average skilled labor costs in a rebuilding project.
These more accurate valuation estimates account for rebuilding an
exact replica of the home, including original materials. Replacement
cost contracts require this unless the insured is willing to accept
commonly used materials (or if the insured doesnt know he has
modified replacement cost on his policy).
Accurately generating replacement cost is a important step to take
when closing on a house or reviewing homeowners coverage. It is
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particularly important to the owners of pre-1940 houses and custom

homes.
Location and Construction Type
Homes built in housing tracts by merchant builders and homes built in
suburban (but not remote) areas tend to cost less than custom homes
built in well-developed metropolitan areas. Exclusive locations behind
guarded gates and subject to association architectural rules require
more planning and costs as well.
Construction costs are higher in some states than in others. Most
valuation programs or systems account for this using an index that
compares costs in nationwide. This index considers all the major
construction cost variables, including labor, material, equipment,
climate, building codes, likely job conditions and markup. Many are
sensitive down to a given zip code.
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Section PC 14
REPLACEMENT COST COVERAGE
Objectives
Since it is impossible to predict today the exact cost to replace a home
or commercial building, it is important to have sufficient coverage to
replace it. This value can differ significantly from market value.
The
market value of real estate is the amount the buyer would pay for real
estate regardless of how much it cost to build. Replacement cost is
the rebuilding cost necessary to repair or replace the entire home.
Replacement cost insurance is extremely important coverage for which
we dedicate this section. Following are the topics we will cover:
Types of Replacement Cost Coverage
Determining Value
Market Value vs. Replacement Cost
Functional Replacment Cost
Replacement Cost Among Different Structures
TYPES OF REPLACEMENT COST COVERAGE

REPLACEMENT COST COVERAGE is intended to provide for the
cost to repair or replace the damaged or destroyed dwelling,
without a deduction for physical depreciation. Many policies
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pay only the dwellings actual cash value until the insured has
actually begun or completed repairs or reconstruction on the
dwelling. Coverage only pays for replacement costs up to the limits
specified in the policy.
EXTENDED REPLACEMENT COST COVERAGE is intended to
provide for the cost to repair or replace the damaged or destroyed
dwelling without a deduction for physical depreciation. Many
policies pay only the dwellings actual cash value until the insured
has actually begun or completed repairs or reconstruction on the
dwelling. Extended Replacement Cost provides additional
coverage above the dwelling limits up to a stated percentage
or specific dollar amount.
GUARANTEED REPLACEMENT COST COVERAGE covers the full
cost to repair or replace the damaged or destroyed dwelling for a
covered peril regardless of the dwelling limits shown on the policy
declarations page.
Replacement Cost Exclusions
The biggest exclusion possible in a replacement cost policy is
underinsurance. An improper valuation could leave a family with less
than needed to rebuild or replace their home. Other than that,
replacement cost coverage under many policies may limit or not
include the cost of removing the debris of the original building and
demolishing whatever is left of it. This can be very expensive and
time-consuming especially if any environmental issues exist such as
lead, asbestos, chemicals, etc.
Replacement cost coverage may also not include:
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An allowance for architectural or engineering fees.

Permits that may be required
Additional costs for tenant improvements, offices, additional wiring,
air conditioning, etc
General Contractor's overhead and profit.
Financing costs such as interest and fees.
Mortgage payments while the home is being repaired.
There may have been a change in building codes that do not allow the
building to be rebuilt the way it was.
In the event of a total loss of an insured structure, no California policy
may contain a provision that limits or denies payment of the
replacement cost in the event the insured decides to rebuild or
replace the property at a location other than the insured
premises. However, the measure of indemnity shall be based upon
the replacement cost of the insured property and shall not be based
upon the cost to repair, rebuild, or replace at a location other than the
insured premises. In essence, the cost to rebuild at another location
may be significantly more. The added costs would not be covered.
Building Ordinance
Ordinance and Law coverage, is an important option that covers
additional costs to repair or replace a dwelling to comply with the
building codes and zoning laws in effect at the time of loss or
rebuilding. These costs are otherwise excluded by most
policies. Meeting current building code requirements can add
significant costs to rebuilding a home.
Appurtenant Structures
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Structures on your property that are not attached to the house are
considered other structures, and are usually covered for an
amount of up to 10% of the dwelling coverage on the policy. If that
amount is insufficient, once can increase Other Structures Coverage
to cover things like in-ground pools, workshops, storage buildings,
garages, etc.
Above-ground pools are considered personal
property, and not an Other Structure.

Extended or Guaranteed Replacement Cost
Guaranteed replacement cost coverage pays for the full cost of
replacing or repairing a damaged or destroyed home, even if it is
above the policy limit.
Extended replacement cost coverage pays a certain amount above
the policy limit to replace a damaged home, generally 120 or 125
percent. It is similar to a guaranteed replacement cost policy, which
has no percentage limits. Most homeowner policy limits track inflation
in building costs. Guaranteed and extended replacement cost policies
are designed to protect the policyholder after a major disaster when
the high demand for building contractors and materials can push up
the normal cost of reconstruction.
Full Risk Misuse
Agents need to know that it is considered a misuse to rely on
replacement cost to insure a clients full risk. The exclusions cited
above are evidence that not everything is covered in a replacement
cost endorsement.
METHODOLOGY OF DETERMINING VALUE
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Agents have several options to determine replacement cost values for

applicants or insureds. However you determine value, keep in mind
your responsibilities:
Agents who provide the estimate of replacement cost must give the
insured a copy at the time the policy limit is set and maintain
records of this estimate for the entire term of the insurance policy
PLUS five years thereafter. Any changes or updates to the
replacement cost estimate must be provided to the applicant or
insured within 60 days from the time it is generated. If an estimate
was made but a policy never issued, estimate records must be kept
for three years. (CCR 2695.182)
Replacement cost estimates MUST NOT include a cost associated
with demand surge . . . where the construction costs can
dramatically increase after a major catastrophe. Agents should
disclose to potential insureds that this cost has not been and legally
cannot be taken into account in the estimate of replacement cost.
(CCR 2695.183). Agents can, however, apprise customers that
additional coverage may be obtained to protect for this contingency.
Licensees who provide estimates of replacement cost or rely on
estimates of others in regard to a recommended homeowner
insurance policy MUST be sure the estimate includes all expenses
that would reasonable by incurred to rebuild the insured structure in
its entirety, including, but not limited to (CCR 2695.183):
Type of foundation
Type of frame
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Number of stories
Materials used in, and types of, interior features and

finishes
Architects plans
Age of structure
Higher costs associated with replacing a single home

versus multiple dwellings
Be based on resale value of the land or the

outstanding balance of any loan
An agent that provides an applicant or insured a copy of a

replacement cost estimate that does not meet the above standards
shall explain exactly what elements above it does not address.
When an insurer requires an agent utilize a specific source or tool to
create an estimate of replacement cost or construction costs the
following must be followed:
9 The insurer shall prescribe procedures to be followed when
they use the source or tool
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9 The insurer will provide the agent training to properly use the
tools or source
9 The insurer and not the agent will be responsible for any
noncompliance
A Word on Estimates
The intent of any cost valuation program is to maintain a high level of
accuracy, recognizing that costs are subject to change. A good system
will use the following to accomplish this:
Collect data on a regular basis.
Collect wage rates . . . union and non-union.
Follow thousands of line items of construction, including productivity
rates and crew sizes to install each of them.

Take into account regulations, debris removal stipulations and
license fees for all municipalities.

Study reconstruction/replacement cost data from past claims to
more closely reflect the cost insurers pay when a loss occurs.
Consider local cost concerns such as building code requirements,
hillside foundation costs, architect fees, and variables for older

structures.
Conduct extensive quality control analyses to validate real cost
activity from claim settlements, both partial and total.

Some of the following evaluators may do this, some do not. Keep in
mind, however, that a software provider, appraiser, builder or
contractor who provides an accurate estimate of what it might cost to
rebuild the structure is basing their cost estimators on current codes.
Building codes have the potential to change rapidly and not all
jurisdictions apply the same rules of what constitutes major damage.
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Structures built more than three to five years ago, for example, are
most likely deficient in some aspect of the applicable building code. Of
course, Ordinance or Law Coverage is designed to financially address
these deficiencies and can pay the additional costs and loss of income
resulting from the application of ANY ordinance or law affecting the
reconstruction of the covered structure.
Then too, another possible claim scenario involves multiple causes of
loss where some perils are covered by the underlying property policy
and some portion of the loss is excluded from the coverage. The best
and most recent example is the combination of wind and flood
damage. In combined-loss situations such as this, the Ordinance or
Law Coverage will pay pro-rata based on the percentage of damaged
caused by each peril. So, if the wind causes 40% of the damage and
the flood the other 60%, the Ordinance or Law coverage will pay only
40% of the loss in all three coverage parts.
Lastly, with the time value of money and improvements in construction
methods and materials, using old estimators and adjusting them to
current values will not provide an accurate estimate.
MARKET VALUE VS. REPLACEMENT COST
Many people confuse market value and replacement cost. Insurers
do not use a homes market value as a loss valuation method.
The terms have different meanings when it comes to insurance. For
example, a home may have a replacement cost of $400,000, an ACV
of $300,000 due to depreciation, but due to a lagging economy for
instance, a market value of only $250,000.
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Market value fluctuates and is not a number that can be calculated

using a mathematical formula or by calculating the costs of labor and
materials to rebuild. The market value of a home changes at the whim
of who would be willing to buy it for a certain price at any given point
in time.
REPLACEMENT COST AMONG DIFFERENT STRUCTURES
Another element of confusion among insureds is the type of structure
and its affect on replacement cost. Lets look at two different but
similar sized houses:
One is a fine tract home built in 2004 and the other is a 2 1/2 story
federalist style brick home built in 1860 in a historic district of town.
Both have a market value that is roughly the same, but the
construction techniques are very different.
The tract home has 2800 SF and a combo of vinyl and stone facing on
the exterior. Common asphalt roof, poured concrete basement, framed
with 2X4, 2X6, engineered floor trusses and manufactured roof
framing. Steel exterior doors and wood/vinyl windows. Interior is
plywood sub-floors with carpet, ceramic tile, vinyl sheet tiling, and
engineered wood flooring, walls are drywall. Interior doors are hollow
core 6 panel with basic oak baseboard and door trim. The kitchen has
standard appliances, granite tile counter tops and semi-custom
cabinets. It also includes a
pre-fabricated
gas fireplace with
manufactured mantel and surround, a modern furnace &
HVAC.
A very
nice home in a upscale neighborhood, it has a market value around

$400,000. Good quality all around, but nothing unusual in the
construction materials. Almost everything in the house can be
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purchased or ordered at Lowes and any competent handyman or

construction crew can repair the house.
The 1860 house at 2200 SF has original antique brick exterior with a
slate roof. The basement walls are field stone and mortar; at some
point the original basement floor has been replaced with poured
concrete. The framing is full dimensional lumber with original
hardwood floors. Original solid wood exterior doors, original wood
windows some leaded decorative windows. Solid wood interior doors,
antique oak trim, including hardwood stairs, handrails, chair rails,
crown molding (man youd think the stuff grew on trees). Original
brick fireplaces (four of them) and original gas lights (refitted for
electric). Modern kitchen and cabinetry, upgraded plumbing, electric &
HVAC.
A historic home in a upscale historic neighborhood, market value
also $400,000. All materials in home need to be repaired since

replacement is difficult. To find existing or matching trim, material
needs to be salvaged or recreated from antique material. Handymen
are usually not up to the job, craftsmen with a specialty in older
construction are needed and they dont work cheap.
Functional Replacement Cost

Some policies specify loss settlement terms as functional replacement
cost, wherein the insurer would cover the loss at replacement cost to
build an old Victorian home using the most new or modern day
techniques and materials. This usually results in a lower cost to the
insurer. A homeowner with a fully restored home, however, may not
be pleased.
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Realistically, the cost to recreate outdated construction techniques

from the 19th century, when the home was originally built, could be
staggering and not a good deal for the insurance to pay $700,000 of
insurance coverage for a home thats only really worth $400,000.
Additional coverage, however, may be available for homeowners
wanting original quality replacement.
So what would replacement cost be on both houses? On the newer

house, a percentage of the retail value comes from the price of land in
a trendy of the neighborhood. Using an industry calculator, the
replacement cost for the house might range from $290,000 to
$360,000 depending on features inside the house. This would suggest
the land value of the lot is around $75,000.
Using the same calculator on the older house, replacement cost would
range from $650,000 to $750,000. The price of the house is dictated
more by the market demand for this type of house and less by the
value of the land and reconstruction costs. Yet at a real estate closing
table, both parties want to see the same replacement cost on their
insurance policy. In fact, even after a extensive explanation of historic
house replacement, the owner of the 1860s house would probably
insist on a lower replacement cost to keep his homeowners premium
down.
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Section PC 15
CONSTRUCTION & VALUES
Objectives
Property and Casualty Agents deal with real estate on a daily basis. To
understand the coverage you recommend, it is also important you
understand the types of construction and how different construction
affects value. In other words, you must help clients determine value in
order to know how much to insure their property.
Following are the topics covered in this section:
Types of Building Construction
How Components of Property Affect Value
TYPES OF BUILDING CONSTRUCTION

According to the International Building Code, there are five major
types of residential construction. They are listed below based on fire
rating. Most homes in California today fall in the Type V category, that
being wood frame.
TYPE I (Fire Resistive) - This concrete and steel structure,
called fire resistive when first built at the turn of the century, is
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supposed to confine a fire by its construction. This type of construction

in which the building elements are of noncombustible materials such
as concrete and steel. The roof is also of noncombustible material such
as concrete or steel .
TYPE II (Non-Combustible) - This type building has steel or
concrete walls, floors and structural framework similar to a type
I construction however, the roof covering material is combustible.
The roof covering of a type II building can be a layer of asphalt water
proofing, with a combustible felt paper covering. Another layer of
asphalt may be mopped over the felt paper.
TYPE III (Ordinary) - This type of constructed building is also called
a brick and joist structure by some. It has masonry bearing walls
but the floors, structural framework and roof are made of wood or
other combustible material. For example; a concrete block building
with wood roof and floor trusses.
TYPE IV (Heavy Timber) - These buildings have masonry walls like
Type III buildings but the interior wood consists of heavy timbers.
In a heavy-timber building a wood column cannot be less than eight
inches thick in any dimension and a wood girder cannot be less than
six inches thick. The floor and roof are plank board. One difference
between a heavy timber type IV building and type III construction is
that a heavy-timber type IV building does not have plaster walls and
ceilings covering the interior wood framework.
TYPE V (Combustible) - Wood-frame construction is the most
combustible of the five building types. The interior framing and
exterior walls may be wood. A wood-frame building is the only one of
the five types of construction that has combustible exterior walls. This
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is the typical single-family home construction method. These buildings

are built with 2x4 or 2x6 studs and load bearing walls, wood floor
trusses or wood floor joist and wood roof framing.
Protected "A" means that all structural members of a building or
structure has additional fire rated coating or cover by means of
sheetrock, spray on, or other approved method. This additional fire
rated coating or cover extends the fire resistance rating of structural
members at least 1 hour.
Un-protected "B" means that all structural members of a building or
structure has NO additional fire rated coating or cover.
COMPONENTS OF PROPERTY AND VALUE
Replacement cost valuation has many variables. Licensees who
provide estimates of replacement cost or rely on estimates of others in
regard to a recommended insurance policy MUST be sure the estimate
includes all expenses that would reasonable by incurred to rebuild the
insured structure in its entirety, including, but not limited to (CCR
2695.183):
Type of foundation
Type of frame
Number of stories
Materials used in, and types of, interior features and finishes
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Architects plans
Age of structure
Higher costs associated with replacing a single home versus multiple
dwellings
Be based on resale value of the land or the outstanding balance of
any loan
Following is a more detailed discussion of considerations that should
be addressed in any replacement cost valuation:
CORNERS
The shape of the outside perimeter is an important consideration in
estimating the total construction cost. Generally, the more complex
the shape (more corners), the more expensive the structure is to
replace. The shape classification of multiple story or split-level homes
is based on the outline formed by the outer most exterior walls,
including the garage area, regardless of the varying level. Most
structures have 4, 6, 8 or 10 corners. Small insets not requiring a
change in the roof shape can be ignored when determining the shape.
FOUNDATIONS
House foundations vary enormously from one part of the country to
the other. There are three major types of foundations that are used
when building a home. In much of the south, the most common type
of foundation is the slab on grade. Another common type of foundation
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is the pier and beam and the third most common is basement or tshaped, which is found in more Northern areas.
The t-shaped foundation or basement is a traditional foundation
method to support a structure in an area where the ground freezes.
This is where you have a concrete slab poured on the ground down at
the bottom of the hole. A footing is placed below the frost line and
then the walls are added on top. The footing is wider than the wall,
providing extra support at the base of the foundation. According to
ConcreteNetwork.com, a website dedicated to concrete information, a
t-shaped foundation is placed and allowed to cure, the walls are then
constructed and then the slab is poured between the walls. This
foundation is used in colder climates, typically in northern states. The
walls are used to support the house.
Another foundation used is the slab on grade foundation. This
foundation is the most popular in southern and many western states.
It is a single layer of concrete that is several inches thick. The slab is
poured thicker at the edges to form an integral footing and then rods
are placed to strengthen the thick edges. The slab is sometimes
poured on a bed of crushed gravel to improve drainage. Also, a wire is
placed in the concrete to reduce the chances of it cracking in the
future. A slab on grade is typically used in areas where the ground
doesn't freeze. It can also be used with insulation in northern states
to prevent it from being affected by frost.
The third type of foundation is the pier and beam, also called a
crawlspace because it is an accessible space with limited headroom,
between the soil and the bottom of the first floor of a home. This
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foundation is used in areas with heavy clay content in the soil, such as
Texas. They typically have a concrete wall that goes around the
outside with a wood floor that spans from one side of the wall to the
other. A footing needs to be poured and short foundation walls are
built to support the home. A majority of the spaces are only 16 to 18
inches between the bottom of the floor joists and the soil. This
foundation is considered the most economical of the three choices.
This space allows installation of plumbing and heating utilities for
accessibility. However, this space needs to be insulated. If not, water
vapor can cause mold and moisture problems in the future. Also, if a
trapdoor is installed, this can provide entry for when severe weather
hits.
ROOFING
Like foundations, roofing varies by location and customer preference.
Concrete tiles are very popular in California, but not as practical on the
east coast. Here some considerations and varieties:
Steel or Metal
Steel roof is good and durable. The structure of the roof will be more
flexible and solid. Basically the corrugated steel roof is less weighty in
comparison to other roofing devices. A metal roof is durable, however,
they can be quite costly due to materials and special onsite
installation.
This may be offset by the fact that a typically metal roof
will last at least 25 years -50 years. Metals like copper and zinc are so
strong and solid they have been known to last over 100 years without
any special upkeep. Of course, these same materials come at a
premium cost.
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Concrete Tile
Concrete roof has been used by many homeowners. They have high
durability, flexibility in handling, good design and great style. One
problem: concrete roofs require substantial structural support over
other forms of roofing.
Flat Roof
Flat roofs are generally constructed of a plywood underlayment,
followed by an asphalt roofing paper and a topping of crushed rock. A
properly designed flat roo will have enough pitch to let water runoff
without leaving puddle pockets of puddles. These roofs would not be
suitable in area will snow falls frequently.
Slate Roof
Authentic slate roof use slate obtained from the rocks and mountain
belt making these roofs among the most expensive.
Real slate slabs
are heavy in weight. But, these weighty slates will be more helpful to
make a roof which will outperform other roofing materials and metal
sheets. There is also a type of synthetic slate roof which acts in the
same as the original. Synthetic slate is not only lighter in weigh but
less costly.
Green Roofs
These are very expensive and complicated roofing systems consisting
of a waterproof substrate topped with growing material such as soil or
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grass. Benefits include added insulation value and the ability to

