Miscellaneous Liability Policies

Overview

This chapter is designed to present and discuss liability related policies and contracts not addressed in previous chapters, and will include the following markets or areas of endeavor: umbrellas, specialty or professional, surety and fidelity bonding, farming aviation and watercraft liability

Umbrella and Excess Liability Insurance

Excess Liability Policy

An Excess Liability Policy is written over a primary policy to increase the overall amount of protection. It is written on a “following from” basis, which means that it only increases the overall limit of coverage; it doesn’t broaden coverage.

Personal Umbrella Policy

Since there are no standardized Personal Umbrella Policy forms, there are often considerable differences from one contract to another. Some of the usual and typical provisions in most Personal Umbrella Policies, are:

Coverage is usually written in increments of one million dollars, with a single limit per occurrence covering Bodily Injury/Property Damage, and Personal Injury Liability in excess of the insured’s underlying policy limits.
Policies require that the insured having underlying Automobile Liability, Comprehensive Personal Liability, and Watercraft Liability coverages. The umbrella acts as excess coverage over the limits of these underlying policies.
When the coverage in an umbrella is broader that the underlying policy, the umbrella will “drop down” and cover the entire loss, less retention, unless the umbrella specifically excludes the loss.
Example: Umbrella policies ordinarily cover Personal Injury losses caused by an insured, while the underlying Comprehensive Personal Liability Policy covers Bodily Injury and Property Damage only. In the event of a personal injury claim against the insured, the umbrella would “drop down” and act as primary insurance for that claim.
The Person Umbrella Policy is generally designed to cover liability on a worldwide basis to a third party, and doesn’t pay benefits directly to the insured.
Normal Personal Umbrella exclusions:
1. Losses arising from Personal Liability, Automobile Liability, or Watercraft Liability of the insured, if the insured fails to maintain the required underlying insurance.
2. Intentional injury
3. Damage to property in the care, custody, or control of an insured.
4. Aircraft
5. Business pursuits
6. Professional Liability
7. Directors Liability
  1. Commercial Umbrella Insurance is known as blanket catastrophe excess liability coverage, and like Personal Umbrellas, aren’t standardized policy forms.
  2. These policies provide three types of liability protection for businesses:
    1. Excess Coverage – Pays when the loss exceeds underlying primary policy limits.
    2. Broad Coverage – Covers liability exposures for which no underlying primary insurance is written, or for which the underlying primary policy contains an exclusion that isn’t excluded under the umbrella policy.
    3. Automatic Replacement – Replaces coverage for underlying liability policies when aggregate limits are impaired or exhausted by loss payment.
  3. Commercial Umbrella Coverage is normally written on an occurrence basis and usually applies worldwide.
    Note: Commercial Umbrella policies don’t provide Workers’ Compensation benefits.

Specialty or Professional Liability Insurance

Medical Professional Insurance

Medical Professional or Malpractice Insurance is sometimes referred to as Physicians’, Surgeons’, and Dentists’ Professional Liability.
This insurance provides protection against liability arising out of the failure to use due care and skill in one’s profession and isn’t a substitute for other forms of liability insurance.
The insurance covers professional acts, mental anguish (personal injury), accidents, and some intentional acts.
The exposure covered is bodily injury.
The policy doesn’t cover employees’ injuries.
The Consent to Settle a Loss Provision may appear in some Medical Professional policies, which means that the insurer must have the written consent of the insured to settle the loss.

Errors and Omissions (E & O) Insurance

Professional insurance agents and brokers (producers) are charged with protecting the interests of both the insurance companies they represent and their clients.
Errors and Omissions Insurance protects the agent/broker (producers) against damages arising out of negligent acts when performing duties for another, including but not limited to: offering improper coverage or amounts of coverage, failing to renew a policy, failing to name a mortgagee on a policy, etc.
Errors and Omissions Insurance doesn’t cover bodily injury, property damage, or fraudulent, dishonest, or criminal acts committed by an insured (such as libel, slander, theft, or embezzlement).
Errors and Omissions Insurance covers other professionals, such as:
1. Realtors.
2. Architects and engineers.
3. Attorneys(Lawyers’ Professional Liability)
4. Accountants.
5. Advertisers, broadcasters, and publishers.
6. Stockbrokers.
7. Directors and officers of corporations. Directors’ and Officers’ Liability Insurance covers those who serve in such capacities because of errors and omissions or wrongful acts.
  Example: Errors and omissions in preparing a financial statement.

