Texas General Lines — Property and Casualty flashcards

A financial or legal stake in the subject of insurance, such that damage to or loss of the property would cause the insured to suffer a financial loss.

• Must exist at the time of loss in property insurance.
• Based on ownership, legal liability, or contractual rights.
• Ensures the insured would genuinely suffer from the loss.
• Prevents gambling and moral hazard.

Memory trick: Interest in what you own, owe, or could lose financially.

The final determination made by an underwriter regarding whether to accept or reject an insurance application, and on what terms.

• Can be Accept (standard), Accept (modified), or Decline.
• Based on risk assessment and company guidelines.
• A modified acceptance involves changes like higher deductibles or special conditions.
• Aims to ensure profitability and solvency for the insurer.

Memory trick: Underwriters decide: Green light, yellow light, or red light.

A marketing and distribution system where agents represent only one insurance company and are compensated by that single insurer.

• Agents are dedicated to one insurer.
• Insurer often provides training and support.
• Can be employees or independent contractors.

Memory trick: Directly EXCLUSIVE INDEPENDENT BROKERS sell.

A risk management technique that involves taking measures to decrease the frequency or severity of potential losses.

• Aims to minimize impact of loss.
• Examples include safety devices, maintenance.
• Often used in conjunction with risk transfer (insurance).

Memory trick: ART is a good REDuction plan.

A risk management technique where an individual or entity consciously or unconsciously accepts the financial responsibility for a potential loss.

• Means paying for losses out of pocket.
• Can be intentional (self-insurance) or unintentional (uninsured).
• Often used for small, predictable losses or when insurance is too costly.

Memory trick: RETAINING risk means AVOIDING REDUCED TRANSFERS.

A marketing and distribution system where agents are independent contractors, represent multiple insurers, and own the expirations (renewal rights) of their policies.

• Agents are independent business owners.
• Represent several unrelated insurers.
• Own the expirations of the policies they sell.
• Compensated by commissions.

Memory trick: Distribution channels: How insurance reaches the people.

An insurance company that is owned by its policyholders, who may receive dividends and have voting rights.

• Owned by policyholders.
• May pay dividends to policyholders.
• Primary goal is to provide insurance at the lowest possible cost.
• No stockholders.

Memory trick: Insurers' forms: Stock for profit, Mutual for members, Reciprocal for peers.

A risk management technique where the financial consequences of a potential loss are shifted from one party to another, typically through an insurance contract.

• Most common method is purchasing insurance.
• Insured pays premium, insurer assumes risk.
• Does not eliminate the risk, only its financial impact on the insured.

Memory trick: Avoid RETURNING REDUCED TRANSFERS.

A profitability ratio that compares an insurer's total incurred losses and loss adjustment expenses to its total earned premiums.

• Formula: (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums.
• Indicates underwriting profitability.
• A lower ratio is generally more favorable for the insurer.

Memory trick: Ratios reveal if the insurance ship is sinking or sailing.

A form of reinsurance where the reinsurer pays losses that exceed a specific amount (the retention limit) set by the primary insurer, up to a maximum amount.

• Protects against catastrophic losses.
• Reinsurer pays only after primary insurer's retention is exhausted.
• Commonly used for property and liability lines.

Memory trick: Reinsurers come in many forms, each with a unique protective charm.

Government involvement in earthquake insurance often takes the form of state-run programs (like the California Earthquake Authority - CEA) or reinsurance support, as private markets may struggle to cover the catastrophic potential.

• No federal earthquake insurance program like NFIP.
• Some states have established earthquake insurance pools (e.g., CEA).
• Private insurers offer earthquake coverage, often as an endorsement.
• Aims to provide financial protection against seismic activity losses.

Memory trick: Government steps in when private markets fear the big risks.

A legal and ethical obligation for an individual or entity to act in the best interests of another party, placing that party's interests above their own.

• Core principle for insurance agents and brokers.
• Requires utmost good faith, loyalty, and honesty.
• Involves prioritizing the client's needs and interests.
• Can lead to legal liability if breached.

Memory trick: Ethics: The moral compass guiding insurance professionals.

An assessment by independent rating agencies (e.g., A.M. Best, S&P, Moody's, Fitch) of an insurance company's financial strength and ability to meet its policyholder obligations.

• Indicates an insurer's solvency and claims-paying ability.
• Ratings range from superior to vulnerable.
• Crucial for policyholders evaluating insurer reliability.
• A.M. Best is a prominent rating agency for the insurance industry.

Memory trick: Ratings tell you if an insurer's wallet is fat or flat.

The oversight by state insurance departments of how insurers and agents conduct their business with consumers, focusing on fair and ethical practices.

• Covers sales, advertising, underwriting, and claims handling.
• Aims to protect consumers from unfair or deceptive practices.
• Enforced by state insurance departments.
• Complements solvency and rate regulation.

Memory trick: Regulators keep insurers in line: Solvency, Rates, and Conduct.