actually grow a garden on your roof!
Solar Roofs
Solar roofs provide a lot of benefits but the panels and systems that
make them work can be very costly and involve more maintenance
than other roofs. A solar roof can be as simple as a row of solar
panels or solar roof shingles/tiles with photovoltaic materials which
transform sunlight into solar energy.
SIDING
Stucco
Traditional stucco is cement combined with water and inert materials
such as sand and lime. Many homes built after the 1950s used a
variety of synthetic materials that resemble stucco. Some synthetic
stuccos have been prone to problems. However, a quality synthetic
stucco will prove durable. Tint the stucco the color you want, and you
may never need to paint.
Stone Veneer
When you think of ancient monuments and temples, you think stone
that has stood the test of time. Granite, limestone, slate, and other
types of stone are beautiful and nearly impervious to the weather.
Unfortunately, they are also extremely expensive so precast stone
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veneers and facings are now used for siding.
These surfaces are
durable, add beauty but can be costly to buy and install.

Cement Fiber
Fiber cement siding can have the appearance of wood, stucco, or
masonry. This durable, natural-looking material is often called by the
brand names HardiPlank and HardiPanel. Fiber cement siding is
fireproof, termite-proof, and may have a warranty up to fifty years.
Some older homes have Cement Asbestos Siding made from Portland
cement and asbestos fibers. Removing that type of siding can be
hazardous, so remodelers often apply a new, modern siding on top.
Wood Clapboard
Modern science has given us many synthetic wood-look products, and
yet solid wood (usually cedar, pine, spruce, redwood, cypress, or
Douglas fir) remain favorite choices for finer homes. With periodic
care, wood siding will outlast vinyl and other pretenders. As with
cedar shingle siding, wood clapboards can be stained rather than
painted. Many wood frame houses built centuries ago still look
beautiful today.
Brick Veneer
Made of fired clay, brick comes in a wide variety of earthy, eyepleasing colors. Although it is expensive, brick is desirable because it
can last centuries and probably won't need any patching or repairs for
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the first twenty-five years. Quality brick veneers are also attractive
and durable, although they don't have the longevity of solid brick.
Cedar Shingle
Homes sided in cedar shingles (also called "shakes") blend beautifully
with wooded landscapes. Made of natural cedar, the shingles are
usually stained browns, grays, or other earthen colors. Shakes offer
the natural look of real wood, but usually require less maintenance
than wood clapboard. By using stain rather than paint, you can
minimize peeling.
Engineered Wood
Engineered wood, or composite wood, is made with wood products and
other materials. Oriented strand board (OSB), hardboard, and
veneered plywood are examples of engineered wood products.
Engineered wood usually comes in panels that are easy and
inexpensive to install. The panels may be molded to create the look of
traditional clapboards. Because the textured grain is uniform,
engineered wood does not look exactly like real wood. Still, the
appearance is more natural than vinyl or aluminum.
Seemless Steel
Seamless steel siding is very strong and resists shrinking and bulging
when the temperatures change. The siding is custom fit to the exact
measurements of your house. You can purchase steel siding with a
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wood-look texture. Or, for a modern house, consider the industrial

look of corrugated steel.
Aluminum Siding
You may think of aluminum siding as an old-fashioned option, but
some builders offer it as an alternative to vinyl. Both materials are
easy to maintain and fairly durable. Aluminum can dent and fade, but
it won't crack the way vinyl will. Also, aluminum is fireproof and is not
usually considered harmful to your health or the environment.
Vinyl Siding
Vinyl is made from a PVC (polyvinyl chloride) plastic. Unlike wood or
cedar, it won't rot or flake. Vinyl is usually less expensive to purchase
and install than most other siding materials. There are, however,
drawbacks. Vinyl can crack, fade, or grow dingy over time. Vinyl is
also controversial because of environmental concerns.
Vinyl Coatings
If one likes the idea of vinyl but don't like the look of vinyl panels,
another option is to spray on a liquid PVC coating. Made from polymers
and resins, the paint-like coating is about as thick as a credit card
when it dries. Liquid PVC became widely available only a few years
ago, and reviews are mixed. The damage caused by poor application
can be devastating.
QUALITY CLASS OF HOME
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Homes and commercial buildings vary widely in quality and quality of

construction is a major cost variable. In any given analysis of
valuation, one must determine the grade of materials (windows,
counters, appliances, insulation, roofing, etc) and construction
(extensive trim, complicated framing, etc) in order to arrive at a
proper valuation. Following is a possible system of rating quality:
Class 1 construction is the most expensive commonly encountered and
Class 6 is the minimum required under most building codes. Most
homes with features that fall in class 4, 5 or 6 are "spec" homes, built
for sale to the public from stock plans. Class 1 and 2 homes have more
than ten exterior corners and are usually built from custom plans
prepared by an architect retained by the property owner. Most singlefamily homes have some characteristics of several quality classes.
Note that exterior walls are either Frame (wood or light steel) or
Masonry.
LOCATION OF PROPERTY
Homes built in housing tracts by merchant builders and homes built in
suburban (but not remote) areas tend to cost less than custom homes
built in well-developed metropolitan areas. Commercial buildings built
in the heart of a busy city will cost more to build than a surburban
structure. Exclusive locations behind guarded gates and subject to
association architectural rules require more planning and costs as well.
Construction costs are higher in some states than in others. Most
valuation programs or systems account for this using an index that
compares costs in nationwide. This index considers all the major
construction cost variables, including labor, material, equipment,
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climate, building codes, likely job conditions and markup. Many are
sensitive down to a given zip code.
BUILDING CODE UPGRADES
Older homes and buildings may have fallen under previous building
codes. The same home needing replacement today might require
addition upgrades to meet current building codes. An example might
be a home built in the 60s using aluminum wiring, this home would
need more expensive copper wiring when reconstructed. In California,
there would most likely be some additional earthquake standards
where additional shear walls and earthquake straps must be
incorporated in any repairs.
Today, insurers are generally forced to offer law and ordinance
coverage by law. If the insured does not obtain a policyholders
written refusal of law and ordinance coverage, any policy covering the
dwelling is typically deemed to include the law and ordinance
coverage--limited to 25% of the dwelling limit.
APPUTENANT STRUCTURES
Is there an attic, balcony, basement, attached or detached garage,
outbuildings, etc.? Are these spaces finished or unfinished? Are they
part of the occupied home or rentals? Everything affects value.
OTHER AREAS OF VALUE
Is the house or building air conditioned? Is it central or individual
units? How many furnaces? Electrical wallboard heaters? Electric wall
heaters? How many fireplaces? Are they zero clearance? Do they
have forced air blowers? Are they upstairs as well? Is the soil
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condition normal or clay? Is the home built on a slope adding to

costs? Carpeting type and quality? Wood floors? Mirrors?
Countertops, bath accessories, plumbing fixtures, cabinets, garage
doors . . . they all affect the final valuation, as does their grade of
quality. In addition to these costs, there are permits, cleanup,
demolition, debris removal, insurance, loss of use (other
accommodations during construction) and the cost of new plans to
consider. Further, an estimate of reconstruction a home must also
account for the fact that a single property is being rebuilt compared to
multiple homes or a tract of homes . . . obviously, costs will be higher.
So, as you can see, a lot goes into the valuation estimate.
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Section PC 16
CATASTROPHE COVERAGE
Objectives
Natural disasters have been more prevalent in the last 10 years
leading to many changes in property and casualty coverages. It is
important for agents to understand what is available AND unavailable
in this special area of insurance. This section will address the following
topics:
Catastrophe Coverage . . . Earthquake, Flood, Hurricane, Mold
Landslide
How Catastrophe Coverage Effects Value . . . Demand Surge,
Shortages, Regional Influences, Building Codes, Delayed Repairs,
Debris, and more
CATASTROPHE COVERAGE
The 10 most expensive natural disasters in U.S. history all have

occurred in the last decade. These catastrophes have resulted in
insurance companies having to cover losses averaging $10 billion each
year since 1989, compared with just $2 billion yearly from 1980 to
1988.
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With the potential catastrophe payouts insurers face far exceeding

their reserves, it's no surprise that major companies, are raising
catastrophe-policy premiums and deductibles and excluding certain
coverages.
For instance, if one lives in a high probability area of
wildfires in certain areas of California, fire coverage, under a normal

homeowners policy is not available other than by supplemental
coverage. The insurance industry is saying to the homeowner, If you
choose to live here, that's great, but you have to take on more of the
risk.
Following are some catastrophe coverages available:
EARTHQUAKE ENDORSEMENT
The earthquake endorsement covers not only earthquakes, but
volcanic eruptions, landslides or any other type of earth movement. A
single earthquake is defined as all shocks occurring within a 72 hour
period. The earthquake endorsement has a percentage deductible
equal to 5% of the coverage for the main residence, with a minimum
deductible of $250. Higher deductibles can be chosen to reduce the
cost of the premium. However, in states with a relatively high
frequency of earthquakes, such as California, the percentage
deductible can range from 10% to 25%.
FLOOD
A handful of private insurers provide flood insurance, but the largest
flood catastrophe insurer is the National Flood Insurance Program
(NFIP) administered through FEMA.
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Most homeowners in a moderate-to-low risk area are eligible for

coverage at a preferred rate. Preferred Risk Policy premiums are the
lowest premiums available through the National Flood Insurance
Program (NFIP), offering building and contents coverage for one low
price. If one does not qualify for a Preferred Risk Policy, a standard
rated policy is still available. Even though flood insurance isn't
federally required, nearly 25% of all NFIP flood claims occur in
moderate-to-low risk areas.
For a high-risk area, a standard rated policy is typically the only

option. It offers separate building and contents coverage. The
Dwelling Form provides insurance for buildings with one to four units,
including single-family condominium units and townhouses. The
General Property Form provides insurance for other- residential and
commercial buildings. Both forms provide flood insurance on contents,
if this optional coverage is purchased.
Flood insurance premiums are calculated based on factors such as:
Year of building construction
Building occupancy
Number of floors
The location of its contents
Its flood risk (i.e. its flood zone)
The location of the lowest floor in relation to the elevation

requirement on the flood map (in newer buildings only)
The deductible chosen and the amount of building and contents

coverage
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If a home is in a high-risk flood area and the homeowner obtained a

mortgage through a federally regulated or insured lender, he is
required to purchase a flood insurance policy.
HURRICAN / TORNADO COVERAGE
Normally, a basic homeowner policy may already have this coverage
under wind damage and wind-driven rain, but hurricane coverage
per se is being excluded by an increasing number of insurance
companies.
The cost of comprehensive hurricane coverage can vary wildly, from as
little as $300 for a modest house in a low-risk area to upwards of
$20,000 for a luxury home in a high-risk zone. On top of the premium,
policies issued in states that are most susceptible to storms can come
with hurricane deductibles, which typically range from 1% to 5% of
the insured value of a home. A standard deductible, say $500, would
apply to claims that arent hurricane-related.
Hurricane deductibles usually kick in when damage results from a
named storm. That means if a house is insured for $200,000, and its
damaged in a hurricane, then the hurricane deductible will range
between $2,000 (1% of insured value) and $10,000 (5%). Some
states allow homeowners to choose the hurricane deductiblethe
higher the deductible, the lower the premiumwhile others set
deductible levels
One common misconception about hurricane / tornado insurance is
that it includes flood insurance. The two are very different insurance
entities and a homeowner may need to purchase both insurances to
become fully protected. Hurricane insurance is often limited to wind
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damages and does not include flooding even when the obvious cause
is the hurricane.
MOLD REMEDIATION
As a general rule, mold and other problems caused due to lack of
maintenance or wear and tear are not covered under most policies.
The resulting mold from floods, storms and hurricanes is yet another
uncovered event for most policies. Chances are, however, for an
additional $200-$300 a year, one can obtain about $25,000 of "mold
remediation coverage." That's generally the minimum amount of
coverage needed if mold is an issue.
LANDSLIDE
Soil expansion, subsidence and landslides affect a lot of homes every
year yet they are events typically excluded from homeowners policies.
Properties might be covered where the subsidence or landslide caused
a large boulder to roll down and damage a property. Otherwise, this
coverage is rare and hard to find.
EFFECTS OF CATASTROPHES ON VALUE
DEMAND SURGE
After certain large-scale natural disasters, insured losses (prices for
materials and labor) rise significantly, compared to losses from
smaller-scale events. Basically, the widespread nature of the
catastrophe causes materials, labor, fuel shortages,
transportation issues and a host of other supporting services to be
in greater demand. Thus, in turn, places rising pressure on costs to
increase. As a result, insurance claims greatly exceed expectation.
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Insurers have been known to pay double or more the normal

settlement . . . even in cases where the homeowner was underinsured.
An early observation of this phenomenonknown variously as
demand surge, loss amplification, catastrophe inflation, etc.
followed the 1906 San Francisco earthquake and fire, and it has been
noted frequently in the aftermath of major hurricanes and floods.
Agents & Demand Surge