Fiduciary Liability Insurance

Following the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), the responsibilities of those serving as fiduciaries or trustees of employee benefit and retirements plans have increased.
This insurance protects both the plan, and individuals acting as trustees, from suits alleging wrongful acts in handling the investment funds.

Employment Practices Liability Insurance

This insurance provides coverage for employment discrimination, sexual harassment, and wrongful termination.
Some insurers include punitive damages, but fines and criminal penalties are universally excluded.
Defense costs tend to be part of the coverage limits, as opposed to above the coverage limits.

Bonds

There are three parties to a bond:

Principal (Obligor) – The party who has agreed to fulfill the obligation, such as a contractor, in the case of Surety Bonds, or an employee in the case of Fidelity Bonds.
Obligee – The party for whose benefit the bond is written, such as the owner of a building in Surety Bonds, or an employee in the case of Fidelity Bonds.
Surety (Guarantor) – The party who provides the bond and guarantees fulfillment of the obligation by paying damages if the principle defaults.
Example: An insurance company or surety company.
Note #1: When comparing an insurance contract to a bond, the insurer/insured relationship in insurance is similar to the surety/obligee relationship in a bond.
Note #2: Bonds differ from insurance policies because they are a contract between three parties. Although liability insurance provides third-party coverage, in that payment is to a third party, the contract is actually performed by two parties.

Surety Bonds (Performance Bonds)

Surety bonds guarantee that specific obligations will be fulfilled. If the principle defaults, the surety must perform the contract, duty, or obligation of the principle, or indemnify the obligee for actual loss. Consequently, before accepting a risk, the surety considers the principle’s ability to perform, financial capability, and previous contracts completed. Surety bonds are generally written for the duration of the contract, and they may be divided into the following categories:

Contract Bonds – The following may be required in connection with a contract:
1. Bid Bond- A bond filed by contractors, guaranteeing that in the event a bid is accepted, the successful contractor will sign the contract and furnish a performance bond.
2. Performance Bond – A bond guaranteeing that the contractor will faithfully perform contractual Obligations to the Obligee.
3. Labor and Material Bond – A payment bond that protects the owner contracting for work against liens from subcontractors or laborers who aren’t paid for their services, and/or materials by the general contractor.
4. Completion Bond (Lender’s Bond) – A bond guaranteeing that borrowed money will be used toward completion of a project.
5. Supply Bond – A bond whereby a supplier (Principle) guarantees to perform under a contract to supply goods or materials to the contractor (Obligee) in accordance with the terms of the contract.
Court Bonds – A bond used when the court requires some form of bond. Two basic forms are:
1. Fiduciary Bond – A bound required when an individual, such as an executor, administrator, or a guardian, is entrusted by the court to handle the property of others: Example: An executor’s Bond.
2. Litigation Bond – A bond required when the individual bringing suit wishes to freeze the assets of another party, or restrain the other party from doing something. Example: Appeal, Injunction, or Attachment Bond.
License and Permit Bond – A bond required by municipalities or other public bodies as a condition for granting a license or permit to engage in a specified activity. The bond guarantees that the party seeking the license or permit will comply with applicable laws or regulations. Example: A municipality may require a merchant to post a Liquor Tax Bond, to assure the municipality that it will collect and pay its collected taxes on time, and in the amount due, as a condition of granting a liquor license.

Fidelity Bonds (Honesty Bonds)

Fidelity Bonds are designed to cover an employer from direct loss due to fraudulent and dishonest acts (theft) by their employees, and are therefore commonly referred to as “dishonesty insurance”.
There are several types of Fidelity Bonds designed for the needs of different employers. An individual Bond is used when an employer wishes to bond a single employee. A Name Schedule Bond is used when an employer wishes to bond several employees that are all named in the bond. A Position Schedule Bond is available to employers that desire to bond a specific position, regardless of who fills the position, or how often the person filling the position is changed. A Blanket Bond is for an employer that desires to cover all existing employees of a firm without exception, as well as any new employees.
A Financial Institution Bond is a package policy designed to provide commercial banks, in a single contract, with protection against a wide range of hazards. It specifically insures money, coins, stamps, precious metals, jewelry, valuable papers, and various kinds of documents. Loss of such property is covered whether the insured is the owner of the items, or is holding the items in any capacity, and whether liable for the items or not. The Financial Institution Bond specifically excludes loss through the payment of forged or altered traveler’s checks, except if due to employee dishonesty. The insured is required to give notice of loss within a reasonable time after discovery of the loss. Proof of Loss must be filed within 120 days after a loss is discovered.
A public Employee Bond is for governmental entities such as cities, towns, counties, and public institutions and agencies to cover loss resulting from employee dishonesty. The coverage can be written to apply per loss or per employee.

