Business Law (part 52)

Laws made by common consent must not be trampled on by individuals.

George Washington

Types of Insurance (part B)

by

 Charles Lamson

 Property Insurance

Property insurance is a contract whereby the insurer, in return for a premium, agrees to reimburse the insured for loss or damage to specified property caused by the hazard covered. A contract of property insurance is one of indemnity or compensation for loss that protects the policyholder from actual loss.

If a building actually worth $40,000 is insured for $45,000, the extra premiums that were paid for the last $5,000 worth of coverage do not provide any benefit for the insured. The actual value, $40,000, is the maximum that can be collected in case of total loss. On the other hand, if a building is insured for only $20,000 and is totally destroyed, the insurance company has to pay only $20,000. The maximum amount paid for total loss of property is the lesser of the face of the policy or the value of the property.

Losses Related to Fire

Normally, fire insurance covers damage to property caused only by hostile fires. A hostile fire is defined as one out of its normal place, whereas a friendly fire is one contained in the place where it is intended to be. Scorching, searing, singeing, smoke, and similar damages from a friendly fire are not covered under a fire policy. For a fire policy to cover damage, normally an actual fire must occur. The policy does not cover loss caused by heat without fire. However, in one case the court held that soybeans were damaged by fire when there were hot spots in the beans that "glowed like charcoal and were orange" and there was an odor of smoke. 

Fire Insurance also does not cover economic loss that results from a fire. A hostile fire may cause many losses other than to the property insured, yet the fire policy on the building and contents alone will not cover these losses. An example is the loss of profits while the building is being restored. This loss can be covered by a special policy called business interruption insurance. If one leases property on a long-term, favorable lease and the lease is canceled because of fire damage to the building, the tenant may have to pay a higher rent in new quarters. This increased rent loss can be covered by a leasehold interest insurance policy but not by a fire policy.

The typical fire policy may also cover the risk of loss by windstorm, explosion, smoke damage from a friendly fire, falling aircraft, water damage, riot and civil commotion, and many others. Each of these additional risks must be added to the fire policy by means of riders. This is commonly known as extended coverage.

The Property Insurance Policy

The property insurance policy will state a maximum amount that will be paid by the insurer. When only a maximum is stated the policy is called an open policy, and in the event of partial or total loss, the insured must prove the actual loss that has been sustained. The policy may be a valued policy, in which case, instead of stating a maximum amount, it fixes values for the insured items of property. Once a policyholder shows a covered total destruction of the property, the insurer pays the total value. If only a partial loss occurs, the insured under a valued policy must still prove the amount of loss, which amount cannot exceed a stated value of the property.

Insurance policies also may be specific, blanket, or floating. A specific policy applies to one item only, such as one house. A blanket policy covers many items of the same kind in different places or different kinds of property in the same place, such as a building, fixtures, and merchandise in a single location. Floating policies are used for trucks, theatrical costumes, circus paraphernalia, and similar items that are not kept in a fixed location. A floating policy is also desirable for items that may be sent out for cleaning, such as rugs or clothes, and articles of jewelry and clothes that may be worn while traveling. An insurance policy on household effects covers for loss only at the named location. The purpose of the floating policy is to cover the loss no matter where the property is located at the time of the loss. 

Most people who own their homes obtain homeowners' insurance. A homeowners' policy protects the house and also its contents from almost every peril. It covers damage from such perils as fire, wind, lightning, hail, and theft. It also covers liability of the homeowner in case someone suffers injury on the property. A tenant can obtain similar insurance that protects the tenants personal property but not the building itself.

Another type of insurance policy of particular interest to merchants is the Reporting Form for Merchandise Inventory. This policy permits the merchants to report periodically, usually once a month, the amount of inventory on hand. This enables the merchants to carry full coverage at all times and still not be grossly over ensured during periods when inventory is low.