Regardless of the reason for demand surge prices, replacement cost estimates by
insurers or agents MUST NOT include a cost associated with demand surge.
Agents should disclose to potential insureds that this cost has not been and legally
cannot be taken into account in the estimate of replacement cost. (CCR 2695.183).
Agents can, however, apprise customers that additional coverage may be obtained
to cover it
The amount of reconstruction work regionally is a sum of the repair

work at individual properties. Understanding how much work is done
at an individual property informs the understanding of the amount of
work regionally. Individual property owners may attempt to reduce
damage to their properties in disasters of any size. A property owner
may take measures before the event to prevent damage or make
emergency repairs immediately after the event to reduce additional
damage. The scale of the disaster, however, may affect these efforts.
Damage may also accumulate in clustered events, possibly negating
any efforts of the property owner. In a catastrophe, properties may be
more likely to decay because of neglect (for example, mold can
flourish in untended, water-damaged buildings). Properties damaged
in a catastrophe may be more prone to additional damage because, for
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example, local authorities do not allow the population to return soon

after the event (as in Hurricane Katrina), or property owners do not
have immediate financing for repairs, or temporary patching materials
may be in short supply. Thus, the amount of damage at an individual
property may be greater because the property was damaged in a
large-scale natural disaster.
A sample of first-hand accounts and explanations of demand surge
provides a good explanation of the phenomenon. A structural engineer
who accompanied claims adjusters after the 1994 Northridge,
California, earthquake said that his insurer client routinely paid for
obviously preexisting damage unrelated to the earthquake. The
payment was made largely to expedite claims in a situation where the
volume of claims would otherwise have been overwhelming. He
estimated that, in aggregate, the insurer overpaid by a factor of
perhaps two.
The 1991 Oakland Hills, California, fire, which destroyed 3,500
residences, provides another example of amplified insured losses.
Many insurers found it politically prudent to compensate policyholders
for the full replacement cost, even in the presence of gross
underinsurance or policies lacking guaranteed replacement cost
coverage. By settling claims in this manner, the insured loss may have
been double what was owed strictly according to the policy.
SHORTAGES
Whether an event overwhelms systems refers to the degree to which
demand exceeds locally available supplies of construction materials
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and labor or claims adjusters. If the latter occurs, insurers may rely on
several measures to handle claims. Insurers may send in-house claims
adjusters from other areas or rely on inexperienced adjusters. In
anticipation of demand surge, insurers may have made agreements
with contractors before an event to perform reconstruction work. Two
additional issues that arise following large-scale events are ex gratia
payments and the problems associated with concurrent causation.
The scope of reconstruction work at an individual property refers to:
changes in the kind and quantity of construction materials; number of
man-hours of skilled and unskilled labor; and any special equipment
required because of the large scale of the event, such as backup
generators that would not otherwise be required. It might be
quantified by a ratio of contractors direct costs (before overhead and
profit) in the catastrophe environment to the direct costs in the
absence of urgency or material and labor constraints.
The prices of materials, labor, and equipment refers to the change in
the cost of a fixed basket of construction goods and services to
construction contractors. This collection of goods and services is
affected by: the distance from which goods and services must be
brought to the affected area (i.e., remoteness); transportation delays
caused by damage to the transportation network; and pre-disaster
state of the economy, meaning construction unemployment and
reserves. Contractor profit refers to the premium contractors can
charge over their direct and overhead costs in the presence of high
demand.
PRIVATE VS. GOVERNMENT INSURERS
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Private property insurers do not indemnify all perils. For example, a

standard homeowners policy covers most fire, wind, and hail damage
but not seismic or flood damage. Governments may provide coverage
in hazardous areas not served by private insurers. Here, the peril may
affect demand surge because the source of reconstruction financing
depends on the peril: Insurers may be better able to provide
immediate funds, whereas a government entity may provide delayed
or reduced compensation. As an example, under the standard flood
insurance policy dwelling form, the United States National Flood
Insurance Program pays replacement costs only if the insured property
is a single-family dwelling and the policyholders principal residence,
and the insurance is 80% or more of the full replacement cost or the
maximum available. Otherwise, the NFIP pays actual cash value,
except for mobile homes and travel trailers. The NFIP always pays
actual cash value for detached garages, personal property, appliances,
carpets and pads, outdoor equipment, and property abandoned as
debris. Sufficient and immediately available reconstruction financing
enables the demand for materials, labor, and equipment. Thus, the
demand for materials, labor, and equipment and the supply of
financing may provide more fundamental explanations of demand
surge after an event than which peril is involved.
REGIONS
The region affected by a disaster may be similarly misleading. The
remoteness of an area has been suggested to explain some past
demand surge events. Isolated populations, such as those in Darwin,
Australia, or on KauaI Island in Hawaii, may pay significantly more for
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reconstruction following disasters. However, geographic remoteness

may not be a fundamental concern. In terms of demand surge, the
ability to supply an affected area determines its remoteness. In
Hurricanes Andrew and Katrina, contractors and materials were
brought into the affected region. The relevant question then is not how
far away, but more immediately, at what cost the materials, labor,
equipment, and financing can be brought to the affected area. Thus,
information on the capacity and costs of transportation and of
temporary housing for workers seems more fundamental than
distance. The particular region may also inform an assessment of the
pertinent socioeconomic issues for demand surge.
Although the demanded materials, labor, equipment, and financing
may be available and readily transported, local authorities may restrict
the free movement of supplies and prices. Authorities may choose to
set prices or place ceilings through anti-price gouging laws. The
migration of labor from outside an affected area may be restricted or
entirely prohibited. Thus, demand surge may vary by region, not
because of physical geography, but rather because of the fundamental
questions of physically supplying an area and any restrictions on the
flow of those supplies.
TIMING
Like the peril and region, the year of an event may not be fundamental
to demand surge. Rather, the year may be a proxy for issues such as
materials supply and the capacities of transportation systems. For
example, materials suppliers may now rely on just-in-time-supply
chains, rather than inventories. Thus, the reconstruction after recent
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disasters may be more vulnerable to materials shortages than after

disasters of twenty or fifty years ago. In regions with recently welldeveloped transportation systems, however, the ease of moving
materials may offset the problem of smaller inventories. Again, the
year per se may not provide fundamental information about demand
surge.
The sequence, or timing, of events may also not directly affect
demand surge. A single event, isolated in time and location from
another event, might be seen as a standard disaster to which other
disasters can be compared. Thus, it can be used in comparisons with
the more unusual catastrophe-following-catastrophes or clustered
events. For a catastrophe following catastrophe, there is the inherent
problem of widespread concurrent causation. Insurance adjusters
would be asked to distinguish the source of damage, making their
work more difficult (and thus more expensive) after a catastrophe
following catastrophe than after a single event.
MORE EVENTS
A cluster of events raises additional considerations. At the regional
level, the demand following a first event may have exceeded the local
supplies, and efforts began to meet this demand. Thus, a second,
third, or fourth event may not cause a disequilibrium in supply and
demand as large as the original disruption. Also, events subsequent to
the first in a cluster may not cause as much damage because many
properties have not been repaired after a previous event. In this case,
the demand for materials, labor, equipment, and financing may not
increase as much after a subsequent event as after a first event.
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In summary, the typical characterization of an event according to its

peril, region affected, and year of occurrence does not appear to be
useful for understanding demand surge. Our current understanding
suggests that there are more fundamental questions surrounding the
demand and supply of materials, labor, equipment, and financing,
which are more directly relevant to a qualitative and quantitative
description of demand surge.
BUILDING CODES
The level of repair required by building codes, and enforced by the
building authority, may also affect the amount of work at a property.
The building code in force during the reconstruction period may require
a heavily damaged structure to be built to a higher standard than what
was required when it was originally built. The rebuilding requirements
affect the amount and type of construction materials and the
necessary skill of the labor. Although newer building codes tend to
become more strict, there can be exceptions: building codes may not
be enforced (for example, before Hurricane Andrew, or the local
building department may temporarily suspend certain provisions to
allow for speedier recovery (for example, after Hurricanes Iwa and
Iniki. Furthermore, insurers or property owners may not have
accounted for changes in building code requirements when
determining the replacement cost of properties. This is properly a
valuation problem for the insurer, but it can masquerade as demand
surge in catastrophe models, which usually rely on multiplying a
damage factor by (in this case, an erroneously low) replacement cost.
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PERFORMANCE
Judgment may also affect the amount and speed of work performed at
a damaged property. Contractors and insurance claims adjusters may
be pressured to quickly define the amount of work to be done. The
adjuster might have a long list of properties to visit, making each loss
assessment quickly and carelessly. Contractors and claim adjusters
may not have enough, or the right, information available about repair
work at a property at the time of a repair estimate or claim
adjustment. An initial assessment of damage may not identify all
damage, and unanticipated damage may be encountered only after
demolition and repair work have begun. These types of judgments
about the amount of repair work following a catastrophe must be
made but may not be fully informed.
DELAYED REPAIRS
The time when reconstruction begins at a property may affect the final
loss. Delayed repairs may be more expensive because of deterioration
of, or additional damage to, the property. Also, labor wage rates,
contractor overhead and profit, and materials prices can change during
the reconstruction period. These issues may be more significantly
affected by the regional factors described in the following paragraphs
than by characteristics of the property. A backlog of properties
damaged in a previous event or a construction boom in the region may
delay work at a recently damaged property (for example, during the
2004 and 2005 hurricane seasons in Florida). The organization of the
reconstruction effort, if any, may determine the prioritization of work.
Contractors may determine a work schedule on a first-come-first-
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served basis, or they may prioritize work according to potential profit.

The government may prioritize the repair of damaged properties, as
was the case after the 1999 Sydney Hailstorm. If the general
population evacuated, there may be a delay in reconstruction until
there is a critical mass of people. The disruption of electrical power
may also affect the timing of rebuilding, unless there are sufficient
supplies of portable generators.
DEBRIS REMOVAL
Debris removal can be critical before reconstruction can begin at a
property. Storm surge in Hurricane Katrina pushed substantial
quantities of debris onto properties near the shore along the
Mississippi coast, hindering access. In addition to disposing of
structural components and building contents, there may be hazardous
materials requiring special attention, as was also the case in Katrina.
Debris removal may also be hampered by insufficient landfill space.
The efforts of local and national governments may affect the timing of
reconstruction. Rebuilding may not begin until the local government
allows the release of building permits. For example, as of 30 June
2008 in Cedar Rapids, Iowaseventeen days after flood-waters
crestedthe building department was issuing plumbing, electrical,
mechanical, and building permits for flood repairs outside the 500-year
floodplain only. The Cedar Rapids building department expected to
release plumbing and electrical permits a few days after this date, but
they would not grant building permits until the city decided on a
reconstruction plan. For properties in the 100-year floodplain, the city
had to consider the guidelines and regulations of the National Flood
Insurance Program. As of 30 June, it was not clear whether the city
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would allow any rebuilding on the 100-year floodplain or adopt the

NFIP requirement that properties with damage valued over 50% of the
structures value be rebuilt at least one-foot above the 100-year
floodplain. The city recommended that property owners clear debris,
dry the structure, and wait for a city council decision. The approach
taken in Cedar Rapids suggests that local governments can affect the
progress of reconstruction. The municipality may actively influence
repairs and rebuilding, or it may passively allow reconstruction to be
determined by property owners, financing, and the availability of
materials, labor, and equipment. Finally, the building department may
be overwhelmed, and permitting and inspections may be delayed (for
example, after the 2004 hurricane season in Florida.
OTHER FACTORS
In addition to the above demand surge pressures, one must also
consider extra services required after a disaster as part of the
additional costs to reconstruct. Services might refer to expenditures
by insurers to claims adjusting firms, or by insurers to construction
contracting firms, or by construction contracting firms to businesses
that serve them while they mobilize, market their services, do the
repairs, etc. Since insurance claims include additional living expenses
and other time-element losses, services in this context could mean
virtually any expenditure paid to businesses at any distance from the
catastrophe by any insured entity during the life of any time-element
claim.
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Section PC 17
INSURANCE TERMS
& CONCEPTS
Objectives
Insurance has a language of its own: in Life insurance, Health
insurance, Property insurance, and in Casualty insurance, as well as
Individual or Group. Well look at some of the common terms in this
unit, but refer to the glossary for additional information.
This unit includes:
General Terms and Concepts (no big mystery there)

More Terms and Concepts
1. General Terms and Concepts

Just so you know, In California, the word:
"Shall" means mandatory
"May" means permissive
"Person" means any individual, association, organization,

partnership, business trust, limited liability company, or
corporation.
Note: Any provision of the code can be sent out by mail.

Here are some general terms and concepts youre going to
frequently run into when dealing with insurance:
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A. Insured
In Life insurance, the insured is the person on whose life an
insurance company writes a policy. The insured and the
policyowner may not be the same person.
In Property or Casualty insurance, it usually means the named
insured, or the one(s) named on the policy.
B. Insurable Interest
Insurable interest is required in the purchase of insurance to
protect against an economic loss.
In Life insurance, the insurable interest has to exist when
someone first applies for the policy.
In Property and Casualty insurance, insurable interest has to
exist at the time of loss.
B. Insurable Events
Insurable Events are any contingent or unknown event, which
may indemnify a person having an insurable interest, or create a
liability against him, may be insured against.
C. The necessary Elements in a Policy
All insurance policies must contain:
7) Information about the parties involved in the contract
8) Description of the property or the life insured
9) The insureds insurable interest
10)
Information about the risks the insurance covers
11)
The policy period
12) Premium rates

Note: The financial rating of the insurer is not required.
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D. Principle of Indemnity
The Principle of Indemnity is the restoration to the approximate
financial position occupied prior to the loss, in whole, or in part,
by payment, repair, or replacement.
E. The Law of Large Numbers

The Law of Large Numbers is a theory regarding probability. The
Law of Large Numbers states that:
3) If you take a random sample from a larger population, its
more likely to represent the whole, than if you took a
random sample from a smaller population.
4) The more people there are, the more the chance of risk
increases.
F. Loss Exposure
Loss Exposure is defined as someones potential for loss, or
their loss exposure/exposure to loss. For example, a homeowner
in a particular region of the country will have different kinds of
exposures than a homeowner in another region. They may be
more vulnerable to hail, tornadoes, or forest fires, so they have
a higher exposure to loss to those particular perils.
Exposure is measured in exposure units, for which the price of

insurance is the rate.
G. Adverse Selection
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Adverse Selection is selection against an insurer by insuring

more poor than good or average risks, and the tendency of
poorer risks to buy and maintain insurance.
H. Concealment
Concealment is the withholding of facts or information by an
applicant or insured that may materially affect the decision
regarding an insurance risk.
I. Risk
Risk is the chance of loss. The term risk is often used in a
general way to designate the entire subject matter of insurance
covered under a policy or upon which an application for
insurance has been received. Risk is also sometimes used to
designate a policyholder (e.g. poor, standard, etc.).
There are 2 categories of risk:
3) Pure Risk is defined as the uncertainty as to whether or
not a possible loss will actually happen. There could be a
loss, but no one knows when or how. A pure risk is the
chance of loss only.
4) Speculative Risk is a loss thats more predictable, such
as gambling, business ventures, or playing the stock
market. Speculative risk assumes that, based on the
persons actions/decisions, a loss is inevitable. A
speculative risk also has the chance of gain.
Note: Insurance only protects against pure risks.
J. Ideally Insurable Risks
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The following criteria describes an ideally insurable risk:
The loss must be measurable
The loss must be accidental
The loss must be predictable
The law of large numbers has to apply
The loss must create financial hardship
Insurance must be affordable and practical
The loss must not be catastrophic
K. Risk Management Methods

There are 4 Risk Management methods used to deal with the
uncertainty of loss:
1) Avoid the risk
2) Reduce or control the risk
3) Retain the risk
4) Transfer the risk (insurance)
L. Hazard
Hazard is any factor that creates or increases the chance of loss.
There are different types of hazards:
A physical hazard is created by the condition, occupancy,

or use of the property itself. Examples include faulty
breaks that increase the chance of collision, and faulty
electrical wiring that increases the chance of fire.
A moral hazard is a characteristic of the insured that

increases the chance of loss. Examples include arranging
an accident to collect the insurance, or inflating the
amount of a claim.
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A morale hazard is carelessness or indifference to a loss

because of the existence of insurance. One example is
leaving the car keys in an unlocked car.
A Legal Hazard is created by decisions or actions of the

courts. If something could result in big, expensive
lawsuits, this is considered a legal hazard.
M. Peril
Peril refers to the specific event causing a loss, such as fire,
windstorm or collision.
N. Fraud
Fraud is the intentional and fraudulent omission, or the
communication of information of matters, proving or tending to
prove false, and entitles the insurer to rescind.
O. Concealment
Concealment is the neglect to communicate that which a party
knows, and ought to communicate, and whether intentional or
unintentional, entitles the injured party to rescind.
Information you arent required to communicate includes
information that is:
Already known or should be known
Waived by the other party
Not material to the risk
Concealment, whether intentional or unintentional, entitles the

injured party to rescind insurance.
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P. Rescission
Rescission means the same as revoke or remove. An insurer
could legally rescind an insureds policy if:
Theres been intentional or unintentional concealment
Theres been an intentional and fraudulent omission
A misrepresentation comes to light after a policy has gone

into effect
A material warranty or a material policy provision has been

violated
Q. Materiality
Materiality has to do with facts and information relevant to an
insurance policy. Materiality can be determined using 3
questions concerning the information:
1) Can the information convince or dissuade either party to
enter a contract?
2) Does the information create a disadvantage for either
party?
3) Does the information have any affect on the risk or
insurability involved?
Materiality concerns both the insurer and the insured. Each party
involved in the contract has to have all the relevant information
that could have any positive or negative affect on the contract.
R. Representations
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Representations are statements on an application that

the applicant represents as true and accurate, to the best
of their knowledge and belief. Representations may be
considered to be an implied warranty.
A representation may be altered or withdrawn before the
insurance is effected, but not after. A representation is
considered false when the facts fail to correspond with its
assertions or stipulations.
Misrepresentations are the false representation of the
terms or benefits of a policy by an agent, or an applicant
who falsely represents the health or other condition of the
proposed insured.
S. Warranty
A warranty is a statement made by the applicant that becomes
a condition of the contract. False warranties void the entire
contract.
Alert!
Warranties do not apply to Life insurance. No statement made on a
Life insurance policy is ever considered to be a warranty. The final
exam will definitely try to trick you on that one (all you potential Life
agents out there).
A warranty is either:
Expressed warranties are in written form and attached to

the policy.
Implied warranties are not written but still exist under the
law. Some representations may qualify as implied
warranties.
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T. The Law of Agency

The Law of Agency is the authority of one to act as the agent
of another, the insurer, with one of 3 types of authority:
1) Express Authority, what is spelled out in the contract
2) Implied Authority, what is assumed to exist
3) Apparent Authority, what is by conduct or action
U. Loss
Loss may refer to the claim itself, the amount sought in a claim,
the reduction in value of an insureds property, or the amount
paid on behalf of an insured under an insurance policy.
The 2 categories of loss are:
1) Direct loss, which is a loss that is the direct result of an
insured peril.
2) Indirect loss, which is a subsequent loss, such as being
unable to use a building after a fire.
V. Liability
Liability is something for which you are legally responsible.
Liability insurance provides coverage and pays for losses to other
people and their property caused by negligence.
W. Negligence
Negligence is the result of carelessness, thoughtlessness, or
inaction, but its never intentional.
Before a court will award any damages to an injured party due to
anothers negligence, the 4 elements of negligence must be
present:
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5) Legal duty means the person has a legal responsibility to

take the necessary precautions to avoid being negligent.
6) Breach of duty means the person failed to uphold their
legal duty.
7) Damage or losses occurred as a result.
8) The breach of duty caused the damages or losses.
Heres a surreal story to help you remember the 4 elements:
Bob decided to put quicksand outside his driveway. He thought to
himself, I should really tell people about this here quicksand. (Legal
duty)
When Gwen was walking by, she said, Is that safe?
Bob forgot about the quicksand, and said, Yep. Safe as safe can be!
(Breach of duty)
Trusting him, she went on her way, and was promptly sucked into the
quicksand. Luckily, she just happened to have a copy of How to
Escape from Quicksand, so she survived, but she still lost one of her
tennis shoes. (Damages or losses)
Hey, she said, I lost one of my tennis shoes because you said it was
safe! (Damages or losses caused by the breach of duty)
True, its a weird story, but were sure youll remember the 4 elements
of negligence long after youve developed senility and forgotten
everything else.
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Note: If these 4 elements of negligence are present, the injured party

has a good chance of winning a lawsuit.
X. Accident
Accident
is an unforeseen and unintentional act identifiable in time and place.
Y. Occurrence
Occurrence is an event that results in a loss.
Z. Reinsurance
Reinsurance is the transfer of risk between insurance companies.
Used in both Life and Health, as well as Property and Casualty,
its an agreement or treaty between insurance companies
where one company may transfer, and one company will accept,
all or part of the risk of loss of the other.
1. From the Top!