Farm Liability Insurance

The Farm Liability Coverage Form to the Farm Coverage Part of the Commercial Package Policy may be written alone or as part of a complete farm package, along with the Farm Property Coverage Form previously discussed. The Farm Liability Coverage Form contains three major coverages, H, I, and J, which are discussed here.

Coverage H (Bodily Injury and Property Damage Liability)

Coverage H pays sums, up to the policy limits, that the insured becomes legally obligated to pay, arising from bodily injury or property damage, such as fire damage liability, to which coverage applies.
Coverage includes product liability from the sale of farm products, provided that the products haven’t been processed.
There is no separate aggregate limit for the products and completed operations exposure. One General Aggregate Limit applies to Bodily Injury and Property Damages, Personal and Advertising Injury, and Medical Payments.
The following are exclusions applicable to Coverage H:
1. Expected or intended injury.
2. Contractual Liability.
3. Workers’ Compensation/Employers Liability.
4. Damage to property of others in the insured’s care.
5. Damage to insured property or product.
6. Damage to insured’s work.
7. Impaired Property (property not physically injured).
8. Bodily injury to any insured or employee other than a residence employee.
9. Professional liability.
10. Certain Watercraft
11. Business pursuits, other than farming.
12. Transmission of Communicable diseases.
13. Custom farming (if annual receipts exceed $2,000).
14. The actual, alleged, or threatened discharge, release, or escape of pollutants. An endorsement may be purchased to provide defense but not clean up costs.
15. A product recalls and work deficiencies.
16. Bodily injury or property damage caused by or resulting from any substance discharged from any aircraft.
17. Bodily injury or property damage arising from an uninsured location.
18. Liability arising out of the transportation of mobile equipment by motor equipment by a motor vehicle owned or operated by an insured.
19. Liability arising out of the ownership, maintenance, or use of any aircraft, motor vehicle, or motorized bicycle owned or operated by the insured.

Coverage I (Personal and Advertising Injury Liability)

Coverage I provides for payment of sums, up to the policy limits, that the insured becomes legally obligated to pay, arising from personal or advertising injury, to which the insurance applies. An offense must be related to the farming business. Example: The insured unknowingly libels a neighbor’s farm products.
Losses arising out of written or oral publication of false material, if done with the insured’s knowledge that it is false, or losses arising from material published before the beginning of the policy period are excluded.

Coverage J (Medical Payments)

Coverage J provides third-party payments for reasonable medical expenses arising out of an accident, if the expenses are incurred and reported within three years of the accident date.
The Medical Payments limit applies per person, and payment is made regardless of fault.
Coverage doesn’t apply to the insured or farm employees. Residence employees, other than farm employees, would be covered.

Additional Coverages

Besides Coverages H, I, and J, the FARM Liability Coverage Form provides two additional coverages:
1. Supplementary Payments – Applicable to Coverages H and I only.
2. Damage to the Property of Others – $500 per occurrence when the damage is caused by the insured, but doesn’t include farm equipment.
These additional coverages operate basically the same as similar additional coverages found under Section II of the Homeowners Policy.

Conditions

Like the Farm Property Coverage Form, the Farm Liability Coverage Form has conditions that apply in addition to the Commercial Package Policy Common Policy Conditions.
These additional conditions are very similar to those found in the Commercial General Liability Coverage Part.

Definitions

Farming – The operation of an agricultural enterprise, including the operation of roadside stands for the purpose of selling farm products.
Mobile Equipment – Bulldozers, forklifts, tractors, and other farm machinery designed for use off public roads; vehicles on crawler treads (including snowmobiles, but only while on premises that the insured owns or rents).

Aviation Liability

This insurance covers claims arising from the ownership, maintenance, or use of an aircraft.
This insurance is similar to automobile liability insurance, except that bodily injury liability is divided into two coverages:
1. Passenger liability.
2. Bodily injury excluding passengers.
It is possible to include the bodily injury liability and property damage liability in a single limit of liability.
Medical Payments Coverage is similar to that found in an automobile policy, except that injury must be sustained while in, entering, or alighting from the insured aircraft.