Description of the Property

All property and its location must be described with reasonable accuracy in order to identify the property and to inform the insurer of the nature of the risk involved. It is not accurate to describe a house with asphalt brick siding as brick. Personal property should be so described that in the event of loss, its value can be determined. The general description "living room furniture" may make it difficult to establish the volume and the number of items. A complete inventory should be kept. If this is done, such descriptions as "household furniture" in the policy is adequate.

Since the location of the property affects the risk, it must be specified. If personal property used in a brick house on a broad paved street is moved to a frame house on an out-of-the-way dirt road, the risk from fire may be increased considerably. To retain coverage, express permission must always be obtained from the insurer when property is moved except under a floating policy. Most homeowners policies sold today continue coverage at a new location for several days together with coverage during the moving trip. If a loss occurs during the specified period, the company must pay, even though it received no notice of the changed location.

Coinsurance

Under the principle of coinsurance, the insured recovers on a loss in the same ratio as the insurance bears to the amount of insurance that the company requires. Many policies contain an 80% coinsurance clause. This clause means the insured may carry any amount of insurance up to the value of the property, but the company will not pay the full amount of a partial loss unless insurance is carried for at least 80% of the value of the property. If a building is worth $50,000 and the insured buys a policy for $20,000, the company under the 80% coinsurance clause will pay only half of the damage and never more than $20,000. The 80% Clause requires the insured to carry $40,000 or 80% of $50,000, to be fully protected from a partial loss. Since only half of this amount is carried, only half of the damage can be collected.

The coinsurance clause may be some percentage other than 80%. In burglary insurance it may be as low as 5 or 10%. On rare occasions it is as high as 100% in fire insurance.

Repairs and Replacements

Most insurance contracts give the insurer the option of paying the amount of loss or repairing or replacing the property. The amount the insurance company will pay for loss will vary depending on whether market value or replacement cost is used to measure the amount of loss. If market value is used, the insurance company will pay whatever the value of the property was immediately before the loss. If the property has been used for several years, the market value could be much less than the cost to replace the property. If replacement value is used, the insurance company will pay what the cost is to procure another item as identical to the insured item as possible. Even if the item is older and shows wear and tear, it will be replaced with a new one. For example, suppose fire damages Alphonse's 15 year-old furniture for which he paid $5,000. Alphonse has raised four children, so the furniture has seen a lot of use and not always had the best treatment. The market value of his much used, 15 year-old furniture would probably be very little, say $500. If Alphonse has an insurance policy that pays only market value, he would recover only $500. If the policy pays replacement cost it could easily cost $5,000 or more to replace the furniture. The amount paid by the insurance company can vary dramatically depending on whether market value or replacement cost is the measure. Which measure is used will depend on the policy.

When the property is repaired or replaced, materials of like kind and quality must be used. The work must be completed within a reasonable time. When the insurance company has the choice of repair or replacement, the insurer seldom exercises the option to replace. The insurer also may have the option of taking the property at an agreed valuation and then paying the insured the full value of the damaged property.

Defense and Notice of Lawsuits

Under a defense clause found in property insurance policies that protect the insured from liability to others injured on the property or by the property, the insurer agrees to defend the insured against any claim for damages. This means that if the insured is sued, the insurance company supplies a lawyer to defend the suit. For example, under a normal homeowners policy, the homeowner is protected not only against damage to the property but also from liability to anyone injured on the property. If someone who slips on ice at the door sues the homeowner, the insurance company will supply a lawyer to defend the suit. This saves the ensured the cost of hiring an attorney.

In the event of an injury to a third party or an accident in the case of automobile insurance, the policyholder has the duty to give the insurer written notice and proof of loss regarding the damages. The notice must identify the insured and give such information as the names and address of injured persons, the owner of any damaged property, witnesses, and the time, place, and detailed circumstances of the incident. This notice must be given within a reasonable time.

If a claim or a suit is brought against the injured, every demand, notice, or summons received must immediately be forwarded to the insurance company. The insured must give the fullest cooperation to the insurer, who normally has the right to settle out of court any claims or lawsuits as it deems best.  

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, PGS. 460-464*

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