Property & Liability Insurance
This article will provide an overview of property and liability insurance. The article will explain the nature of an insurance contract and important concepts relating to property and liability insurance. These concepts include the coverage commonly provided by homeowner's and business owner's property insurance policies and the basis for the premiums charged by insurers to cover property under an insurance policy. Also, an explanation of liability insurance is provided along with information about the most common type of liability insurance, Commercial General Liability insurance, and exemptions that are typical in these policies. Other issues that frequently arise in conjunction with property and liability insurance are also described, such as subrogation, reinsurance and bad faith causes of action. This article also provides an explanation of some of the factors that affect insurance rates and policies, such as insurance regulation, risk and insurable interests. Finally, the issues that commonly arise relating to the liability of insurers, such as the procedures that policyholders must follow to file claims, the defenses that insurers typically use to dispute claims and the measure of recovery that is used to assess claims and determine the proceeds paid by insurers in response to those claims, is explained.
Keywords Appraisal; Beneficiary; Claims; Estoppel; Insurable Interest; Liability; Premium; Subrogation
Insurance is essentially a way to manage risk and protect assets against potential financial loss. In exchange for a fee, known as a premium, risk is transferred from one entity to another. There are many different types of insurance, and each one of these types provides coverage for different assets. For instance, life insurance provides a monetary benefit to a decedent's family upon the death of the insured, automobile insurance covers legal liability claims against a driver and any loss of or damage to the insured's vehicle itself, property insurance provides protection against risks to property arising from natural disasters or criminal activity and liability insurance covers legal claims that are brought by third parties against the insured. Each type of insurance differs in the scope of coverage it provides, the premiums that are charged and the procedures that are required for policyholders to maintain coverage, file claims and receive payments.
Property and liability insurance are both common forms of insurance. Property insurance is often sold by insurers in tandem with other types of insurance. For instance, when people purchase a home, they generally buy a homeowner's insurance policy that covers damage to the home and property and the replacement value of the owner's belongings. The owner or management of a company may purchase a business owners policy that will cover damage or loss to the property. Liability insurance is also routinely purchased by businesses to cover any liability from damages or losses owed to a third party that arise from conduct relating to its business activities or its agents or employees. The following sections provide a more detailed explanation of property and liability insurance policies.
Basic Concepts in Property
Insurance is a unique form of contract, known as a policy, between an individual or entity whereby the policyholder pays the insurer regular installments, called premiums, and in return receives financial protection or reimbursement against losses from the insurer. The insurance company pools the premium payments of its policyholders along with other income-generating assets to create a reserve fund from which payments are made. Insurance companies also assess the risks involved in insuring various assets against loss or damage and use this information to determine whether to underwrite insurance policies and to develop appropriate rates for premiums and coverage limits for claims. Property and liability insurance policies are commonly purchased by individuals and businesses to protect their most valuable assets. The following sections provide further detail about these two types of insurance policies.
Nature of Insurance
An insurance policy is generally characterized by three elements: (1) distribution of risk, (2) among a substantial number of members, (3) through an insurer engaged primarily in the business of insurance. Risk distribution acts to mitigate the onus of an individual or business entity single-handedly bearing the full consequences of a misfortune. Most individuals and businesses do not have sufficient cash reserves on hand to cover significant losses to their property or to pay substantial damages in the event of a lawsuit. However, most of these same individuals and business can afford to make reasonable monthly, quarterly or even annual payments to an insurer that will in turn pay these significant costs when they arise.
Insurers use statistics and the law of averages to determine when it is economically feasible to underwrite insurance policies. When insurers underwrite an insurance policy, the insurance company assumes the risks of the occurrence of any of the events it lists in the policy, which is a contract of insurance wherein the term, coverage, premiums and deductibles of the contract are listed in writing. Insurers fix the premium rates that policy members pay by predicting the number and size of losses during the period of the insurance policy and then spreading these costs evenly among its members. Although payments on a claim, or a request for reimbursement from an insurance company when the insured has suffered a loss that is covered under an insurance policy, can be substantial, they may not occur very frequently. Thus, insurance companies are able to build their cash reserves by collecting premium payments by a substantial number of policyholders and only paying claims for losses that are relatively infrequent.
The process whereby insurers allocate prospective risks among many members to minimize the economic liability for any one member is what distinguishes an insurance policy from a traditional contract. In most contracts, one party is only willing to assume the liability of another for some consideration. For instance, a surety (a person or organization that promises in writing to pay the debt of another in the event of default) generally only accepts this responsibility upon receipt of payment or other type of consideration. However, in an insurance contract, the insurer promises to cover an economic loss that falls within the scope of a policy held by any of its policyholders. Thus, the one-to-one nature of the exchange of liability for consideration in traditional contracts is diffused among many members in insurance contracts.
Finally, insurance policies differ from traditional contracts in that they are written by an insurer that is primarily in the business of insurance. There are other types of contracts that have the common elements of distribution of risk among a sizeable group of participants, as in warranty contracts that cover certain types of merchandise such as household appliances. However, these appliance manufacturers are not primarily in the business of insurance and the purpose of the risk distribution in these contracts is merely to obtain an amount of immediate income to defray the potential future expense of rendering services on the appliances.
Property insurance provides protection against most risks to property, such as damages resulting from fire, theft or weather events. Specialized forms of property insurance may be sold to cover specific types of damage, such as fire insurance, flood insurance or earthquake insurance. Property insurance is often packaged with other types of insurance and sold as homeowner's insurance or a business owner's policy.