Airport Liability

This insurance coverage is available for private, municipal, and commercial airports.
The policy may include the following coverages.
1. Premises and Operations.
2. Contractual Liability.
3. Independent Contractors.
4. Products and Completed Operations.

Hangarkeepers’ Liability

This liability endorsement provides coverage for liability arising out of damage to non-owned aircraft in the care, custody, or control of the insured.
This coverage operates very similarly to Garagekeepers’ Coverage.

Other Liability Policies

Commercial Ocean Marine Liability Insurance

In the Ocean Marine Insurance, liability coverage is called Protection and Indemnity. Protection and Indemnity covers legal liability imposed on the insured for damages arising out of the operation of the insured vessel, such as:
1. Cargo lost or damaged through the insured’s negligence.
2. Damage to other property, including fixed objects, such as wharves, docks, and other vessels, when not caused by collision.
3. Damage to property on board insured vessel when caused by collision.
4. Injuries to seamen resulting from the un-seaworthiness of the vessel, for other job-related injuries, and general damages subject to the Jones Act caused by negligence.
This insurance may be attached to a Hull Policy or written as a separate policy.

Boatowners

Section II of a Boatowners Policy provides bodily injury and property damage liability coverage for an occurrence arising out of the use of maintenance of covered property or a non-owed boat.
Medical payments are paid for expenses that are incurred and reported within three years of a covered accident.
Coverage includes payment for claim and defense costs.
Many insurers limit coverage while the watercraft is engaged in sports such as waterskiing, in that participants aren’t covered under liability or medical expense. However, many insurers offer the insured the opportunity to buy this coverage back for an additional premium.

Glossary

Insurance: Insurance is the substitution of a small certain expense for a large uncertain loss. It also transfers the risk, protects against uncertainty, shares the loss, and reduces anxiety.

Insurable Events: Any event, whether past or present, which may cause loss or damage to a person having an insurable interest, or any such event that may create a liability against them.

Risk: Risk is the uncertainty of a loss. Some authorities may also refer to it as the chance, likelihood, probability, or potential for loss. The two types of risk are:

Speculative Risk – Risk for which there exists a possibility of loss, or gain. Example: Gambling
Pure Risk – Risk for which there exists a possibility of loss, no loss, or gain. Example: The possibility of damage to property caused by fire, windstorm, explosion, etc.
Note: Insurance is designed to provide protection against pure risk.

Loss: A reduction in, decrease, in, or disappearance of value.

Exposure: The extent to which one may be affected by a peril.

Peril: A cause of a potential loss.

Hazard: Something that increases the chance or likelihood of a loss occurring. Three types of hazards are:

Physical Hazard – A physical condition that increase the probability of loss.
Example: Flammable material stored near a stove, or property located next door to a dynamite factory.
Moral Hazard – Dishonesty. Example: An insured burns their house to collect on the insurance.
Morale Hazard- Indifference to loss or the failure to take the proper care to protect property from loss.
Example: An insured leaving their house unlocked.

Risk Management: The determination of what types of protection are required to meet an insured’s needs. The steps involved in risk management are as follows:

Identification and Analysis of Risk – A survey of the insured’s operations, assets, and exposures that could give rise to losses, and their potential frequency and severity. Example: Physical inspections’ flowcharts, etc.
Methods of Handling Risk –
1. Reduction (loss prevention) – Techniques for the prevention or reduction of potential loss, such as a sprinkler systems, burglar alarms, pollution controls, and safety guards on machinery.
2. Elimination (avoidance) – After potential areas of hazard have been identified, it may be found that some exposure to risk can be eliminated entirely.
3. Retention (self –insurance) – It may be economically practical for an insured not to insure each exposure to loss, but instead insure only those risks that threaten the financial stability of their business.
4. Transfer – This risk management technique utilizes the purchase of insurance to transfer the uncertainty of loss to an insurance company from the insured.
5. Sharing – Investments of a large number of people may be pooled by use of a corporation or partnership.
  Note: Insurance companies avoid large numbers in concentrated areas to “spread the risk.”

Elements of Insurable Risks

There must be a large number of like units to make losses reasonably predictable.
The loss must be definite in terms of cause, time, place, and amount.
The loss must be an accident.
The loss must be due to financial hardship
The policy must exclude catastrophic perils, such as war, nuclear hazard, and illegal operations.