You may have noticed that weve run out of letters of the alphabet.
Well, were too enterprising to let that stop us! Well just start over
again! (Problem-solving!)
A. Cancellation
Cancellation is the termination of coverage in the policy
period by the insurer.
B. Lapse
Lapse is the termination of coverage for non-payment of
premium. A policy will lapse at the end of the grace period.
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C. Renewal
Renewal is the continuation of coverage from one policy
period to the next. Non-renewal is termination of coverage
at the end of the policy period.
D. Unearned versus Earned Premiums
Unearned versus earned premiums are based on whether or not
someone has paid for future coverage.
If someone pays an annual premium, and six months have gone
by, then they have six months of:
Unearned premium, for the six future months that are
prepaid
Earned premium, for the six months that have already
gone by
E. Binders
A binder gives the insured temporary coverage. An insured may
have just requested or applied for the insurance, and he/she
doesnt actually have the official documentation in hand, but the
binder means the insurer has agreed to provide temporary
coverage pending approval.
Someone can receive a binder and still be denied insurance. If
the insurance company gives the person a binder while the
insurance application is being processed, that binder doesnt
guarantee a certificate of insurance. If the insurance company
decides not to insure someone, the company has to issue a legal
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notice of cancellation. Until then, the binder will continue to

provide coverage.
Note: Binders are not used with Life insurance.
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Section PC 18
LICENSING
Objectives
This unit discusses how to obtain and maintain an insurance license,
the importance of keeping accurate financial records, and which
actions could result in suspension or revocation of a license. As future
licensees, it is important to know that all of your actions as an
insurance Producer will be checked through the Commissioners office
and honesty is critical to the longevity of your business.
SPECIAL NOTE:
Until 2011, agents who sold homeowners, auto, commercial,
professional liability, workers compensation, flood, earthquake or
personal property insurance did so under one license . . . called a Fire
and Casualty License. Today, an agent selling these products is
required to have two licenses . . . A Property Broker-Agent License
and a Casualty Broker-Agent License. This course prepares you for
BOTH licenses. Similarly, our property-casualty workbook materials
(provided under separate cover), that prepare you for the State Exam,
cover BOTH Property and Casualty topics.
It is also of interest that Property and Casualty Broker-Agents today
are NOT permitted to sell health, disability and long term care
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insurance products; products previously sold under the defunct Fire

and Casualty License. The sale of these health insurance products
today requires a separate Accident and Health License . . . a course
available from our school.
1. People Required to have an Insurance License

California requires anyone who transacts insurance to have an
insurance license.
Transact means solicitation of insurance,
negotiation and execution of insurance policies and dealing with

matters that pertain to and arise subsequent to the execution of an
insurance contract. Types of licensees include:
A. Producers
Insurance Agents are now known as producers, except in
states where theyre still known as agents. Just think of the
two as synonymous and youll do fine.
Producers are authorized by and on behalf of an insurer to
transact insurance, i.e., sell and negotiate insurance policies to
applicants and handle ongoing coverage with clients. Unless the
producer has the proper license, they cant sell, solicit, or
negotiate any class of insurance.
A Property or a casualty licensee is a person authorized to
act as an insurance agent, broker or solicitor. Licenses to act as
a property broker-agent entitle the licensee to transact
insurance coverage on the direct or consequential loss or
damage to property of every kind. Licenses to act as a casualty
broker-agent shall entitle the licensee to transact insurance
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coverage against legal liability, including for the death, injury,

disability, or damage to real or personal property. We believe
that an agent adequately serving his homeowner, auto
and commercial clients, needs BOTH a property and
casualty license. This course provides training for BOTH
licenses.
A Personal Lines Agent is a person authorized to sell the
following insurance:
Personal automobile, dwelling and
homeowners insurance, including earthquake, flood, umbrella

policies and marine insurance covering personal property. He
cannot sell commercial policies, pet insurance, workers
compensation or other lines available to a full property and
casualty agent / broker.
A Limited-Lines Automobile Agent is a person endorsed or
appointed to sell ONLY automobile liability coverage,
automobile physical damage and automobile collision insurance.
It is important to know that a limited lines automobile agent is
an agent license. As such, these agents cannot broker
limited lines auto insurance nor charge broker fees. Nor can
they serve other needs of the homeowner and commercial
client.
Here are a few other insurance agency categories:
The Broker is paid for transacting insurance on behalf of

another person (any line of insurance except Life).
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The Consultant makes recommendations to the insured

for a fee.
The Administrator works with Life insurance, Health

insurance, and Annuities. Their duties include, collecting
premiums and adjusting or settling claims.
A Managing General Agent can be any person, firm,

association, partnership or corporation that manages all or
part of an insurers business. Where direct written
premiums equal or exceed 5% of a companys
policyholders surplus, the MGA can adjust or pay claims or
even negotiate and bind reinsurance.
An Insurance Adjustor determines the extent of the

insurance company's liability when a claim is submitted.
A Public Insurance Adjustor is a self-employed person

who is hired by litigants to determine or settle the amount
of a claim or debt.
A Surplus Lines Broker is an insurance producer,

individually licensed in surplus lines, specially licensed
to solicit, negotiate and place insurance with eligible
surplus line insurers. NOTE: individuals licensed as a
Property and Casualty Broker-Agent may not transact
surplus lines business on behalf of a surplus line brokers
organizational license, without also holding an individual
surplus line broker.
An Independent Agent represents more than one

insurer. He has a contract with each but typically owns
the business, expirations and rights of renewal.
An Exclusive Agent represents only one insurer. The

company usually controls renewals and expirations.
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Direct Writing Companies are insurers who deal direct

with insureds through their own salaried employees. No
agencies are involved.
Direct Mail Companies use direct mail advertising to

solicit and conduct distribution of their policies.
A Solictor is an employee of an agent or broker who

assists with client services. A solicitor cannot act as an
insurance agent or broker or be employed by more than
one property and casualty agent/broker. Similarly, agents
should not portray themselves as a solicitor.
Any person who transacts insurance without a valid license is guilty

of a misdemeanor and could be fined up to $50,000, or imprisoned
for a year, or both.
Title 18, Section 1033-1034 legislation (1994) says that certain
prohibited persons cannot participate in the business of insurance
(selling, reinsuring or the role as an officer, director or employer of an
insurer) unless they have received written consent of the Insurance
Commissioner. A prohibited person means any person who has
been convicted of a felony, dishonesty or breach of trust. Conviction
means a finding of guilty or plea of guilty or no contest in a criminal
court of the U.S. Felony means a crime for which the maximum
punishment exceeds one year incarceration. Dishonesty includes
perjury, bribery, forgery, counterfeiting, making false statements,
deception, fraud, schemes, material misrepresentation and failure to
disclose material facts. Breach of trust means crimes of misuse,
misapplication or misappropriation. The penalty for violating the
above section is a fine of not more than $50,000 for each
violation OR the amount of compensation the person received for the
prohibited conduct (whichever is greater) or imprisonment for not
more than 10 years or both. Failure to inform the Department of
Insurance of a prior felony conviction on a license application could
result in a violation of this statute and/or constitute grounds for denial
of an insurance license.
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Future producers have to pass a written exam that tests

knowledge of the different classes of insurance, the duties and
responsibilities of Producers, and the states statutes and rules.
Note: The CIC defines "Transact" when applied to insurance as any of
the following:
Solicitation
Negotiations preliminary to execution
Execution of a contract of insurance
Any dealings before/after the execution of a contract, or any

matters
arising from the contract
2. Licensing Examination
Future producers have to pass a written exam that tests knowledge
of the different classes of insurance, the duties and responsibilities
of producers, and the states statutes and rules.
People who want to be involved in certain kinds of insurance arent
required to take the final licensure examthough they may still end
up taking some form of test of knowledge. For example:
Livestock
Mortgage
Travel and transportation
Credit Life
Credit Health
Baggage, Trip Cancellation, and Interruption
Lenders Property
Motor Vehicle Physical Damage
Mechanical Breakdown
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Credit Involuntary Employment
Applicants can take the states examination after completing one

or more of the following requirements:
40 hours of instruction in Property and Casualty

Insurance
20 hours of instruction in Life Only
20 hours of instruction in Accident and Health
12 hours of instruction in Code and Ethics
20 hours of instruction in Personal Lines
20 hours of instruction in Limited Lines Automobile
3. Resident and Nonresident

A resident producer lives in the state they transact insurance
for, whereas, a non-resident producer doesnt live in the state
that they transact insurance for. If you get that one wrong on
the final exam, were coming to your house to slap you in
person.
If someone wants to transact in another state, they have to
obtain a license in their home state before becoming a
nonresident producer.
All non-resident producers have to apply to the NAIC. The
Commissioner acts as the Attorney-in-fact after the application is
accepted. This means the Commissioner handles any legal
actions brought against the non-resident producer.
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The Commissioner can also arrange a reciprocal agreement,

exempting certain people from taking the prelicensing
examination. This agreement means that if someone from
another state is allowed to transact insurance in California, then
a California insurer will be allowed to transact insurance in that
other state.
4. Temporary License
The Commissioner can issue a temporary license to someone
before theyve completed the final examination. The temporary
license is valid for a maximum of 180 days.
A temporary license is granted if:
A producer dies or is physically/mentally unable to follow

through on their duties, a spouse or legal representative can
obtain a temporary license to either give the producer time to
recover or train their replacement.
A producer enters into active military duty, a temporary

license can be issued to allow the replacement producer time
to train and obtain a license.
The Commissioner revokes a producers license and a

temporary license needs to be issued, in order to give the
replacement time to train and obtain their own permanent
license.
The Commissioner can limit the temporary licensees authority or

revoke the license at any time.
5. Responsible Producers
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California requires all producers to engage in honest and

responsible insurance transactions. A producer has to meet certain
qualifications before becoming licensed, such as:
Be 18 years or older
Establish a residence and business in the state of California
Not committed a felony involving dishonesty or breach of

trust (A violation of Title 18, United States Code, Section
1033-1034)
Completes Pre-licensing Training from a school like Affordable

Educators, college, or university registered with the
Department of Insurance and received a Completion
Certificate verifying educational hours (valid for up to 3
years)
Passes the state examination with a score of 70% or above
Pays the required fees
Apply to the National Association of Insurance Commissioners

(NAIC) Uniform Application. The Commissioner will send an
Examination Eligibility Notice, which is valid for 180 days once
approved
Note: Prohibited persons, such as felons, must request written consent

from the Commissioner, pay a fee, provide all documentation, and
receive
consent prior to engaging in any business. It is a criminal offense,
punishable by civil penalty up to $50,000 for each violation, and
imprisonment for up to 5 years, to employ or permit prohibited
persons to participate in the business of insurance without consent.
The Commissioner may require additional information in some cases.
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Businesses applying for Producer status must pay all applicable

fees; plus, they are required to designate one person as the
business state rules and regulations compliance specialist.
6. Producer Appointment
Producers have to become affiliated with an insurer before they can
transact insurance. Once someone is an affiliated producer, they
represent the insurer, not the insured.
Being affiliated or appointed by a company basically means they
hire a producer to sell their insurance. Just because youre licensed,
doesnt mean you can immediately start selling your own brand of
insurance: you need to represent an established insurance
company.
Licensed insurance producers only represent the insurer that
appointed them. They cant write policies or represent other
insurers if they havent been appointed. That being said, its
possible for a producer to be appointed by more than one company,
and then they can transact insurance for each company.
Note: If a producer hasnt been appointed or affiliated, they cant
legally transact insurance, even if theyre licensed.
7. Termination of Appointment
An insurer may Terminate, or cancel, a Producers Appointment
or Affiliation at any time; however, the insurer must notify the
Commissioner within 15 days of the termination. The
Termination Notice needs to specify the reason(s) for
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termination and either be delivered in person or mailed to the

Producers last known address. Whoever initiates the termination
(either the insurer or Producer) is responsible to notify the
Commissioner within 15 days of the effective termination date.
The insurer is exempt from notifying the Producer of an
Appointment termination if the insurer ceases to sell insurance or if
the termination is a mutual agreement.
The insurer can also terminate a Producer without written notice if
any of the following occur:
The license is denied, restricted, revoked, suspended, or

cancelled
The business is sold, transferred, or merged
Bankruptcy is filed
Fraud or intentional misconduct takes place
A licensee may surrender his license for cancellation by delivery

of the license to the Commissioner, or if an insurer holds his license
by written notice of the intent to cancel.
A license terminates upon the death of the licensee, or when an
licensed entity ceases to exist or is otherwise terminated or
dissolved.
A co-partnership however may continue to transact insurance if it
files an application notify the Commissioner of the change in
membership within 30 days.
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A Producer may terminate an Agency Appointment at any time

as long as the Commissioner and insurer are notified.
If a policy of insurance is issued regarding that application, the
insurer is considered to have authorized the agent to act on its
behalf, and the insurer is responsible for all actions of the agent
that relates to the application and policy, as if the agent had been
appointed. This has to happen no more than 14 days after the life
agent submits an application for insurance to the insurer for which
the insurer issues a policy. The insurer shall forward to the
commissioner a notice of appointment of the life agent as the
insurer's agent. However, nothing obliges an insurer to accept an
application for underwriting from an agent.
An inactive license occurs when a licensed agents appointment is
terminated or the agent is NOT specifically appointed for a
particular insurer.
At that point, the agent cannot:
Present a proposal to a prospective policyholder for insurance

with that insurer
Transmit an application for insurance to that insurer if the

insurer requires all its life agents to represent only that
insurer or a group of affiliated insurers of which that insurer is
a member
Except when performed by a surplus line broker, the following acts

are misdemeanors in California:
Acting as agent for a non-admitted insurer to transact

insurance
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Advertising a non-admitted insurer to transact insurance
Aiding a non-admitted insurer to transact insurance
In addition to any other penalties, the person might have to pay

$500 to the state, as well as $100 per each month the person
continues the violation.
8. Obtaining a License
Here are the necessary requirements that must be completed if
someone wants to obtain an insurance license in California:
A. Qualifications
Individuals in pursuit of a California insurance license must prove
their qualifications to the Commissioner of the Department of
Insurance.
The Commissioner will deny an application for any license if:
The applicant isnt qualified
Granting the license isnt in the publics best interest
The applicant doesnt intend to actually engage in business
The applicant doesnt have a good business reputation
The applicant lacks integrity
The applicant has been refused a professional,

occupational or vocational license or had such a license
suspended or revoked
The applicant wants the license in order to avoid

enforcement of insurance laws in California
The applicant has knowingly or willfully made a

misstatement in a document or application for a license, or
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a false statement in testimony given under oath before the