The party in a surety bond who has the primary obligation to perform a duty or fulfill a contract.

• The one whose performance is guaranteed.
• Defaults if they fail to meet their obligation.
• Often pays the premium for the bond.

Memory trick: POS: Principal, Obligee, Surety – the three musketeers of bonds.

A type of bond that protects an employer from losses caused by the dishonest acts of employees.

• Covers acts like theft, fraud, embezzlement by employees.
• Employer is the obligee, employee is the principal, insurer is the surety.
• Can be individual, schedule, or blanket bonds.

Memory trick: Fidelity: Faith in employees, protection if it breaks.

A surety bond that guarantees subcontractors, laborers, and material suppliers will be paid by the contractor.

• Protects third-party claimants (subcontractors, suppliers).
• Prevents liens from being filed against the project owner's property.
• Often required in conjunction with a Performance Bond on public projects (Miller Act).

Memory trick: Contract Bonds: Pay, Perform, or Bid?

A type of fidelity bond that covers specific individuals whose names are listed on the bond, for acts of dishonesty.

• Coverage is tied to named employees only.
• Requires updating if named employees leave or new ones are hired.
• Contrast with Blanket Bonds (all employees) and Position Schedule Bonds (specific positions).

Memory trick: Fidelity: Name, Position, or Blanket?

A category of surety bonds required by courts to protect parties involved in legal proceedings.

• Includes appeal bonds, attachment bonds, guardianship bonds.
• Guarantees compliance with court orders or payment of judgments.
• Often required to allow specific legal actions or to stay execution of judgments.

Memory trick: Judicial: Judge's order, Jury's decision, Justice's bond.

A type of contract bond that guarantees a contractor or developer will complete a project or specific improvements as agreed.

• Often used in subdivision development for infrastructure.
• Ensures completion of required site improvements.
• Protects the obligee (e.g., municipality) from unfinished work.

Memory trick: Contract Bonds: Before, During, After, or All?

The maximum amount of money the surety bond will pay out in the event of a claim.

• Represents the surety's maximum liability.
• Specified in the bond agreement.
• Also known as the 'bond penalty' or 'face amount'.

Memory trick: Penal Sum: The ceiling of the surety's financial pain.

Assets provided by the Principal to the Surety to secure the bond obligation, reducing the Surety's risk.

• Can be cash, irrevocable letters of credit, or other liquid assets.
• Used by the Surety to cover losses if the Principal defaults.
• Often required when the Principal's financial strength is a concern.

Memory trick: Collateral: Cash or Credit, for Surety's Safety.

A type of surety bond that guarantees a contractor will complete a project according to contract terms and specifications.

• Guarantees fulfillment of contractual obligations.
• Protects the project owner (obligee) from contractor default.
• Common in construction contracts.

Memory trick: Surety bonds: Contracts, Courts, or Crooks?

Reinsurance is insurance purchased by an insurance company from another insurance company to spread the risk and reduce the ceding insurer's exposure to large or catastrophic losses.

• Allows primary insurers to write larger policies.
• Helps stabilize underwriting results for the primary insurer.
• Can be treaty (automatic) or facultative (per-risk).

Memory trick: Insurers Re-share Risks to spread the burden and stay stable.

Personal Auto Policy split limits specify the maximum amount the policy will pay for bodily injury per person, total bodily injury per accident, and total property damage per accident.

• First number: maximum bodily injury per person.
• Second number: maximum total bodily injury per accident.
• Third number: maximum property damage per accident.

Memory trick: Remember 'PPA' for Person, Per Accident, and Property.

Collision coverage in a Personal Auto Policy pays for damage to the insured's own vehicle resulting from an upset or impact with another vehicle or object, regardless of fault, after the deductible is met.

• Covers damage to the insured's vehicle.
• Applies regardless of who is at fault.
• Subject to a deductible, which is the amount the insured pays out of pocket.

Memory trick: Collision coverage helps 'C'over your 'C'ar after a 'C'rash, minus the 'D'eductible.

Provisions in an insurance policy that eliminate coverage for certain perils, property, or situations.

• Reduce the scope of coverage.
• Can be for specific perils (e.g., flood, earthquake).
• Can be for specific property (e.g., aircraft, animals).
• Can be for specific circumstances (e.g., war, nuclear hazard).

Memory trick: Declarations Tell Who, Insuring Agreement Gives What, Conditions Set Rules, Exclusions Say No.

Homeowners policies, including HO-3, have specific dollar limits for certain types of personal property, especially for theft, to control exposure for highly valuable and easily portable items.

• Limits vary by item category (e.g., jewelry, firearms, silverware).
• The limit applies per occurrence, not per item.
• These limits are often much lower than the overall Coverage C limit.

Memory trick: Remember 'JETS' for Jewelry, Electronics, Theft-prone items, and Silverware, as these often have special limits.

The HO-5 Comprehensive Form is the most extensive homeowners policy, providing 'open perils' coverage for both the dwelling (Coverage A) and personal property (Coverage C).