Law of Large Numbers: This principle states that the larger the number of exposures considered, the more closely the losses reported will equal the underlying probability of loss. The principle applies to like groups, but not to individual risks.

Adverse Selection: The insuring of risks that is more prone to losses than average risks. Poorer risks or less desirable insured’s tend to seek or continue insurance to a greater extent than better risks.

Reinsurance: A device used by insurers to transfer or share in risk. This process disperses the probability of a large loss and in turn provides coverage for a possibly otherwise uninsurable risk. There are at least two insurers involved, the insurer originating the application and the insurer or companies who share in the risk (reinsurance insurers). The agreement of reinsurance is strictly between the two insurance companies and will be classified as either an Automatic or Facultative agreement.

Automatic Agreements – The ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium. The transfer is automatic in accordance with the reinsurance agreement.
Facultative Agreements – Allow the ceding insurer and the reinsurance companies an opportunity to exchange advice about the underwriting of each case. This agreement is more time consuming and may result in a higher premium.

Insurable Interest

Insurable interest is the potential for financial hardship in the event of a loss.
In property insurance, property ownership is evidence of insurable interest. The insured must prove that there was an insurable interest at the time of the loss in order to collect. In casualty insurance, insurable interest usually results from property rights, contract rights, and potential legal liability.
Insurable interest must exist in every enforceable contract.
Note: A person can’t sell their house then burn it down, to collect the insurance.

Underwriting

The selection of risk is the primary function of the underwriter.
The underwriter must protect the insurer against adverse selection by selecting risks that fall into the normal range of expected losses.
When evaluating a risk, an underwriter examines:
1. Nature of the risk.
2. Present hazards.
3. Outside factors that might affect the risk.
4. Past losses that have occurred.
  Note: Underwriters like to select insured’s whose actual losses will be similar to expected losses.
The underwriter must also charge an adequate premium for the risk based on the same factors used in evaluating the risk: Example: In most states an underwriter may consider whether the primary insured of a vehicle is over 30 or male or female.
Rates are considered inadequate when they don’t sustain projected losses and expenses.
Producers engage in field underwriting, which not only saves the insurer time and money in rejecting unacceptable risks, but also improves the producer’s book of business, making it more profitable.

Reserves: Reserves are accounting measurements of an insurer’s future obligation to its policyholders.

Loss Ratio and Expense Ratio

Loss Ratio – Is determined by dividing paid losses plus loss reserves by total earned premiums.
Expense Ratio – Is determined by dividing an insurer’s total operating expenses by total earned premiums.

Rating Methods

Class Rating – A group of insured’s who have similar exposures and experiences are charged the same rate.
Experience Rating – Based on the actual losses during a specified period of the past.
Individual Rating – Used in cases where there aren’t enough similar insured’s to support a class rate. Primarily used in commercial risks because of the number of variables involved.
Judgment Rating – Based on the underwriter’s judgment and experience.
Loss Cost Rating – A rating organization provides insurers with the portion of a rate that doesn’t include provisions for expenses or profit. The expense and profit components to develop the final rate must be added by each insurer based upon their projections. This method of rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit.
Manual Rating – Rates contained in a manual published by the insurer or those of the rating organization of which it is a member.
Merit Rating – An approach that rewards an insured who takes measures to decrease the probability of loss occurring by the institution of safety programs, loss control programs, etc.
Retrospective Rating – The insured’s premiums are adjusted at the end of the policy period based on a formula of debits or credits for losses that have occurred during that period.
Schedule Rating – A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk that is being rated.

Rate Approval

File and Use – Rates must be filed with the state insurance regulatory authority (DOI), and may be used as soon as they are filed.
Mandatory Rates- Some states require that mandatory rates be used for certain lines of insurance. These rates are set by state rating bureaus.
Open Competition – A states relies on competition between insurers to produce fair and adequate rates.
Prior Approval – Insurers can’t use rates until approved by the DOI, or until a specific time has passed after the filing without being disapproved.

Rating Bureaus

Independent rating bureaus serve the insurance industry by gathering and analyzing statistical data for rate-making purposes.
Insurance Services Offices (ISO) is the largest rating bureau in operation. It prepares policy forms and develops loss costs for property and casualty lines other than Workers’ Compensation, Crop, and Bonds.

Types of Insurers

Stock Insurance Company

The ownership of the company rests with stockholders with a stated amount of capital.
Stockholders direct the company’s operation by electing directors and officers.
Stockholders share in any profit or loss earned by the company.