Commissioner
The applicant has previously engaged in a fraudulent

practice or a dishonest manner
The applicant is incompetent and untrustworthy
The applicant has knowingly misrepresented the terms or

effect of an insurance policy or contract
The applicant has failed to perform a duty or has

committed an act expressly forbidden
The applicant has been convicted of:

o A felony
o A misdemeanor by this code or other laws regulating
insurance
o A public offense involving a fraudulent act or
dishonesty in acceptance, custody or payment of
money or property
The applicant helped someone else do something which

could result in the suspension, revocation or refusal of a
license
The applicant has permitted any person in his employ to

violate any provision of this code
The applicant has violated any provision of law under

authority conferred by license
The applicant submits a fake certificate to the

Commissioner
Note: A judgment, plea or verdict of guilty or a conviction following a

plea of nolo contendere is considered to be a conviction, so its best
not to set even one toe in a courtroom.
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In addition, the following acts could result in suspension or

revocation of a license:
The licensee makes the client cosign, or make a loan,

investment, or gift of their policy
The licensee talks the client into making them the

beneficiary under the terms of any intervivos or
testamentary trust, or the owner or beneficiary of a life
insurance policy or an annuity
The licensee talks the client into making them or any of

their buddies a trustee under the terms of any intervivos
or testamentary trust
The licensee, acting as power of attorney for the client,

used their position in order to buy insurance for the client
that would give the licensee a commission.
An entity that holds a license (a dba, corporation, etc)

ceases to exist because of a dissolution of the corporation,
partnership or membership.
Agent World: The insurance code is very specific: Realtors or

mortgage brokers cannot require their customers to buy insurance
as a condition of buying property or closing a loan. Nor, can they
require customers to buy insurance through a particular agent or
broker.
Producer applicants may eventually be qualified to receive a license in
one of the following areas:
Life Only Insurance
Accident and Health Insurance
Variable Life Insurance
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Property and Casualty Insurance
Personal Lines Insurance
Limited Lines Automobile Insurance
B. Written Consent
If a person who has been convicted of a felony or engaged in
dishonest activity deemed inappropriate by the Commissioner,
he/she may ask for Written Consent to transact insurance. The
Commissioner will review each individual situation and, if
applicable, establish rules or procedures for the individual to
follow. If the person does not follow the Commissioners
mandates or commits other dishonest acts, he/she may not be
able to transact insurance in the state of California.
C. Exemptions and Exceptions
The following people dont have to be licensed:
An insurance company and its employees that are

indirectly involved in insurance transactions. This includes
an underwriter, loss control, inspection, processing, or
claims settling employees
Administrative, clerical, customer service, those in the

position of receiving insurance premium, taking claims and
requesting change
A Producer or representative of a Fraternal Benefit Society,

which is a non-profit group that provides Life and Health
Insurance to its members. The Producer must not devote
more than 50% of his/her time to selling insurance, plus
not sell more than $50,000 of Life insurance coverage in a
year.
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People who train others to become Producers and do not

actually sell, solicit, or transact insurance
An Attorney-in-fact who represents a Reciprocal Insurer, or

an employee of the insurer or attorney
A Real Estate Licensee who sells Home Protection or

Warranty Insurance
People who advise others regarding insurance, but do not

solicit its sale
9. Maintaining a License
An individual is required to do the following in order to maintain
their California insurance license:
A. Continuing Education
The Continuing Education Requirement promotes trustworthy
and competent insurance agents for benefit of the public. All
resident licensees must fulfill Californias Continuing Education
Requirement. An insurance license remains in effect (unless
revoked or suspended) as long as applicable fees are paid and
the Continuing Education Requirement is fulfilled.
This requirement does not apply to those persons holding
resident licenses for any kind or kinds of insurance for which an
examination is not required, nor shall it apply to any limited or
restricted license the commissioner may exempt, or licensed
nonresident agents who comply with the continuing education
requirements or brokers of their state of residence.
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Note: A licensee is exempt who submits proof satisfactory to the

commissioner that he or she has been a licensee in good standing for
30 continuous years in this state and is 70 years of age or older.
Each new licensee is responsible for obtaining educational credit
hours through approved instructional methods.
Upon renewal, these licensees must comply with the following
requirement:
Property Broker-Agents - A minimum of 24 hours per license

term (every two years)
Casualty Broker-Agents - A minimum of 24 hours per license

term (every two years)
Property Broker and Casualty Broker Agents - A minimum of

24 hours per license term (every two years)
Life-Only and/or Accident & Health PLUS Property and/or

Casualty Agents - A minimum of 24 hours per license period
(every two years) following the date of the original license
issuance.
Personal Lines Agent -- A minimum of 24 hours per every

license period following the date of the original license
issuance.
Limited Lines Automobile Agents -- A minimum of 24 hours

per license period (every two years) following the date of the
original license issuance.
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The courses or programs of instruction that meet the standards for

prelicensing or continuing education requirements, and the number
of classroom hours for which they are equivalent, are as follows:
Any part of the Life Underwriter Training Council (LUTC)

Course Curriculum totaling 30 hours.
Any part of the Chartered Life Underwriter (CLU) curriculum

totaling 30 hours for the life-only license.
Any part of the Insurance Institute of America's Accredited

Advisor in Insurance (AAI) program totaling 25 hours
Any part of the American Institute of Property and Liability

Underwriters' Chartered Property Casualty Underwriter (CPCU)
professional designation program totaling 30 hours
Any part of the Certified Insurance Counselor (CIC) program

totaling 25 hours
Any insurance-related course approved by the curriculum board

and the commissioner taught by an accredited college or
university per credit hour granted totaling 15 hours
Any course or program of instruction or seminar developed or

sponsored by an authorized insurer, recognized agents'
association, or insurance trade association, or any independent
program of instruction, if approved by the curriculum board
and commissioner, qualify for the number of hours assigned
Any correspondence course approved by the curriculum board

and commissioner qualify for the number of classroom hours
assigned
B. Special CE Requirements
Ethics:
Every licensed agent must complete a minimum
of 4 hours in specially-approved courses in ethics every

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renewal period.
Personal Lines and Limited Auto agents
need only complete 2 hours. NOTE: This requirement is

PART OF not in addition to the continuing education hours
required and discussed above.
Annuities: Only life agent can sell annuities. Every life

agent who sells annuities shall complete an annuity eight
hour certification course BEFORE soliciting or selling
clients. Thereafter, four hour certification refresher
annuity training must be taken every two years prior
to license renewal. NOTE: This requirement is PART OF
not in addition to the continuing education hours required
and discussed above.
Long Term Care: Only accident and health agents can sell
long term care. Every agent show sells long term care
insurance must complete an long term care eight-hour
certification course BEFORE soliciting or selling long
term care insurance. Thereafter, an eight-hour
certification long term care course must be taken each
renewal period. However, if the agent has been in
business less than 4 years, he must take an eight-hour
long term certification care course every year for the first 4
years in business in order to be certified to solicit and/or
sell long term care. This does not increase the total
continuing education hours required and discussed above.
California Partnership for Long-Term Care (PR): Only

accident and health licensees can sell California
partnership. Accident and health agents who wish to
solicit individual consumers for the California Partnership
product must (prior to being authorized); complete one
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specifically designated LTC training course (2004 LTC) and

one specifically designated Partnership 8 hour course.
Maintaining authority to solicit individual consumers for the
Partnership Product requires:
o An 8-hour specifically designated LTC training course
(2004LTC) each year and must be accompanied by
either a 4-hour PR course every 12-month period or
an 8-hour PR course every 2-year license term.
Workers Compensation: Any life agent who wishes to

sell 24-hour coverage shall complete a course, or
seminar of an approved continuing education provider on
workers' compensation and general principles of employer
liability. Satisfactory completion of this requirement is by
proctored examination, administered or approved by the
department.
Any person failing to meet the requirements and who has not
been granted an extension of time within which to comply by the
commissioner shall have his or her license automatically
terminated until the time that the person demonstrates to the
satisfaction of the commissioner that he or she has complied
with all requirements.
Where a person cannot perform the requirements due to a
disability or inactivity due to special circumstances, the
commissioner will provide a procedure for the person to place his
or her license on inactive status until the time that the person
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demonstrates to the satisfaction of the commissioner that he or

she has complied with all of the requirements.
C. Change of Address or Place of Business
Every licensee and every applicant for a license shall
immediately notify the Commissioner in writing of any
change in his address.
10. License Renewal, Nonrenewal and Fees

Not less than 60 days before a license will expire, the commissioner
will mail, to the latest address of record, an application to renew
the license for the succeeding license term. It is the licensee's
responsibility to renew whether or not a renewal notice is
received. (The commissioner may accept a late renewal. Application
for renewal of a license may be filed on or before the expiration
date. The application for renewal of an expired license may be
filed up to one year later. The regular fee and a delinquent fee of
50% of the regular renewal fee apply. Unless a license is
suspended or revoked, a licensee who has applied to renew a
license is entitled to continue operating under the existing license
for 60 days after its specified expiration date, or until notified
the renewal application is deficient, whichever comes first, if the
applicant has satisfied all license renewal requirements, including:
The submission of the applicable renewal application and fee

on or before the expiration date of the license.
The satisfaction of all required continuing education or

training requirements.
A. Military Service
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If a licensed person enters the military service of the United

States and is in the service at a time of a Renewal application,
the filing of such application is waived, and the license held shall
remain in force during the period of such military service and
until the end of the license year in which he is released from
such service but not for less than 6 months after such release.
During this period a person can file an application and pay the
fee without taking an examination or paying any penalty.
11. Suspension and Revocation of License

The Commissioner may suspend or revoke a license for any of the
grounds on which he may deny an application. A suspension or
revocation may be with or without notice or hearing based upon the
reason for action.
The following are grounds for suspension, revocation and/or
license penalties:
Providing false or misleading information in the license

application
Violating any insurance laws or rules
A violation committed by a partner or associate that was

known or should have been known by the Producer
Fraudulently obtaining or trying to obtain a license
Mishandling money received through insurance transactions
Intentionally misrepresenting the terms of a policy
Having been convicted of a felony or misdemeanor where the

Producer (or license applicant) was dishonest or breached the
trust of others
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Fraudulently transacted insurance
Demonstrated dishonesty in a businesss financial matters
Had a license revoked or suspended in another state (U.S. or

Mexican) or Canadian Province
Forged another persons name on an insurance document
Cheated on the license examination
Knowingly transacted business with an unlicensed individual
Failure to pay a civil penalty or any fees to the Commissioner
Failure to comply with the Continuing Education Requirement
Refusal to renew a license by the Commissioner
Transacting business with a non-admitted insurer, i.e., an

insurer not approved to transact insurance in California (only
surplus lines brokers are authorized to handle nonadmitted
insuerers).
Requiring someone to buy insurance from you if they are

securing a loan from a relative or affiliated party.
Offering free insurance as an inducement to purchase or

rent property or merchandise.
An accused Producer can request a hearing from the Commissioner.

The Producer will have an opportunity to defend him/herself and will
receive any decisions in writing.
Agent World -- Admitted vs, non-admitted insurer: For various
reasons, you may only be able to place a clients insurance with a nonadmitted insurer. A California admitted insurer is one that is
domiciled (has a license to operate) in California. An admitted insurer
is regulated by the State of California and also has the protection of
the States Guaranty Association a fund used to protect policyholders
by paying claims or guaranteeing insurance company investments
much like the FDIC protects bank deposits. A non-admitted insurer
is not subject to solvency and enforcement regulation by the State of
California nor are they a member of the State Guaranty Fund.
However, these types of insurers may be able to provide special types
426
of insurance, lower rates or more flexible underwriting not provided by

admitted companies.
12. Records Maintenance
It is the obligation of each life, life and disability, and disability
insurance agent and any other agent and insurer to preserve and
maintain all applicable records in his or her possession, in addition
to those records transmitted to the insurer, at his or her principal
place of business for a minimum of 5 years. The records must be
kept in an orderly manner, readily available, and open to inspection
or examination by the commissioner at all times.
A. Reporting of Actions
If any administrative action has been taken against a Producer,
he/she must report it to the Commissioner no later than 30 days
after the final disposition or no later than 30 days of the initial
pretrial hearing date in the case of criminal prosecution. The
Producer must include all relevant documentation, including a
copy of the court order, any complaints filed, plus the results of
any hearings.
B. Assumed Business Name
Every individual and organization licensee and every applicant
for such a License, shall file with the commissioner in writing the
true name of the individual or organization and also all fictitious
names under which he conducts or intends to conduct his
business and after licensing shall file with the commissioner any
change in or discontinuance of such names. The commissioner
may disapprove the use of any true or fictitious name.
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13. Fiduciary Responsibilities

A fiduciary is a person who is trusted to fulfill their responsibilities,
especially where handling money is concerned. All funds received
by an insurance agent, broker, or solicitor, life agent, life analyst,
surplus line broker, special lines surplus line broker, motor club
agent, bail agent, permittee, administrator, or solicitor, as premium
or return premium for any policy of insurance, are held in a
fiduciary capacity. Any person who diverts or appropriates those
fiduciary funds to his or her own use is guilty of theft and
punishable for theft as provided by law.
Producers accept payment for insurance premiums, plus handle
money from business and personal use. It is extremely important
that these premium funds are placed in a separate trust account
and do not end up being mixed with other funds, except money
used for the following:
Advancing premiums
Keeping reserves to refund premiums
Paying bank charges and fees
Paying for any other costs arising out of the process of

receiving and returning premiums
A Producer must keep a Client Trust Account in the form of a

checking account, demand, or savings account and fiduciary funds
deposited into this account. If the insured makes the payment
payable the insurer, the Producer must forward it directly to the
insurer.
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Producers/agents must establish and maintain records in an

appropriate accounting system for all client payments received. The
Commissioner may request to see these records at any time
during the Producers business hours. If the Producer does not
make these records available or maintain client premium fund
records for 3 years following the policy cancellation date, serious
consequences can result.
When receiving cash from a client for premium payments, the
Producer must take the following steps:
Give the person a receipt showing the amount of money paid,

the date and time, the policy number, plus the policy holders
name
Deposit the money into a Client Trust Account
If the Producer does not have such an account, he/she must

convert it into a money order, certified check, or cashiers
check made out to the insurer
Keep records of all money received and forwarded
Agent World Return of Premium Offset: At any given time, an

insured may be entitled to a refund or return of premium resulting
from a reduction in coverage or cancellation of part or all of his policy.
As an agent, you can use this refund to offset or pay for premiums
owed on the same policy or another policy . . . as long as the amounts
due and refund are for the same insured.
14.
More Agent Responsibilities
In addition to fiduciary and records maintenance, items basic legal

responsibilities as an agent can be summarized as follows:
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While it may not be your legal duty to secure complete

insurance protection against every conceivable need an insured
might have, but there is definite legal obligation to explain
policy options that are widely available at a reasonable
cost
An agent has a legal duty to use reasonable skill in asking

certain questions during the application process to determine
types of coverage needed.
Failing to determine the nature and extent of the coverage

requested may subject you to a lawsuit and loss of license.
In some cases, agents have been responsible for after sale

duties to see that a policy continues to meet client needs. The
more that your clients depend on you for their insurance needs
and the longer you do business with them, the higher your
standard of care is in selling and serving them.
Pretext Interviews: The insurance code prohibits the use of pretext

interviews to collect information about potential customers. One such
abusive scheme might involve an agent sponsoring a presentation or
group function where potential clients are invited for one purpose
(education or entertainment), under the pretext of collecting
information about the client. Then, using that information to sell
services or insurance products. An example involved living trust mills
in the 1990s. Seniors were invited to seminars to learn about the
benefits of starting a living trust. Asset information collected at
pretext interviews was unethically shared or used by licensed agents
to learn about client monies that could be repositioned in order to buy
annuities or other investment products. This is illegal.
The effect of authority an agent assumes as a representative of an

insurer varies. In general, the agent/broker generally assumes those
duties normally found in any agency relationship. Your agency
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contract is a good source of basic duties. There are three levels of

authority surrounding agency agreements:
Express Authority: Specific authority you are given by the insurer . .
. usually in writing. This can include your ability to represent the
insurer, sell their products, solicit business, etc.
Implied Authority: Additional authority not specifically in writing but
customarily given to agents of the insurer such as the ability tot collect
premiums.
Apparent Authority: Authority the public is lead to believe you have
because of certain circumstances, e.g., an agent for Company ABC
accepts a late premium payment and indicated the policy is reinstated.
The agent may be acting beyond the scope of his authority but the
public has not reason to doubt the agent is acting with authority.
15. Applications, Binding and Renewals
Insurance agents are more than sales people. You are involved in
both pre-selection and post-selection process of evaluating clients or
insureds. However, there are limitations on your involvement.
In the pre-selection process, you are typically asked to secure an
application for insurance where the prospective insured completes
answers to questions. The agent has a responsibility to the insurer to
report to the insurer on the application to provide information the
insurer requests, such as how long the agent has known the applicant,
whether the agent has knowledge that the proposed insurance is being
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purchased to replace existing insurance and to supply basic

information the agent has knowledge of regarding the applicants
property, health, financial situation and general character. You
certainly would not want to lead applicant answers simply to get him
approved.
A binder is best described as temporary insurance used to cover the
insured until the actual policy is issued. Depending on your insurer,
you may be authorized to collect a premium and bind the coverage
for the applicant on the spot. Certain lines of insurance, like long term
care, prohibit binders as underwriting needs to take place before the
client can be approved.
Certificates of liability insurance are forms produced by insurers or
agents that provide evidence or proof to a third party that the insured
has coverage. A bank or mortgage company, for example, would want
to see evidence that your home is insured before or concurrent with
making a loan.
Post-selection occurs when the insurer decides whether to continue
or renew insurance. An insurer may decline to renew insurance or
may offer narrower coverage. Responsibilities of the agent will be to
help secure additional information or determine if the needs of the
insured has changed.
Keeping or tracking client transactions or communications can be very
important to serving a client and protecting yourself against lawsuits.
A suspense/diary system is one such method. State law may
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determine what you must include and how long records must be
maintained.
As an agent, you may also be involved in securing a lost policy
release. An insurer who cancels a policy is interested in being
relieved from liability by requiring the policy be returned. If an insured
has lost or misplaced his policy, a lost policy release form will help
clear the air as the policyholder agrees to relieve the insurer from
liability.
16. Agent Errors and Omissions Insurance
Like many professionals, insurance agents should carry E&O insurance.
This is valuable protection for both you and your clients.
There is no standard errors and omissions policy.
Most policies are
written on a claims-made basis rather than on an occurrence