• Dwelling and personal property are covered against all risks unless specifically excluded.
• The burden of proof for an exclusion rests with the insurer.
• Often includes higher special limits of liability for certain items compared to other forms.

Memory trick: HO forms increase coverage from 'B'asic to 'C'omprehensive.

Under a DP-1 Basic Form Dwelling Policy, Coverage B provides coverage for other structures on the insured's premises, such as detached garages or sheds, against perils specifically listed in the policy.

• Coverage B is typically 10% of Coverage A (Dwelling).
• Perils covered are the same as those for Coverage A under DP-1 (Fire, Lightning, Internal Explosion, and EC perils if endorsed).
• Structures must be separated from the dwelling by a clear space or connected only by a fence or utility line.

Memory trick: Remember 'B' for 'Buildings' that are 'B'eside the main house.

Vacancy means neither people nor contents are present. Unoccupancy means contents are present, but no people are present.

• Both can lead to coverage limitations or exclusions.
• Definitions vary by policy, but generally follow these guidelines.
• Often a time threshold (e.g., 60 days) before limitations apply.

Memory trick: Vacant is Empty, Unoccupied has Stuff.

The HO-5 Comprehensive Form provides 'open perils' coverage for both the dwelling and personal property, meaning it covers all perils except those specifically excluded.

• Personal property is covered on an open perils basis.
• Special limits of liability still apply to certain categories of property (e.g., money, jewelry, firearms).
• The burden of proof for an exclusion rests with the insurer.

Memory trick: HO-5 is 'O'pen to most perils, but still has 'L'imits for some 'V'aluables.

A policy condition that prohibits the insured from abandoning damaged property to the insurer to claim a total loss, especially if the damage is only partial.

• Prevents insured from forcing a total loss settlement.
• Insured still has a duty to protect the property.
• Distinguished from Salvage, which is the insurer's right after payment.

Memory trick: Don't Abandon, Protect and Report.

Flood insurance provides coverage for direct physical loss to property caused by flood, which is typically excluded from standard property policies.

• Most flood insurance is provided through the NFIP.
• Coverage usually has a 30-day waiting period.
• Flood includes overflowing bodies of water, unusual accumulation of surface water, and mudflow.

Memory trick: When 'W'ater 'R'ises, 'N'FIP 'S'aves.

The right of the insurer to take possession of damaged property after paying for a total or partial loss, and then sell it to recover some of the loss.

• Reduces the net cost of a claim for the insurer.
• Prevents the insured from profiting from a loss.
• Often applies to property that is damaged but still has some value.

Memory trick: Subrogation pursues, Salvage sells, Abandonment prevents dumping.

Standard homeowners policies typically exclude liability and property damage arising from the ownership, maintenance, or use of most motorized watercraft, especially those exceeding certain horsepower or length limits.

• Jet skis are almost always excluded due to their power and inherent risk.
• Limited coverage may exist for very small sailboats or canoes.
• Separate watercraft policies are usually required for adequate coverage.

Memory trick: For a 'J'et 'S'ki, 'J'ust get a 'S'eparate 'P'olicy.

Insurance that protects a motor carrier from their legal liability for loss or damage to cargo belonging to others while it is in their care, custody, or control during transit.

• Covers property of others being transported by the insured.
• Addresses legal liability of the carrier for cargo damage/loss.
• Typically includes specified perils or 'all-risk' depending on the policy.

Memory trick: Cargo on the 'Motor Truck' needs 'Cargo Coverage' for safe travels.

The cost to replace damaged property with new property of like kind and quality, without deduction for depreciation.

• No depreciation applied.
• Allows the insured to fully restore property.
• Often requires the insured to actually replace the property to receive full RC.

Memory trick: ACV Depreciates, RC Replaces, Market Sells, Stated Limits.

Under an HO-2 Broad Form policy, personal property is covered on a 'named perils' basis, meaning coverage applies only for losses caused by perils specifically listed in the policy.

• Both dwelling and personal property are covered by named perils.
• The list of named perils is broader than a basic form but narrower than an open perils form.
• Common HO-2 perils include fire, windstorm, theft, falling objects, and accidental discharge of water.

Memory trick: HO-2 is 'N'amed, 'N'ot 'O'pen.

An Ordinance or Law Endorsement adds coverage to a property insurance policy for the increased costs of repair or reconstruction due to the enforcement of building codes, ordinances, or laws.

• Standard policies typically exclude these costs.
• Crucial for older homes that may not meet current codes.
• Can cover the undamaged portion of a building that must be demolished or upgraded.

Memory trick: For 'O'ld 'L'aws and 'C'odes, get the 'O'rdinance 'L'aw 'E'ndorsement.

The Surety is the party, typically an insurance company, that guarantees the performance or obligation of the Principal to the Obligee.

• Guarantees the Principal's performance.
• Promises to pay or perform if Principal defaults.
• Often a financially strong entity like an insurance company.

Memory trick: P.O.S. - Principal, Obligee, Surety, know their roles!