Mutual Insurance Company

The company is owned by the policyholders. Every policyholder is a member of the company and is entitled to vote at any regular or special meeting of the company.
As part owner of the company, each insured is entitled to share in any profits earned by the company, in the form of a refund of premium.
Most mutuals’ are non-assessable; however, a few are assessable, which means that they can charge members a pro rata share of loss and expense experience at the end of the policy period.

Fraternal Benefits Societies

Are primarily social organizations that engage in charitable and benevolent activities that provide insurance, to its members.
Membership is usually drawn from members of a given order, society or lodge.
They are usually organized on a nonprofit basis.

Reciprocal Insurance Company

Group owned insurer whose main activity is risk sharing.
Is unincorporated, and is an aggregation of individuals, firms, and business corporations, who exchange insurance on each other. members are known as subscribers.
Exchange of insurance is affected through an Attorney-In-Fact, who is appointed by the subscribers and empowered on their behalf to bind them to one another.
Each subscriber assumes a part of the risk of all subscribers, so, if premiums collected are insufficient to pay losses, an assessment of additional premium can be made.

Lloyds

Not an insurance company, but a grouping of syndicates, each specializing in a particular risk.
Provides a meeting place and clerical services to its syndicate members, who actually transact the business of insurance.
Coverage that is provided is underwritten by a syndicate manager, who may also be known as an Attorney-In-Fact, or an Individual Proprietor.
No corporations or other limitations on liability are permitted, so members expose their entire fortune on each risk they accept, therefore, making each individual liable.
Lloyds of London and Lloyds of America are the presently known Lloyds.

Risk Retention Groups

Primarily assumes and spreads the liability – related risks of its members.
They are an insurance company, licensed in at least one state that is owned by their policyholders, who are also their shareholders.
Although they only need to be licensed in one state, they may insure members of the group in other states.
Membership is limited to risks with exposure to similar liability needs. Example: Walt Disney World, Blue Bayou waterslide park, Go Fast Go Cart track, etc.

Admitted versus Non-admitted Insurers

Admitted Insurer – authorized to transact insurance in a particular state by that state’s DOI. An insurer who has a Certificate of Authority to transact business.
Non admitted Insurer – Not authorized to transact insurance in a particular state, either by failing to comply with that state’s requirements, or by not seeking admission.

Private versus Government Insurers

Most insurance is written through private insurers, but there are instances where governmental based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. These instances are usually related to the catastrophic nature of the risk, the capacity to handle the risk, and the lack of desire to engage in a line of insurance where the experience to evaluate the necessary premium intake to offset potential loss is lacking. Examples of government insurance are as follows:

Federal Social Insurance programs (Social Security, Medicare, and Medicaid).
Federal Crop Insurance.
Federal Crime Insurance
Federal Flood Insurance

Residual Markets: Designed for those risks unable to find coverage in the ordinary market.

Joint Underwriting or Joint Reinsurance Pool – Participating insurers accept every eligible risk, and then may choose to reinsure some of those risks.
Risk Sharing Plan – Insurers agree to share among themselves those risks that are unable to obtain insurance through normal channels.

Domicile of Insurer

Domestic Insurer – Organized under the laws of this state, whether or not it’s admitted to do business in this state.
Foreign Insurer – Not organized under the laws of this state, but in one of the other states within the United States, whether or not it is admitted to do business in this state.
Alien Insurer – Organized under the laws of any jurisdiction other than a state of the United States, whether or not it is admitted to do business in this state.

Marketing and Distribution Systems

Independent Agent

Person who enters into agency agreements with more than one insurer.
Agent has ownership of the business written.
Independent agents usually receive a higher rate of commission than exclusive agents do, but gent must finance their own agency.
Agents pay the cost of office space, clerical support, marketing, and for the collection of renewal information.

Exclusive Agent

Person under agreement to represent a single insurer, or a group of insurers, having common ownership. The insurer retains the rights to the business written by the agent. If the agent leaves the insurer, the book of business is kept by the insurer.
The insurer normally provides services to its exclusive agents, such as providing office space and clerical support, preparing contracts, mailing renewals and handling claims.

Direct Writer: Deals directly with the insured through a salaried representative or a captive agent, as opposed to an insurer that contract with an agent.