basis. Claims made means the insurer is ONLY responsible for claims
filed while the policy was in force.
So, if a claim is made against you
after you retire and cancel your E&O policy, it will not be covered.
Policies today also have some very significant limitations, caps, gaps,
consent clauses and relatively high deductibles. Aside from the
primary limits of the policy ($1 Million seems to be the limit of choice
for most agents) the cost of defense is the most important exclusion
to watch.
Does your errors and omission policy include defense
costs as part of the limit? If so, the amount of money available to

pay monetary or punitive awards will be significantly reduced.
Defense costs can also be limited to a percentage of policy limits.
Here, when the number is reached, you start paying for the balance of
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defense costs. Obviously, the best errors and omission plan will pay
for all defense costs in addition to policy limits.
In addition, there are many other important coverage exclusions an
agent must consider, such as: insurer insolvency, receivership,
bankruptcy, liquidation or financial inability to pay; acts by the agent
that are dishonest, fraudulent, criminal, malicious or committed while
knowing the conduct was wrong; promises or guarantees as to
interest rates or fluctuations of interest rates in policies sold, the
market value of any insurance or financial product or future premium
payments, etc.
Also, be aware of specific limitations. You may not be covered
errors and omissions in the following areas: punitive damages,
business outside the state or country; failure to give notice if new
employees or agents are added to your staff; fraudulent or dishonest
acts of employees or agent staff; negligence may be covered, but
bodily injury and property damage may not; judgements -- some
policies only pay if a judgement is obtained against you; some exclude
contractual obligations in the form of hold harmless clauses (watch
them); outside services like the sale of securities, real estate or notary
work.
Most errors and omissions policies are far from perfect. However,
before losing interest in buying this valuable coverage, you should
consider the high costs, and lost production time, associated in the
defense of even one protected client claim and any subsequent
judgement requiring an agent to pay any deficiencies and possible
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attorney/court fees. The cost of the average errors and omissions

policy is cheap when compared to these costs.
17. License Compliance

In addition to paying license renewal fees and performing continuing
education, there are several areas where agents must comply in order
to keep their license valid:
Agency Name (Fictitious Name): Every individual and

organization licensee and every applicant for such a license shall
file with the commissioner in writing the true name of the
individual or organization and also all fictitious names under
which he conducts or intends to conduct his business and after
licensing shall file with the commissioner any change in or
discontinuance of such names.
Display of License: You license must be displayed in a

prominent place in your office so it may be inspected by anyone
to learn that it is current and the right license for the insurance
you are selling.
Records: Agents must maintain records in the principal office in

the State of the agents license and where the insured
(customer) is served. Further, records must be maintained in an
orderly manner and readily available and open to inspection
by the insurance commissioner at all times. Records can be
manual or mechanical (digital), and must provide an audit trail
so that details like summary data, invoices, checks and
statements can be identified. A record system should be able to
trace any transaction back to its original source and sufficiently
detail the application or process being performed. The following
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records must be kept by agents for at least five years after

expiration or cancellation of a policy: Name of insurer, policy
number, effective date, termination date, gross premium
amount, net premium amount, commissions and basis for same,
names of others who received commissions or consideration,
date premiums received, bank and account where premiums
deposited (if any), date a premium was paid or mailed to
another person or the insurer, etc. For at least one year after a
policy is cancelled, these records must be kept in the office
where the insured (customer) was served. For the remainder of
the five years, they can be stored off premises as long as they
are retrievable in two business days. Violations of
recordkeeping may cause the insurance commissioner to require
the agent to restore records in 60 days. Failure to comply
can mean suspension or revocation your license.
Office Location: Every resident insurance property and

casualty broker-agent shall maintain a principal office in this
state for the transaction of business. The address of the office
shall be specified on all applications for license and renewal
applications.
Change of Address: Every licensee and every applicant for a

license shall immediately notify the commissioner in writing of
any change in his address.
Premium Financing: Agents who arrange for the financing of

premiums must disclose any and all compensation he may be
receiving from the premium financier.
License Renewals: After meeting all renewal requirements

(fees and continuing ed), a licensee can continue doing business
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for 60 days after his license expires pending the renewed

license.
License Number: Every licensee shall prominently affix, type,

or cause to be printed on business cards, written price
quotations for insurance products, and print advertisements
distributed exclusively in this state for insurance products its
license number in type the same size as any indicated telephone
number, address, or fax number
Effective Date: Agents are required to provide ALL applicants

for insurance the circumstances (if known) under which coverage
will be effective if there are conditions to that coverage.
Example: Your insurance will be effective when your premium is
received by the insurer. You must notify applicants of their
effective date at the time of application or when you provide a
receipt for their premium payment.
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Section PC 19
CODE & ETHICS
Objectives
Welcome to your courseware for Code and Ethics. This first unit will
give you a historical background of the regulation of insurance,
dating back to the 1850s.
This unit includes:
Historical Background
Federal versus State Regulation
Ethics and History
1. Historical Background
The following timeline illustrates and explains important court
decisions and events in the history of Insurance Regulation in the
United States. You will come across many of these events again in
your study of insurance and further down the road when you are a
licensed agent.
A. Early 19th Century
There were no specific laws or regulations in place other than the
individual state laws that governed corporations and private
businesses. There were no state insurance laws on the books
and no federal regulation of the industry. Resulting improprieties
and abuses lead to a demand among the industry for regulation.
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B. 1850
New Hampshire is the first state to establish a state Insurance
Commissionerstill a very important office now. The states of
Massachusetts, California, Connecticut, Indiana, Missouri, New
York and Vermont soon appoint state Insurance Commissioners.
C. 1868
A Supreme Court decision in the case of Paul vs. Virginia rules
that insurance is not interstate commerce. This establishes that
states actually have the right to regulate insurance and not the
federal government.
D. 1871
The National Association of Insurance Commissioners is
formed. The NAIC seeks some uniformity with regards to state
insurance regulation and reporting requirements. The
organization also develops regulations concerning the solvency
of insurance companies and methods for the exchanging of
information between states.
E. 1905
In New York, the Armstrong Investigation of insurance is
conducted to improve regulation and lessen abuses.
F. 1910
Again in New York, the Merritt Committee Investigation of
fire insurers leads to greatly improved state regulation and a
new state insurance code.
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G. 1939
The state of New York adopts a rule that states all insurance
companies doing business in New York must comply with the
insurance laws of New York with regards to any state they do
business in.
H. 1944
Another very important Supreme Court decision concerning Paul
vs. Virginia. The South-Eastern Underwriters Case causes
the U.S. Supreme Court to overturn Paul vs. Virginia, and rules
that insurance was indeed interstate commerce when conducted
over state lines and that federal anti-trust laws applied to the
industry. The effect of this ruling left the industry virtually
unregulated.
I. 1945
The McCarran-Ferguson Act (Public Law 15) is passed by
Congress due to strong opposition against federal regulation of
insurance. This law gave back to individual states the right
to regulate and tax insurance to the extent that it is not
regulated by the federal government. This is a landmark
moment in the history of insurance regulation, and the
McCarran-Ferguson Act is still an important law today.
2. Federal versus State Regulation
Current federal influence of the industry includes regulation by the
Security and Exchange Commission (SEC) and the National
Association of Securities Dealers (NASD) for securities regulation of
certain insurance products; and the Internal Revenue Service (IRS)
for tax code provisions regarding products and companies. Pension
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legislation with regulations from the Labor department such as

ERISA, protects plan participants and their beneficiaries. Health
insurance legislation, such as the standardization of Medicare
supplement policies, as well as long term care insurance, are areas
of overlapping regulation by states and the federal government.
The sale of insurance products in the banking industry will involve
their regulatory organizations, The Federal Reserve and the Office
of the Comptroller of the Currency.
Like any other industry, there is debate concerning the influences of
federal versus state regulation.
Proponents of Federal regulation argue that:
State regulation is not uniform which, leads to inefficiencies

and other tangles. Despite improvement led by the NAICs
model legislation, this situation is unlikely to change.
State regulation is ineffective in controlling insurance

companies that operate on a nationwide basis.
Federal regulation would be more effective as well as

cheaper.
Proponents of continued State regulation argue that:
State regulation is satisfactory, more flexible and capable of

meeting individual state insurance needs. There is no real
proof that federal regulation would improve conditions or be
more efficient.
The voluntary cooperation of state insurance departments has

already made great strides in achieving uniform provisions.
If federal regulation were imposed, it would lead to two

regulatory systems instead of one cohesive system.
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The future is likely to see more federal influence of the industry,

however it is unlikely to become the sole regulator in all matters
relating to insurance.
In state legislatures, and in Congress in recent years, there has
been proposed legislation and passed legislation regarding current
Life and Health insurance issues including; a tax on the cash value
build-up in a life policy, certain mandated benefits such as Family or
Maternity leave, privacy and authorization with HIPAA.
3. Ethics and History
The overall purpose of regulation is to protect the public good
and the insurance consumer.
The state insurance department seeks to provide protection by
regulation regarding three primary areas:
1) Company authorization and financial stability or solvency
2) Agent licensing and education
3) Sales practices
These regulations set minimum standards and form the basis of
ethical guidelines by making certain actions unlawful. There
remains a difference however between law and ethics. Witness the
business scandals such as Enron and World Com, breaches in
ethical behavior in the securities industry in spite of penalties that
include prison as well as fines or civil penalties. An action may be
lawful, but unethical.
442
Today, higher legal standards for the benefit of consumer protection

will likely find an agent or company liable for their actions. Public
perception of the industry has been affected by scandal, insolvency,
class action lawsuits, and their own personal experiences.
How then, do insurance agents live up to higher expectations and
responsibilities? To tell someone Do the right thing, may be too
simplistic. A personal ethical or moral code is required to answer
the question of what one should do in a given situation.
Ethical or moral codes have long existed, a universal norm being
The Golden Rule, a version of it expressed by most religions
including Christianity, Judaism, Islam, Hinduism, Buddhism, and
Confucianism.
Ethics is the basis for trust, promises, and reliability in our
business. Accepting ethics at the philosophical level is one thing,
living the practicality of it in business daily is another. The evolution
from insurance agent to insurance professional, and the
responsibility of that role may help.
There are 7 requirements for recognition as a professional:
1) Specialized knowledge not understood by a lay person
2) Academic study of the subject
3) Licensing examination is required
4) Professional organization or society
5) Independence in their recommendations
6) Public recognition as professionals
7) A code of conduct (ethics)
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Professional organizations include the National Association of

Insurance and Financial Advisors (NAIFA), Society of Financial
Service Professionals, the Million Dollar Round Table (MDRT), the
American College, sponsor of the professional designations;
Chartered Life Underwriter (CLU), Chartered Financial Consultant
(ChFC) and Life Underwriting Training Council Fellow (LUTCF).
Other designations in the industry are the Charted Property
Casualty Underwriter (CPCU), and Certified Financial Planner (CFP).
All of these organizations have a code of conduct, code of ethics, or
pledge, that have as its common theme, a recognition of
obligations and responsibilities to those they serve:
The best interests of the client come first
Obey the law
Loyalty to the company
Professional conduct, truthfulness, confidentiality
Duties to other professions, family, and self
Many of the regulations in our industry have to do with sales

practices. Suitability, disclosure, sales illustrations, and
replacement, the particulars of which you will learn later in units
that follow, are the issues that concern regulators, companies, and
ourselves as professionals.
The solicitation, selling, and servicing of insurance properly, may be
accomplished by following some basic principles:
Identify yourself as you are without misleading titles
Use illustrations and sales materials properly
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Provide options or choices in recommendations
Record all information requested on the application
Protect client confidentiality
Deliver the policy and explain things to your client
Service with a regular review
Even so, the best professionals realize that mistakes are made,
clients fail to remember what was once explained, and complaints
occur.
Professional liability or malpractice insurance is a must today, and
the professional agent carries Errors and Omissions (E&O)
coverage for even a baseless lawsuit. If you are sued and the
other party wins, E&O coverage will pay the loss, subject to policy
limits and a deductible, in addition to defense costs.
An agents exposure may be in one or more of several areas:
Alleged misrepresentation of policy terms and coverages
Misuse of policy illustrations
Improper licensing for product
Misunderstanding of tax ramifications
Downside risk that is not explained
Premiums or premium offset arrangements
Incorrect information on an application
Failure to provide proper coverage
Inappropriate or unsuitable product recommendations
Agents can protect themselves with documentation of client files

with copies of; checklists, questionnaires, factfinds, agendas, notes,
445
illustrations, disclosures, and phone logs. Maintaining client contact

is important in the relationship also, and many agents use birthday
or greeting cards, client newsletters, and periodic reviews to stay in
touch.
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Section PC 20
THE COMMISSIONERS
& INSURERS
Objectives
In this unit we will discuss the office of Commissioner of the
California Department of Insurance (DOI). Another section of
the Unit will describe the different types and classifications of
Insurance Companies.
1. General Duties and Powers

The Commissioner of the California Department of Insurance
(DOI) is the elected official responsible for administering and
enforcing the laws of the California Insurance Code, and the
California Code of Regulations.
Currently, the Commissioner has a 14 member executive team that
includes a Chief Deputy Commissioner, General Counsel, Chief
Deputy of Operations, and Deputy Commissioners for Enforcement,
Financial Surveillance, Rate Regulation, Consumer Services and
Market Conduct (underwriting, sales, ratemaking, claims handling),
Legislative, Community Relations, Communications and Press
Relations, as well as several assistants. Together they oversee 1350
employees, a $200 million budget, and nine bureaus made up of
Auto Enforcement, Sacrament Enforcement, San Francisco
Enforcement, Corporate Affairs I and II, Policy Approval, Rate
Enforcement, Fraud Liaison, and Government Law.
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Note: In some states this office is referred to as the Director or the

Superintendent of Insurance.
The Commissioner is responsible for enforcing the California
Insurance Code, which are laws passed by the state legislature and
the California Code of Regulations, and also the administrative law
written by the Commissioner and staff to further interpret,
explain, and enforce Code.
It is important to note that the Commissioner may not make
changes to the Insurance code. Only the state legislature may
make those changes. However, the Commissioner may review the
Insurance Code and issue recommendations for changes.
It is also important that any notice required to be given to any
person by any provision of this code may be given by mailing
notice, postage prepaid, addressed to the person to be notified, at
his residence or principal place of business in this State.
A. Issuing Orders
The Commissioner can issue orders, which are oral or written
actions given to an insurance company, any representative of an
insurance company, or anyone outside the DOI. An official order
must include its intent, its effective date, the information the
order is based on, and the specific Insurance Code provision that
directly relates to the order.
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A Cease and Desist Order is a written order from the

Commissioner that tells someone they need to stop what theyre
doing. If the Commissioner determines that a Producer is doing
something illegal or dishonest, the Cease and Desist Order
means knock it off or else
The Commissioner can issue a Cease and Desist Order to an
authorized individual who is:
Transacting insurance without the proper authorization
Involved in dishonest or unfair acts
In a hazardous condition
In a hazardous financial condition
Dangerous to the safety of the general public
Note: Hazardous condition is a legal term meaning the

insurer/company is doing something construed as shifty. This could be
filing a falsified financial report, not filing a financial report when its
due, or claiming it has more/less money than it really does.
A Cease and Desist Order has to contain:
The name and last known address of the

person/organization
A statement regarding the violations, and which parts of

the code or which regulations were specifically violated
The danger the violations could pose to the public
The proposed penalty
A command for the person/organization to immediately

stop violating the code
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B. Hearings
The Commissioner has the power to hold hearings. These
hearings must be held upon written demand to the
Commissioner. The written demand must include the reason for
the Hearing. During the hearing, the Commissioner may:
Deliver oaths and affirmations, subpoena witnesses and

examine under oath any person who may be able to offer
information towards the investigation
Require the individual being investigated to produce any

relevant evidence
The Commissioner may appoint examiners, administrators or

deputies in order to collect evidence or conduct hearings. The
Commissioner is responsible for the actions of these appointees
and may revoke these appointments at any time. The
Commissioner may act under the Insurance Code in a quasijudicial capacity, in that the Commissioner may apply to any
judge of any county circuit court for court-ordered contempt
orders.
C. Issuing Penalties
The Commissioner can issue 3 different types of penalties
towards those in the insurance industry:
1) Civil Penalties
2) Criminal Penalties
3) Disciplinary actions towards applicants or licensed agents
Heres a closer look at those 3 types of penalties:
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Civil Penalties can be imposed on any insurance company that

violates any provision of the Insurance Code. These penalties
could be as high as:
$1,000 per violation for individuals
$10,000 per violation for companies
A Civil Penalty must be paid within 10 days after the order

becomes final.
The Commissioner will impose criminal penalties if a violation
of the Insurance Code leads to a criminal conviction for an
individual. These penalties could be as high as:
Up to 1 year in county jail, or a maximum fine of $1,000

for individuals
A maximum fine of $10,000 for companies
Disciplinary actions towards applicants or licensed agents are

actions the Commissioner may take against any licensed
individuals or applicants for license. The Commissioner may
revoke, suspend or refuse to renew a license for any business or
classification of insurance. Also, the Commissioner may refuse to
issue a license or grant authority for license to transact or
engage in any business or class of insurance.
The following is a list of violations the Commissioner may
penalize for:
Incompetence or untrustworthiness of an agent
Any dishonest or deliberately false act in relation to the

insurance application or examination
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Violation or noncompliance with the Insurance Code
Misappropriation, embezzlement or any illegal withholding

of customer monies
Conviction of any felony or imprisonment
Material misrepresentation of policy terms
Fraudulent or dishonest practices in transacting insurance

business
Failure to pay a civil penalty, fee, or charge assessed by

the Commissioner
Improper or illegal use of an insurance license
Cancellation, revocation, suspension or refusal to renew

the license by any other state or government agency
Failure to comply with Continuing Education requirements
Evidence of dishonesty, fraud, or misrepresentation of an

agent even if such activity is not related to the insurance
business
D. Financial Statements and Investments