Homeowner's insurance typically includes a number of sections. These sections define the terms and scope of insurance coverage relating to different assets. For instance, a homeowner's insurance policy may include sections that specify the policy's coverage for the main dwelling, other structures on the property, the owner's personal property, the loss of use of the property and any liabilities arising from loss or damage to the property; such as the personal liability of the owner and coverage for medical payments.
The portions of the policy that cover the dwelling and any additional structures on the property state the coverage limits in the case of damage or total loss to these structures. If there is a total loss, the amount paid is based on the policy limit of the insurance contract and the type of coverage provided. For instance, structures other than the main dwelling house, like garages, sheds, or guest houses are usually covered at 10% of the limit set for the main dwelling. In other words, if an insurance contract provides $500,000 coverage for the main dwelling, it will likely provide up to $50,000 coverage for the other structures. If landscaped property that includes trees and other shrubbery is protected against loss or damage by the policy, the coverage is generally about 5% of the dwelling limit. Finally, most property insurance policies also cover personal belongings such as jewelry, artwork, furniture, computers and other similar items, and many include coverage for third party liability, which protects property owners against personal liability if somebody is injured while on their property.
Business Owner's Policy
Insurance companies that sell business insurance typically offer policies that bundle property and liability protections into one package. These packages are known as business owner's policies (BOPs). BOPs include three types of coverage:
Provide property insurance for buildings and contents owned by the company.
Offer business interruption insurance, which covers the loss of income due to any catastrophe that disrupts the operation of the business so as to cause no income.
Any additional expenses that businesses may incur while operating out of a temporary location due to damage or loss of its office space or facilities, until the original property is restored or rebuilt.
Finally, BOP's also generally offer liability protection, which covers legal responsibilities arising from harms that a business or its employees cause to another. These responsibilities can be the result of a business doing something or failing to do something in its business operations that causes bodily injury or property damage to another. For instance, a BOP may provide coverage for liabilities stemming from defective products or faulty services rendered by an employee. It is important to distinguish BOPs from other types of insurance that businesses may purchase to cover specific aspects of their operations. BOPs, for example, do not provide coverage for automobiles, worker's compensation claims or health and disability benefits. These are generally covered through other types of insurance.
Insurance companies determine the amount of premiums that they charge policyholders based on the statistical frequency of major risks to a home or business, such as through fire or theft. Property insurance premiums are set by considering several factors such as the type of building structure, the presence or absence of safety measures, and the proximity of the property to potentially dangerous hazards. Once an insurance company has established a baseline premium, the individual policies it offers can be easily adjusted to allow each insurer to purchase additional types of insurance or greater amounts of coverage for additional assets. Some states have set caps on certain types of insurance rates whereby premiums may not be charged above the limits established by state law.
One of the most prevalent types of insurance today is third-party liability insurance. Liability insurance differs from first-party insurance, such as life or property insurance, in that liability insurance covers the liability of the insured for damage caused to a third party rather than a loss to the insured's own property. While liability insurance provides important protections, its coverage is not universal. The damages or tort liabilities that it protects against are generally carefully specified in the policy and if liabilities arise from an occurrence or accident that is not covered by the policy, the individual or business charged with causing the damage may be personally responsible for those costs.
Comprehensive General Liability Insurance
The most common type of third-party liability insurance in use today is the Commercial General Liability (CGL) policy, also known as Comprehensive General Liability insurance. The basic CGL insurance policy provides coverage up to the face amount of the policy for bodily injury and property damage that the insured becomes legally obligated to pay, including harm caused to intangible property such as a company's good will or reputation. In addition, many CGL policies provide coverage for damages arising from any personal injury suits filed by a customer or from libel or slander suits filed by a competitor. However, like most forms of liability insurance, to cover legal responsibilities resulting from bodily injury or property damage, most CGL policies require that the injury results from an occurrence or accident that is defined in the policy.
Liability insurance policies, including CGL policies, frequently have exclusions that limit the coverage provided by the policy. Any activities, errors or omissions that the insurance company will not cover or that are beyond the insurer's interest are referred to as exclusions and are specified in a separate section of the policy. Common exclusions include any fraudulent, criminal, malicious or dishonest acts committed by the insured that result in the incurrence of damages or a lawsuit.
In addition, one notable exclusion in CGL policies is the work product exclusion. This exclusion generally precludes coverage for property damage to the insured's products or to a third party's property caused by work done by or on behalf of the insured, or for claims that the insured's product or completed work was not completed according the claimant's expectation. This exclusion has been redefined by the courts and the insurance industry over the years; but in 1973, the insurance industry specified that the work product exclusion would eliminate coverage in any case in which a defective product damages another part of the insured's work, even if the insured's work was performed by a subcontractor or other entity working on behalf of the insured. This revision has since been upheld by the courts and continues to be included in many CGL policies today.
Common Issues in Insurance Law
While insurance provides a means of protecting an insured against a financial loss, insurance is not meant to provide an insured with a net profit after she has received a payment for a claim. Insurance companies prevent overpayments by requiring that policyholders have an insurable interest in the asset they are seeking to insure. An insurable interest exists when loss or damage would cause the insured to suffer a measurable financial loss. For example, if a dwelling is damaged by fire, the value of the property has been reduced. A measurable financial loss thus occurs whether the homeowner pays to have the house rebuilt or sells it at a reduced price.
Further, in regards to property insurance, the insurable interest must exist both at the time the insurance is purchased and at the time a loss occurs. Thus, the homeowner must own her home when she buys a homeowner's policy to insure it, and she must also be the owner at the time the home experiences any damage or loss for which she will file a claim against her insurance policy.
Subrogation occurs when one person or business entity...
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