Direct Mail

A marketing system that doesn’t use an agent. Policies are usually marketed directly from the insurer’s home office.
The insurer offers its contracts to the public through direct mail campaigns, and newspaper, radio, television, and magazine advertising.

Operating Divisions of Insurers

Actuarial – Gather and interpret statistical information to aid in rate making and setting.
Underwriting – Is responsible for risk selection and rating; works with the field underwriter to accomplish acceptance.
Marketing/Sales – Responsible for advertising and selling insurance policies and contracts to the public.
Claims – Provides service to the policyholder in the event of a loss.
Executive Staff – Oversees and regulates the business.

Insurance Company Financial Structure

The DOI regulates all insurers doing business in this state. Its major concern is providing protection against the insolvency of an insurer.
The DOI regulates the organization and ownership, capital and surplus requirements, reserves, accounting. Investments, annual statements, rehabilitation or impaired insurers, and the liquidation of insurers when necessary.
The DOI’s main goal is the protection of the general public through the use of the following reports and regulations:
1. Investments – Insurance regulations require that all investments be approved by the insurer’s board of directors. Most investments are required to be invested in something that is fairly stable.
2. Annual Statement – Every insurer authorized to transact business in this state must file a financial report with the DOI annually. The financial report must be detailed so the DOI might see anything of financial concern.
3. Examination of Insurers – The DOI conducts examinations on every insurer in this state. The exam may be as often as the DOI deems necessary.
4. Rehabilitation and Liquidation – Regardless of the regulations and controls, a few insurers find themselves in financial difficulty. When this happens, the DOI will step in and attempt to help the insurer become solvent again. Only as a last resort are insurers declared insolvent, and the liquidation process started.

Insurance Company Financial Structure (continued)

The DOI may implement a rehabilitation plan if it determines that the insurer could be reorganized, consolidated, converted, converted, reinsured, or merged. Under a rehabilitation order, the DOI maintains control of the insurance company until management can be turned over to a private management after the problems have been resolved.
Evaluating an insurer’s surplus (excess assets, over liabilities) is very important. Any major change in surplus from year to year should be carefully scrutinized to determine

Financial Rating Agencies Agents are responsible for placing business with insurers that are financially sound. Several independent financial rating services provide ratings available to the public. Five of the most popular services are A.M.Best, Standard’s and Poor’s, Moody Investment Services, Duff and Phelps Credit Rating, and the Weiss Insurance Ratings, Each service assigns rating codes to show strengths and weaknesses of each company rated.

Producers/Agents

Law of Agency: A relationship between two parties where the producer/agent may act on the behalf of the principle and bind the actions or words of the principle.

Insurer as Principle – Insurer is the source of the authority in which the producer/agent must abide.
1. When acting within the scope of authority, the insurer is responsible for all of the producer’s/agent’s acts.
2. When the producer/agent exceeds the authority in the agency contract, the producer/agent may be in the position of being personally liable for their actions.
Producers/Agents – Individual appointed by an insurance company to represent the company and to present policies on its behalf.
1. Responsibilities to the Insurer
  1. The producer/agent is responsible for presenting, modifying, affecting, accepting the performance of, or terminating the business contracts of the insurer.
  2. Producers/Agents have a fiduciary duty to the insurer when handling premium funds in an account separate from personal funds.
  3. After submitting an application, the producer/agent should report any material facts that may affect the underwriting of a policy to the insurer.
  4. The producer/agent isn’t required to emphasize profitable policies.
2. Authority
  1. Express – The power that is expressed (written) in the producer’s/agent’s contract. Example: Binding authority)
  2. Implied – The authority that the public assumes the producer/agent has. The active authority when conducting the insurance business, such as filling out applications, providing quotes, and accepting premiums for the insurer.
  3. Apparent – The authority created when a producer/agent exceeds the authority expressed in their contract, and the insurer does nothing to counter the public impression that such authority exists. Example: Accepting money on a lapsed policy.
3. Responsibilities to the Applicant/Insured
  1. The producer/agent has the responsibility to seek and gain knowledge, not just initially, but on an ongoing basis throughout their professional career. The sale and servicing of insurance is a professional endeavor and requires knowledge of policies coverages, provisions, limits, and risk evaluation. Only with this knowledge can you serve the best interests and needs of the applicant or insured.
  2. As the producer/agent serves in a fiduciary capacity to the insurer, their applicants and insured’s rely upon them to forward premiums and to secure the coverages that address their exposures. The failure of a producer/agent to do so is a violation of trust and professional expectation, even though the producer /agent technically are a representative of the insurer.
Broker – Negotiates insurance contracts on behalf of the insured, thereby representing the client’s interest, not the insurer.
Nonresident Agent – Licensed to write business in other states as well as their resident state.
Surplus Lines Agent – Licensed to write insurance coverage with non-admitted insurers when such coverage can’t be place with an admitted insurer.