All California insurers are required to submit a financial report to
the Commissioner by December 31st and due by June 30th.
This annual report includes information on the
companys/insurers:
Capital
Stock
Assets
Liabilities
Income
Expenditures
Balance sheet
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All insurance and premiums written in California.
Note: Audits determine the insurance company's financial condition,

nature of operation, ability to fulfill insurance obligations and the
presence of any Insurance Code violations. The insurance company
under examination pays for any costs associated with these audits.
The report becomes a public record.
2. National Association of Insurance Commissioners (NAIC)
The NAIC is an organization formed by the Insurance
Commissioners from all 50 states, Washington, D.C., and Puerto
Rico.
The purpose of the NAIC is to promote and support uniformity
between the states in regards to the insurance business. The NAIC
keeps a registry of all agent and producer licenses granted in each
state that require such licenses.
Note:
With respect to the NAIC, insurance agents are now known as
producers, unless youre in a state where theyre still known as
agents. In California, we call them producers, but if you think of the
two as synonymous, youll do just fine.
This registry lists both licenses and appointments by state. The
NAIC has formed a 'model bill' for each state to present to their
state legislatures when attempting to make changes to State
Insurance Code.
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3. Classification of Insurance Companies

In California, any person capable of making a contract may be an
insurer, subject to the restrictions imposed by this code. A
person "Person" means any individual, association, organization,
partnership, business trust, limited liability company, or
corporation.
There are 3 different types of insurance companies for classification
purposes:
1) Domestic
2) Foreign
3) Alien
Heres a closer look at those 3 classifications:
A. Domestic
Domestic insurance companies are ones that are incorporated
and domiciled in California.
B. Foreign
Foreign companies are ones formed under the laws of any other
state in the U.S.
C. Alien
Alien companies are formed and originate in another country
outside of the U.S.
An excess and surplus lines insurer writes standard coverages
in a state where the insurer is unlicensed.
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A standard market insurer is an insurer who offers rates to

insureds who have average or better than average loss exposure.
No matter the classification, all insurance companies in California
must have a certificate of authority, issued by the Commissioner,
to be admitted to transact insurance. It is a violation to act as an
insurer without a certificate of authority. A public offense
punishable by imprisonment not exceeding one year or by fine
not exceeding $100,000 or both.
An Admitted Insurer has a certificate of authority and is
permitted to do business and appoint agents in the state of
California.
All authorized insurance companies have to:
File detailed annual financial reports
Pay all fees and expenses of the DOI examiners
Contribute to appropriate insurance guaranty funds
Agree to abide by all insurance Laws and Regulations
Produce insurance business through licensed producers/agents
Note: If someone violates the requirement for a certificate of

authority, they could face penalties of:
Imprisonment in state prison, or in a county jail for up to 1 year
A fine of up to $100,000
All of the above

An Nonadmitted Insurer is one that does not have a certificate of
authority and is not permitted to appoint agents in the state of
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California. A surplus lines broker is specially licensed to represent

unauthorized insurers.
An insurer is considered insolvent when it is unable to meet its
obligations when they are due. An impairment in paid-in capital is
also considered grounds for the classification of insolvency.
Further,
an insurer cannot escape the condition of insolvency by being able to

provide for all its liabilities and for reinsurance of all outstanding risks.
An insurer must also be possessed of additional assets equivalent to
such aggregate "paid-in capital" or "capital paid in" required by this
code after making provision for all such liabilities and for such
reinsurance.
Paid in capital is defined as the value of an insurers assets in excess
of its liabilities, expenses, taxes, debt and reinsurance.
If an insurer or agency you are involved with is found to be insolvent,
the insurance commissioner, without any court order needed, can take
possession of books and property. It is a misdemeanor to refuse to
deliver any books records or assets once a seizure order has been
executed. A violation subjects you to a fine of up to $1,000 and
imprisonment up to one year or BOTH!
Surplus Lines Broker
You might assume that nonadmitted or unauthorized insurer is
simply the exact opposite of an authorized insurer, but it isnt. An
unauthorized insurer isnt allowed to transact normal kinds of
insurance, and so they deal with Surplus Lines brokers. A List of
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Eligible Surplus Lines Insurers (LESLI), can be found on the California

Department of Insurance website.
Surplus Lines brokers handle insurance for very high risks and nonstandard coverages.
For example, if someone wanted to insure a
shipment of volatile chemicals, it would be difficult for them to insure

such a high risk through the normal insurance market. The person
would then contact a Surplus Lines broker, possibly working through
his existing agent, who would arrange insurance through an
unauthorized insurer.
It is important to note that there is an absence of binding authority
when placing business through an excess and surplus lines broker.
4. Distribution Systems
Companies may further be classified by their marketing or
distribution systems, such as:
A. Direct Writers (or Direct Response), companies that market by
mail, phone, and /or the internet with their own employees.
B. Exclusive or Captive Agency, companies whose agents
represent only one company.
C. Independent Agency -- agents represent and are appointed
with several companies.
D. Managing General Agent (MGA), any person, firm,
association, corporation, or partnership who manages all/part of
an insurers business. MGAs act as an agent and can underwrite
up to 5% of the insurers annual policyholder surplus and may
adjust or pays claims in excess of an amount determined by the
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Commissioner as well as negotiate reinsurance on the insurers

behalf.
E. Home Service, also known as debit companies, sell small
face amount policies and industrial insurance.
Insurers divide their company in major departments organized by
function and include;
Actuarial; responsible for data analysis, loss predictions,

mortality and morbidity, premium determination
Underwriting; determines standards for risks, evaluates

applicant information, approve, decline, and rate risks
Claims; investigation and settlement of claims
Administration; policy issue, billings, commissions
Investments; responsible for investment return for the insurer
Marketing; sales, advertising, promotion and recruiting, training

agents
The structure of insurance companies varies:

Stock Companies: Sell shares of stock to raise money necessary to
operate.
Stockholders own the company.
Policyholders do not
participate in dividends.
Mutual Companies: Policyholders contribute capital and become the
owners. Their policies are participating in that they allow policyholders
to participate in company profits.
De-mutualization is the process
whereby a mutual insurer becomes a stock company,
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Fraternal organizations are described as any benefits society

(without capital stock) conducted solely for the benefit of its members
and their beneficiaries and not for profit.
Lloyds of London:
Not really insurance companies, rather an
insurance exchange where wealthy individuals agree be responsible for

losses but also share in company profits.
Reciprocal and Risk Retention Group: A Risk retention Group is
a form of insurer owned by policyholders who gather together to selfinsure all or a portion of their risk, e.g., a group of doctors covering
their own claims.
In a Reciprocal Group, subscribers or members
share insurance responsibilities and losses with other members but are
managed by an attorney in fact.
USAA is one example.
Your
consumers should know that coverage through these groups carries

certain risks: They may not be subject to all insurance laws; nor do
they qualify for state guaranty fund protection. In essence, the ability
for these entities to pay claims is based solely on their present or
reasonably anticipated financial condition.
5. Fraud and Prevention
The Department of Insurance, Division of Enforcement, has created
the Fraud Division to enforce the provisions of the Code and to
identify and combat insurance fraud. The business of insurance
involves many transactions that have the potential for abuse and
illegal activities. This division is intended to permit the full
utilization of the department so that they may more effectively
investigate and discover insurance frauds, halt fraudulent activities,
and assist and receive assistance from federal, state, local and
administrative law enforcement agencies in the prosecution of
persons who are parties in insurance frauds.
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Note: Preventing all types of insurance fraud significantly reduces the

cost of insurance premiums.
The following statement is required on all claims forms in California:
"Any person who knowingly presents false or fraudulent claims for
the payment of a loss is guilty of a crime and may be subject to
fines and confinement in state prison."
Note: An insured signing a fraudulent claim form may be found guilty
of perjury.
It is unlawful to do any of the following:
Make or cause to be made a knowingly false or fraudulent

material statement or material representation for the purpose
of obtaining or denying any compensation
Present or cause to be presented a knowingly false or

fraudulent written or oral material statement in support of, or
in opposition to, a claim for compensation for the purpose of
obtaining or denying any compensation
Knowingly assist, abet, conspire with, or solicit a person in an

unlawful act under this section.
Anyone who commits fraud can be punished in one or more of the

following ways:
Imprisonment in a county jail for one year
Imprisonment in the state prison, for two, three, or five

years,
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Required to pay a fine that could be as high as $150,000 or

required to pay a fine thats double the value of the fraud
(whichever is higher)
Required to pay restitution for any necessary medical

evaluations or treatment services
Possibly required to pay for the costs of the investigation
Note: Anyone who has had a prior felony conviction will also receive an
extra 2-years for each prior conviction in addition to one of the
penalties mentioned above.
A. The National Automobile Theft Bureau
Every insurer in California is required to report covered
automobiles involved in theft and salvage total losses, including
the vehicle identification number to the National Automobile
Theft Bureau (NATB) or a similar organization engaged in
automobile loss prevention.
B. The Arson Information Reporting System
The Arson Information Reporting System was created to
permit insurers, law enforcement agencies, fire investigative
agencies, and district attorneys to deposit arson case
information in a common database within the Department of
Justice.
C. Fraud and Workers Compensation
When an insurer or rating organization knows or reasonably
believes it knows the identity of a person or entity whom it has
reason to believe committed a fraudulent act relating to a
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workers' compensation insurance claim or insurance policy,

including any application, the insurer, or agent authorized by an
insurer to act on its behalf, or rating organization shall notify the
local district attorney's office and the Fraud Division of the
Department of Insurance.
D. Insurance Claims Analysis Bureau
An insurance claims analysis bureau performs the following
functions:
Collect and compile information and data from members or

subscribers concerning insurance claims.
Disseminate information to members or subscribers

relating to insurance claims for the purpose of preventing
and suppressing insurance fraud.
Promote training and education to further insurer

investigation, suppression, and prosecution of insurance
fraud.
Provide, without fee or charge, to the Commissioner, all

California data and information contained in the records of
the insurance claims analysis bureau in furtherance of the
prevention and prosecution of insurance fraud.
6. Insurer Takeover
Whenever it appears to the commissioner that an insurer refuses to
submit reports or meet prescribed deadlines, submit to an examination
or where irreparable loss and injury to the property and business of an
insurer has occurred or may occur unless the commissioner so act
immediately, the commissioner, without notice and before applying to
the court for any order, can take possession of the property, business,
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books, records and accounts of the insurer, and of the offices and
premises occupied by it for the transaction of its business, and retain
possession subject to the order of the court.
Where there is sufficient time, the commissioner can also petition the
court to act as a conservator for the insurer.
7. Insurer Discrimination
No admitted insurer, licensed to issue any policy of insurance covered
by this chapter, shall fail or refuse to accept an application, issue
or cancel a policy or charge a higher premium for reasons related to
marital status, sex, race, color, religion, national origin, or ancestry;
nor shall sex, race, color, religion, national origin, or ancestry.
Applications for insurance shall not carry any identification, or any
requirement thereof, of the applicant's race, color, religion, national
origin, or ancestry. A question on birthplace, however, can be used
only to identify the applicant and not to discriminate against the
applicant.
8. Insurer Privacy Protection Privacy Protection.
There are several significant acts of legislation agents should know
affecting the privacy of consumer information supplied to financial
institutions: 20-17
1.
The Gramm-Leach-Bliley Act (1999)
concerns consumer
financial privacy and financial safeguards: Financial Privacy - Requires financial institution to provide each consumer with a
privacy notice explaining what information is collected about
the consumer, where the information is used and how it is
protected.
Any changes must be disclosed. Prohibits the
sharing of nonpublic information with a non-affiliated third

party unless consumers are given an opportunity to opt-out.
Financial Safeguards -- Requires financial institutions to
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develop a written security plan describing how the company is

prepared
for
and
plans
to
protect
consumer
nonpublic
information, even if the consumer is no longer with the

financial institution.
2.
The California Financial Information Privacy Act (2003)

adds to the financial privacy provisions of Gramm-Leach Bliley
by requiring that consumers opt-in PRIOR to any sharing of
nonpublic information among financial institution non-affiliates.
Consumers can opt-out for any sharing of information among
affiliates of the financial institution.
3.
Insurance Information and Privacy Protection Act (2003)

provides that personally identifiable information supplied to an
insurance agent or broker in order to apply for insurance must
be protected. Agents must provide consumers with a Privacy
Notice explaining how and with whom this information will be
shared and the consumer right to opt-out from having
personal information shared.
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Section PC 21
MARKETING &
TRADE PRACTICES
Objectives
This unit will cover the Code and Ethics concerning the selling of
insurance products in California. The purpose of Regulation
concerning the Marketing of Insurance products is to ensure that all
insurance companies act in good faith, abstain from deception and that
they treat all members of the public with honesty and fairness in all
insurance matters. While this is common sense in all business
practices, there are several concepts and regulations that are
particular to the insurance business.
1. Illegal and Unfair Practices

Insurance products are regulated to make sure that all members
of the public are treated with honesty and fairness. Obviously,
thats business ethics 101, but there are regulations specific to
the insurance industry that could end up on the final exam.
With regard to the marketing or claims handling of insurance
products, the following are defined as unfair methods of
competition and unfair and deceptive acts or practices:
A. Misrepresentation
Misrepresentation means any of the following:
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Misrepresenting the terms of a policy, its dividends, the

financial condition of an insurer, or making any
misrepresentation to any policyholder insured in any company
in order to induce them to lapse, forfeit, or surrender their
insurance
Making untrue or misleading statements
Entering into any agreement to commit any act resulting in

unreasonable restraint, or monopoly in the business of
insurance
Publishing or circulating false statements of financial condition

in order to deceive
Making false entries or willfully omitting any material facts in

order to deceive
Making or allowing any unfair discrimination
Stating that the named insurer is a member of the California

Insurance Guarantee Association, or stating that the insurer is
insured against insolvency
Canceling or refusing to renew a policy in violation of the code
B. Premiums
There are 3 main illegal practices regarding premiums:
1) Commingling means company money is mixed with the
customers money or the agents money.
2) Overcharging premiums involves overcharging the
insured and then keeping the excess.
3) Charging premiums for unapplied coverage means a
producer accepts premium payments for coverage that
isnt in effect.
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C. The insurance License

Its illegal to transact insurance without a license, and its illegal
to obtain a license fraudulently. Its also illegal to sell insurance
thats outside the scope of the license you have. If a producer is
licensed to sell Property and Casualty insurance, they cant
transact a Life insurance policy. So, just to reiterate:
Its illegal to transact insurance without a license
Its illegal to obtain a license fraudulently
Its illegal to sell insurance outside the scope of your

license
D. Rebating
Rebating means you use a sales inducement to get a
prospective customer to buy an insurance policy. This could
involve guaranteeing a dividend, splitting commissions with the
client, or paying premiums for the client.
E. Illegal Inducement
This is a nice way of saying bribing somebody. It could mean
giving gifts to prospective clients, offering them money, or even
buying them nice dinners. Offering special contracts or changes
to a contract or policy is also illegal, as well as offering
prospective clients foot massages or a free phrenological
assessment. Illegal, illegal, illegal.
F. Concealment
Concealment involves intentionally withholding facts or
information to gain an advantage in an insurance transaction.
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G. Twisting
Twisting means any situation where the truth is twisted or bent
to get someone to drop an existing policy for a new policy. For
example, if a producer could get a commission by convincing a
client to drop their existing life policy, which takes care of all
their needs, for a new policy they might not necessary need, the
producer is engaging in twisting.
H. Defamation
The official definition of defamation is the malicious discrediting
or slandering of an insurance company or its agents. Basically,
its saying/writing/implying something mean that could hurt a
company/individuals reputation or cost them money. For
example: Buy from us, because unlike our competitors, we
dont reek of day old cheese! Usually its harsher than that, but
you get the general idea.
I. Controlled Business
You cant get a license just to write controlled business, which
means youre only selling to friends and family. You can write
some controlled business, but there are guidelines regarding
controlled business:
In a 2-year period no more than twice the amount of a

producers premiums can be from controlled business
A producer cant have twice the amount of controlled Life

and Health policies, than they have for noncontrolled
premiums
J. Free Insurance
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This would fall under inducement, but the CIC specifies that
Free Insurance is a no-no. Basically, someone would offer free
insurance as a benefit of buying an annuity or a property.
Agents/producers/insurers arent allowed to do this.
Note: The prohibitions of free insurance doesnt include insurance
written in connection with newspaper subscriptions or general
circulation. It also doesnt include insurance issued to credit unions or
members of credit unions.
2. Misrepresenting Policy Provisions
Its considered a misrepresentation of policy provisions if an
insurance company or producer:
Fails to disclose policy benefits during a claim
Denies a claim because the insured fails to exhibit property

without proof of demand
Denies a claim because the insured didnt act within time

frames that werent in the policy
Requires a release beyond the scope of claim for the payment

of the claim
Issues payment checks for partial settlement that releases

the insurance company of its total liability
Makes payments to the insured that requires reimbursement

if the company doesnt tell the insured about that policy
3. Unfair Claims Settlement practices