Contracts

Contract Law and Tort Law

Contract law –Pertains to the formation and enforcement of contracts.
Tort law –Pertains to injuries suffered by one party as a result of another party’s actions.
1. A tort is a civil wrong other than a crime or a breach of contract

Elements of a Legal Contract

Agreement
1. Offer – Applicant applies for insurance by completing an application.
2. Acceptance – The insurer promises to pay by issuance of a policy or a binder.
Consideration
1. What the two parties to a contract give in exchange or value.
2. The insured’s consideration is the payment of premium, or the promise to pay, plus an agreement to abide by the conditions of the contract.
3. The insurer’s promise to indemnify in the event of a loss is its consideration.
Competent Parties
1. The parties to a contract must have the legal capacity to enter into a contract.
2. Restricted persons are:
  1. Minors – The insurer may be required to uphold the terms of the contract, but minors may void contracts of property, casualty, and health insurance.
  2. Mentally incompetent persons.
  3. People under the influence of drugs or alcohol.
    Note: Retired persons aren’t restricted.
Legal Purpose
1. Insurance may not be issued for an illegal activity or immoral purpose.
2. All insureds’ must have an insurable interest.

Characteristics of an Insurance Contract

Contract of Adhesion – One party prepares a contract and submits it to the other party on a “take it or leave it” basis (without negotiation).
Aleatory Contract – Parties to a contract exchange unequal amounts of money. In insurance, the premium paid is less that the potential benefit to be received in the event of a loss. Performance depends on an uncertain future event. The exchange of values may be unequal.
Personal Contract – Insurance policies cover the insurable interest of the insured. The insured can’t transfer or assign any policy, except life insurance.
Unilateral Contract – Only one part is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurer has made a promise of future performance, and only the insurer can be charged with breach of contract.
Conditional Contract – Both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complies with policy conditions.
Contract of Indemnity – This principle establishes that the insured is restored to the same financial condition as before the loss, with no intent of loss or gain.

Legal Interpretations Affecting Contracts

Ambiguities in a Contract of Adhesion – Any doubt or ambiguity found in the document is construed against the party who drew up the contract, which is the insurer.
Reasonable Expectations Doctrine – What a reasonable and prudent buyer can expect. The reasonable expectations of policyholders and beneficiaries will be honored even though the strict terms of the policy don’t support these expectations.
Principle of Indemnity – The restoration of an insured, after a covered loss, to the same financial condition that existed before the loss; the insured shouldn’t profit from a covered loss.
Utmost Good Faith – Both parties bargain in good faith in forming the contract. Applicants are required to make a full, fair, and honest disclosure.
Representations – Statements made on the application by the applicant that are believed to be true to the best of insured’s knowledge, but aren’t warranted to be exact in every detail, and may be withdrawn before policy issuance.
Misrepresentation – A false statement on the application that can render the contract void if material to acceptance of the risk. An incorrect statement that results in the insurer’s acceptance of risk.
Warranties – A statement made on an application for insurance by the insured that is guaranteed to be true, such as the statement that “the building has a sprinkler system”. A warranty may also appear in the policy as a requirement for coverage, such as “warranted that the insured will maintain an anti-theft device”. If the insured doesn’t comply, the coverage will be void.
Concealment – The withholding of known facts which are so important that the disclosure of them would change the decision of an insurer with respect to underwriting, settling a loss, or determine premium. The willful or intentional failure to disclose material facts.
Fraud – The intentional misrepresentation, deceit, or concealment of a material fact known to a person with the intent to injure another party.
Waiver – The voluntary abandonment of a known or legal right or advantage. An insurer’s failure to enforce a provision of a contract.
Estoppel – A legal doctrine that prevents the denial of a fact, if the fact was admitted to be true by a previous action.

National Association of Insurance Commissioners (NAIC)

This organization recommends model legislation and attempts to standardize insurance laws.
All commissioners are members of the NAIC.
The organization doesn’t exercise official legislative power.

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Casualty Insurance: Unit 10