The following are considered specific unfair claim settlement
practices. An insurance company cant:
Misrepresent facts or policy provisions
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Fail to respond promptly to a claim
Fail to properly investigate a claim
Refuse to pay a claim without an investigation
Fail to affirm or deny coverage after Proof of Loss is provided
Refuse to act in good faith when payment is reasonably clear
Fail to offer reasonable settlement amounts, forcing the

insured to resort to litigation or arbitration
Delay processing a claim with excessive paperwork
Delay settlement under one coverage as leverage to effect

the settlement under another coverage for that policy
Deny a claim without providing the insured with a clear

explanation
Discriminate against claimants who are represented by a

public adjuster
Fail to honor checks paid to claimants
Fail to pay a claim promptly after settlement
Fail to promptly deliver a release or settlement document to

the insured of claimant
Delay or add to the cost of Property/Casualty appraisals
Fail to make a good faith effort to settle and force the insured
into a Property and Casualty appraisal
Settle directly with a claimant whos represented by an

attorney without the attorneys consent
Delaying the payment or provision of hospital, medical, or

surgical benefits for services provided with respect to
acquired immune deficiency syndrome or AIDS-related
complex for more than 60 days after the insurer has received
a claim for those benefits, where the delay in claim payment
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is for the purpose of investigating whether the condition

preexisted the coverage.
Note: This 60-day period doesnt include any time during which the
insurer is awaiting a response for relevant medical information from a
health care provider.
3. Prompt, Fair, and Equitable Settlements Definitions
Claimant
The claimant is any person who asserts a right of recovery under
a surety bond, an attorney, any person authorized by operation
of law to represent the claimant.
Proof of claim
means any evidence or documentation in the possession of the
insurer, whether as a result of its having been submitted by the
claimant or obtained by the insurer in the course of its
investigation, that provides any evidence of the claim and that
reasonably supports the magnitude or the amount of the claimed
loss.
D. File and Record Documentation
Every licensee's claim files shall be subject to examination by the
Commissioner or by his or her duly appointed designees. These
files shall contain all documents, notes and work papers
(including copies of all correspondence) which reasonably pertain
to each claim in such detail that pertinent events and the dates
of the events can be reconstructed and the licensee's actions
pertaining to the claim can be determined.
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E. Duties upon Receipt of Communications

Upon receiving any written or oral inquiry from the Department
of Insurance concerning a claim, every licensee shall
immediately, but in no event more than twenty-one (21)
calendar days of receipt of that inquiry, furnish the Department
of Insurance with a complete written response based on the
facts as then known by the licensee. A complete written
response addresses all issues raised by the Department of
Insurance in its inquiry and includes copies of any
documentation and claim files requested.
Upon receiving any communication from a claimant, regarding a
claim, that reasonably suggests that a response is expected,
every licensee shall immediately, but in no event more than
fifteen (15) calendar days after receipt of that communication,
furnish the claimant with a complete response based on the facts
as then known by the licensee. This subsection shall not apply to
require communication with a claimant subsequent to receipt by
the licensee of a notice of legal action by that claimant.
4. Standards for Prompt, Fair and Equitable Settlements
These are the standards for prompt, fair, and equitable settlements
by insurance companies.
No insurer shall discriminate in its claims settlement practices
based upon the claimant's:
Age
Race
Gender
Income
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Religion
Language
Sexual orientation
Ancestry
National origin
Physical disability
Address or location
After receiving proof of claim, every insurer has to:
Accept or deny the claim as quickly as possible, and no later

than 40 calendar days
Notify the claimant if more time is required to determine

whether a claim is going to be accepted or denied, either
partially or wholly. The claimant needs to be notified every 30
days if more time is needed
Settle the claim by making a reasonable offerinsurers cant

make an offer thats unfair or unreasonably low
Note: If someone thinks they have received an offer thats too low,
they can file a complaint with the Commissioner. The Commissioner
shall consider any admissible evidence offered in determining whether
or not a settlement offer is unreasonably low.
Pay any approved claims no later than 30 calendar days
5. Insurance Information and Privacy Protection Act

An insurance institution or agent has to provide a notice of
information practices to all applicants or policyholders in connection
with insurance transactions as provided below:
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At the time of the delivery of the insurance policy when

personal information is collected only from the applicant, an
insured under the policy, or from public records
At the time of the collection of personal information is

initiated when personal information is collected from a source
other than the applicant, an insured under the policy, or
public records.
The written notice has to include the following:
Whether personal information may be collected from persons

other than the individual or individuals proposed for coverage
The types of personal information that may be collected and

the types of sources and investigative techniques that may be
used to collect such information
The types of disclosures and the circumstances under which

the disclosures may be made without prior authorization
A description of the rights established and the manner in

which the rights may be exercised.
That information obtained from a report prepared by an

insurance-support organization may be retained by the
insurance-support organization and disclosed to other persons
Disclosure forms must be:
In plain language
Dated
Include the nature of information, as well as to whom it may

be disclosed
The name of the agent or insurer
How long the authorization is valid.
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Penalties for violation could include a fine of up to $50,000 and

any court awarded damages.
Note: In California, marketing life, annuities, or disability to seniors
who are 65 years or older, has specific regulations. Policies have to
include a 30-day free look period, a written comparison of any existing
health coverage, and the person has to receive advice concerning
HICAPs free services to seniors (the Health Insurance Counseling and
Advocacy Program).
6. The Insurance License
It is illegal to sell any insurance product without an official stategranted license to do so. Also, selling insurance that is outside
the scope of one's license is illegal. If an agent is licensed to sell
Automobile and Home insurance, they cannot sell or write a
Health insurance policy without being licensed for that line. It is
also illegal to obtain any insurance license by fraudulent means.
Every licensee shall prominently affix or be printed on business
cards, written price quotations for insurance products, and print
advertisements distributed exclusively in this state for insurance
products, its license number in type, the same size as any indicated
telephone number, address, or fax number, as well as the word
insurance.
If someone violates these rules, the person could receive a fine of
up to:
$200 for the first offense
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$500 for the second offense

$1,000 for the third offense, or any other offenses afterwards
Note: The penalty cant exceed $1,000 for any one offense.
7. Unfair Discrimination
Insurance companies cant deny insurance coverage based solely on
the basis of race, religion, or national origin. Coverage also cant be
denied because of a physical or mental disability.
Law and regulations regarding unfair discrimination state that:
Insurance companies have to treat all applicants equally
Insurance companies can discriminate as long as the

discrimination is based on Risk Selection and Sound
Actuarial Principles
Note: Risk Selection and Sound Actuarial Principles are methods

for determining whether a person or a group of people are desirable
insurance risks. This takes into account their age, occupation, gender,
lifestyle, and history, but it also looks at a statistical model of certain
demographics. Actuarial principles help companies deduce how much
money in claims they could end up spending on claims based on
morbidity rates, mortality rates, etc.
Companies are allowed to use the following characteristics only if
those characteristics increase the risk of insurance:
Age
Sex
Marital status
Race
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Creed
National origin
Ancestry
Lawful occupation
Change of occupation
Change of domicile
Previous insurance rejection
Cancellations/nonrenewals of insurance
A previous lack of insurance
8. HIV
California has established mandatory and uniform minimum
standards for insurers to avoid making or permitting unfair
distinctions between individuals of the same class in the
underwriting of life or disability income insurance for the risks of
acquired immune deficiency syndrome (AIDS)and AIDS-related
conditions (ARC), for assessing AIDS and ARC risks for determining
insurability which are deemed to be sufficiently reliable to be used
for life and disability income insurance risk classification and
underwriting purposes, and to require the maintenance of strict
confidentiality of personal information obtained through testing as
well as require informed consent before any insurer tests for HIV.
9. Commissions and Fees

Only licensed producers can receive commissions or fees, or any
other valuable considerations from insurance transactions. Its
illegal for anyone who isnt licensed to accept a commission.
Someone can accept renewals and deferred commissions if they
were licensed at the time of the sale.
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A service fee is a charge the insurance producer makes that isnt

part of premium payments.
Note: Service fees arent allowed in Personal lines of insurance: Auto,
Property, and Liability.
Service fees can be charged in Commercial lines of insurance if the
producer provided additional services above and beyond customary
practice. In these instances, the producer would have to provide a
written explanation for the charge.
You cant accept compensation from the insurance company
unless you have done the following, prior to the insureds
purchase of a policy:
Obtained the insured's documented acknowledgement
Disclosed the amount of reimbursement or provided a

reasonable estimate of what that reimbursement might be
Disclosed the nature of the work that will be done on behalf of

the insured
10. Advertising
False advertising is illegal. Here are some guidelines concerning
advertising:
Advertising has to be clear and not misleading
If a company advertises their assets, those assets have to

match the last verified statement filed with the Commissioner
You cant infer or suggest youre an insurer unless youre an

insurer
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All advertising has to be true and accurate no matter what

form its in: media, newspapers, magazines, online, and etc.
Note: Advertisements for term life insurance aimed at people who are
55 years or older will:
Clearly and prominently distinguish basic life insurance benefits from
supplemental benefits such as accidental death benefits
Prominently disclose any limitations, exceptions, or reductions
affecting each benefit
Prominently disclose any condition affecting the policy or certificate
holder's continued insurability. If term coverage terminates at a
stated age, or at the end of any designated period, that fact and the
specified age or designated period shall be disclosed
Prominently disclose any change in benefits resulting from the aging
of the insured, policy duration, or any other factor
Prominently disclose any change in premium resulting from the aging
of the insured, policy duration, or any other factor. If the insurer
retains any right to modify premiums in the future, that fact shall be
disclosed
A. Internet Advertising
A person licensed in this state as an insurance agent or broker,
who advertises on the Internet, and transacts insurance in this
state, must identify all of the following information on the
Internet:
Name as it appears on his or her insurance license, and

any fictitious name approved by the commissioner
The state of his or her domicile and principal place of

business
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License number
If someone who advertises on the Internet does any of the

following, the California Code considers them to be transacting
insurance:
Gives an insurance premium quote to a California resident
Accepts an application for coverage from a California

resident
Communicates with a California resident regarding terms

of an agreement to provide insurance or an insurance
policy
11. Fiduciary Responsibilities

Producers have certain financial responsibilities. If they receive
premium payments on behalf of an insurance company, they have
to report the exact amount of the payment and records must be
kept on all received/refunded premiums.
Any refunded or returned premium has to be delivered promptly to
the insured.
If the producer accepts a premium payment, they have to provide
the insured with a receipt for the payment of premium no later than
the next business day.
The producer has to deposit premium payments within 7 days of
receipt, and if the payment is a check thats made out to the
insurance company, the producer has to forward the check directly
to the insurance company.
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Note: Insurance producers have to keep client records for Property

and Casualty insurance for 3 years past the policys expiration.
If premiums are paid in cash, the insured has to get a receipt,
which includes:
The date
The name of the agent/producer
The name of the policyowner/insured
The amount received
The insurance companys name
The policy number
Okay, so some of that is ultra-obvious. Dont roll your eyes at us,

were just being thorough.
Note: Just a quick asideif there are extra charges relating to
someones policy or application, the insured needs an explanation in
writing for those charges.
12. Policy Retention
Policy retention benefits everyone. A producer who keeps an
open line of communication with his/her clients will have the
opportunity for more sales, as well as be able to provide the
maximum protection for that client.
It benefits the client because they always have the insurance
protection they need. And, obviously, if a producer has a lot of
481
happy clients, this is going to benefit the producer and the insurer
financially.
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Section PC 22
CALIFORNIA INSURANCE
GUARANTEE FUND
Objectives
Guarantee associations are the safety nets of the insurance industry.
This unit includes:
What are Guarantee Associations?

The California Life and Health Guarantee Association
The California Insurance Guarantee Association (CIGA)
1. What are Guarantee Associations?

Guarantee associations protect the public from insolvent
insurance companies. Insolvent means an individual or
company cant pay their debt. The company might even be going
through bankruptcy. The Commissioner determines if a company
is insolvent, which means the company cant fulfill any future
financial obligation.
Heres the core of the issue: just because a company becomes
insolvent doesnt mean it can stop paying claims. If an insurance
company becomes insolvent, and then its clients experience
covered losses, those clients still have settlements coming to them.
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Obviously, once a company is bankrupt, it doesnt really have the

money to pay insureds claims. Guarantee associations pay
insurance claims that an insolvent company isnt able to pay. This
protects claimants and policyowners.
Any insurance company that wants to do business in California is
required to belong to one or both of the following guarantee
associations:
A. California Life and Health Guarantee Association
The California Life and Health Guarantee Association is
under the Commissioners authority, and protects annuity
policyholders, beneficiaries, and payees of Life and Health
policies.
The California Life and Health Guarantee Association guarantees
any payments of benefits and continued coverage if an insurance
company becomes insolvent. This association guarantees the
following:
80% of contractual limitations
Up to $250,000 for Life insurance Death benefits
Up to $100,000 for cash surrender value
Up to $100,000 for the present value of annuities
Up to $200,000 for Health benefits
Note: The maximum amount an individual can receive for all policies is
$250,000.
The maximum amount a firm or corporation can receive
for all policies is $5 million.
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The California Life and Health Guarantee Association

doesnt cover:
Variable Life or Variable annuities that arent guaranteed

by the insurer
Risks the policyholder accepted
Any part of the policy thats reinsured
Policies issued by a health care service contract
Anyone thats self-funded or uninsured
Parts of a policy subject to dividends or experience credits
Policies issued by an insurer that doesnt have a Certificate

of Authority in California
Any coverage issued by the California Medical Insurance

Pool
B. California Insurance Guarantee Association for

Property and Casualty
The California Insurance Guarantee Association for
Property and Casualty protects Property and Casualty
policyowners from insolvent insurance companies.
Every California insurance company that transacts Property and
Casualty insurance has to be a member of the California
Insurance Guarantee Association for Property and Casualty.
The limits of coverage per policy for all Fire and Casualty
(excluding Workers Compensation) are:
A minimum of $100
A maximum of $500,000
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The California Insurance Guarantee Association for Property and

Casualty pays claims for most types of Property and Casualty
policies, including Workers Compensation.
Alert!
There is no limit on Workers Compensation claims. The California
Insurance Guarantee Association for Property and Casualty doesnt put
any limits on Workers Compensation claims. Were drawing attention
to this fact, because weve seen this actual question on the test.
Claims are paid if they are filed within 30 days of a company
becoming insolvent. Once the Commissioner receives notification
that a company is insolvent, the Commissioner notifies the CIGA
within 3 days.
The Commissioner could request that the policyowners also be
informed of the insolvency and their rights regarding the
insolvency. Claims are paid up to $500,000.
Note: Before a company can receive a Certificate of Authority in
California, they have to belong to one or both of the CIGA. They wont
be able to transact insurance business or appoint any producers until
theyve done so.
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For more course offerings

today requires a separate Accident and Health License . . . a course

location where coverage applies. Insured residence means

Life insurance insures someones life and pertains to the

Property insurance protects against losses from fire,

Marine insurance includes insurance against any kind of

Title insurance protects the owners or lien holders of real

Surety insurance guarantees the behavior and

Disability insurance provides financial assistance when

Plate Glass insurance protects against the breaking of

Workmens Compensation protects employees who are

Common Carrier Liability insures truckers for any

Boiler and Machinery insures against losses from bodily

Burglary insurance insures against losses from burglary

Credit insurance protects insureds if a

Sprinkler insurance protects against loss through water

Team and Vehicle insurance protects against damages or

Automobile insurance protects anyone who owns, uses,

Mortgage insurance guarantees the payment of

Aircraft insurance protects anyone who owns, uses, or

Mortgage Guaranty insurance protects against financial

Miscellaneous insurance protects against direct or

Miscellaneous insurance also protects producers in the

Speculative risk assumes that, based on the persons

The following criteria describes an ideally insurable risk:

The loss must be measurable

The loss must be accidental

The loss must be predictable

The law of large numbers has to apply

The loss must create financial hardship

Insurance must be affordable and practical

The loss must not be catastrophic

Note: So whats the difference between a risk and a hazard? Risk is a

interest means X needs to cover Y, because if Y were lost or damaged,

The amount sought through an insureds claim

The amount of reduction in the value of an insureds property

The amount paid on behalf of an insured under an insurance

insurance policy insures a business against fire, and

Deductibles reduce insignificant claims

Deductibles keep the cost of insurance down

Whenever deductibles are discussed it is important to determine

The named insureds

P. Law of Large Numbers

General compensatory damages are straightforward.

Special compensatory damages are harder to

Punitive damages are designed to punish the liable

the citizens to the toxins, the court could decide on

S. Pair and Set Clause

Repair or replace any part of the set, to restore the set, or to

Pay the difference between the ACV of the property before

Nonrenewal means an insurance company, agent, or insured

Policy Cancellations in California

A vacant/unoccupied building is more vulnerable to vandalism

Bodily injuries to a third-party

In English: Liability insurance protects other people and other

and have the contractor sign a waiver stating that the

3) Absolute Liability refers to injuries that result from

Determining loss/loss valuation is the method the insurer uses to

pay a certain percentage over the policy limit typically 20