The Insurance Institute of Canada www.insuranceinstitute.ca C82 General Insurance Essentials Part 2 Licensing Kit Textbook Addendum February 2011 (To be used with the 2009 edition of C82 as part of the Alberta Licensing Kit only.) Study 5, page 9, at the end of the fourth paragraph under the heading The Policy add section as follows: Insured The definition of insured in a homeowners policy includes people other than the named insured, though these others are not named anywhere in the policy. They include, while living in the same household the insured s spouse the relatives of either the insured or the insured s spouse and any person under 21 in their care Only the insured named in the Coverage Summary may take legal action to enforce the contract. The definition of insured also includes a student who is temporarily living away from home to attend a school, college, or university. This extension ensures that the student is not construed to be no longer a member of the household and so, not insured while away. It protects the student s interest during his or her temporary absence. But the student must be dependent on the named insured (or spouse) for support and maintenance. The student may still earn money towards living expenses or school materials or costs. But if the student is self-supporting, the extension does not apply. Study 5, page 9, add section at the end of the page as follows: Determining Replacement Cost: There are a number of different valuation guides available that may be helpful when determining replacement cost, for example Boeckh or Marshall & Swift Building Valuation methods. Your brokerage, or insurer(s), may have a preferred one. Generally, factors used to calculate the building s replacement cost include the size of the building (floor area plus the number of storeys); construction materials; heating type; and any special features of property, such as a garage, other outbuilding, pool, and finished basement. Because these guides use replacement figures based on average or usual construction materials and types, use extra care when dealing with luxury or custom homes. Luxury materials or methods of construction can increase the cost to repair or replace such dwellings above the figures suggested by the valuation guide. While brokers can assist their clients in making valuations, the client must ultimately decide the limit of insurance. If there are any doubts about the amount of insurance required, brokers should recommend that the client have the building appraised by an independent professional appraiser. Page 1 of 7
The insurance broker is at risk of being held responsible for not having recommended adequate limits of insurance. Study 5, page 22, before the heading Endorsements add section as follows: Home Business What clients do for a living and where they do it are also matters to consider. Sometimes clients have exposures beyond the scope of a typical homeowner, such as a home business, that may require separate insurance. Many people are choosing to work at home. The IBC Homeowners forms define business to mean any continuous or regular pursuit undertaken for financial gain including a trade, profession, or occupation. The main difference between a home-business risk and a commercial risk is its size and location, not the types of exposure it can face. Home-based businesses cover a wide range of operations, from someone working alone doing office-related tasks in the home to a fully equipped manufacturing operation with several employees. For example, the client may have a hobby making pottery but his friends have been commissioning his work. His hobby is really a business now. Similarly an automobile mechanic who does minor service and repairs at his home now has a responsibility for others people s property on his premises and he also has tools and supplies for his work on the premises. Or your client is a dress designer and you ask her questions of her business activities at home. She tells you that she manufactures clothing from her home. Her exposures include inventory stocks; computer equipment and software; sewing machines; furniture and fixtures used exclusively for business purposes; and records of her business. The specific characteristics of a home business that will affect liability exposures and premiums must be determined. This information is also required for ordinary commercial risks and includes: number of employees customers, suppliers, or other contractors who enter the premises operations or activities that occur off premises (selling products at trade shows or at the homes of customers) size of the business (home businesses are usually small scale and are rated by sales) type of product or service. Whether the client s homeowners policy can be extended to cover this business or a separate business policy is required will depend on how large the business is, the nature of the business, and the philosophy of the insurance market(s). Generally insurers are more likely to extend a personal lines policy if the business risk is incidental. Page 2 of 7
Study 6, page 4, replace the paragraph headed Mobile Homeowner s Form as follows: Mobile Homeowners Policy Forms Mobile homes may be used as principal residences, as cottages, or as recreational vehicles. They may be moved usually by towing to a site where they will be used or kept. However, there are many variations. Some mobile homes have been put up on blocks; or are permanently attached to foundations. Some are trailer homes with their wheels and hitch attached and can be moved at any time. When mobile homes are attached to foundations they can be secured by straps called tie downs. Tie downs are employed to improve windstorm resistance. They are heavy straps that pass over the top of the unit and are fastened to the foundations on either side to aid in keeping the unit on the ground during high winds. Mobile home policy wordings provide named perils coverage for the building and contents similar to the basic homeowners policy. Building coverage includes built-in equipment and furnishings; permanently attached carports and garages; awnings; skirting; porches; and tie-down equipment. With mobile homes, items that are considered contents in a normal home such as appliances can be considered part of the building. Because these fixtures tend to be built in, damage to them can lead to structural damage as well; this means that what might be a minor loss to a conventional home could be a major loss to a mobile home. Also, because of the high rate of depreciation of a mobile home, replacement cost is not usually available for the building, though it might be available for the contents. Differences between the basic homeowners form and the mobile homeowners form stem from the nature of the home. There are two exclusions not found in the basic homeowners policy. Since a mobile home can be moved, the policy excludes loss due to conversion, embezzlement, or secretion by any person in possession of the building. losses arising from moving the home unless the building is moved in an emergency to protect it from an insured peril. There is an optional extension for the building known as emergency removal expense. This covers the expense of moving the building to protect it from an insured peril, such as a forest fire. Moving of a mobile home includes the period of time during which the leveling jacks or blocks are removed and/or all utilities are disconnected. In Quebec, there is no separate policy form for mobile homes; this type of dwelling is covered on a basic homeowners policy with amendments to the wording to reflect the special nature of this type of home. Study 6, page 6, at the end of the first paragraph add as follows: The original condominiums in this country were almost entirely high-rise developments, but today there is a variety of condominium housing available, including high- or low-rise apartment condominiums, townhouse or rowhouse developments, and even fully detached dwelling units within a condominium village complex. Page 3 of 7
The legislation in some provinces recognizes other types of condominium with plots of land as units; the description of a unit will include all of the land, structures, and fixtures within the area of the unit in these condominiums, the roadways leading to the lots are common elements and the dwelling constructed by the owner of the unit (lot) is regarded as unit owner s improvement. For example, the Alberta Condominium Property Act defines as unit as 1 (1) (y) (i) in the case of a building, a space that is situated within a building and described as a unit in a condominium plan by reference to floors, walls and ceilings within the building, and (ii) in the case other than that of a building, land that is situated within a parcel and described as a unit in a condominium plan by reference to boundaries governed by monuments placed pursuant to the provisions of the Surveys Act respecting subdivision surveys; Study 7, page 26, at the end of the page add section as follows: Business Organization A business organization may take one of three forms: a sole proprietorship, a partnership, or a corporation. How it will be organized will depend on many things, but one of the major ones is the amount of capitalization available. The named insured under a commercial liability policy can be any one (or more) of the following types. Sole Proprietorship A sole proprietorship is a business owned by one person. The owner is totally responsible for the administration of the business and for all debts. The owner has unlimited liability for the debts of the business. This means if the business fails, the owner could also lose all personal assets. The expansion of the business is limited to the capital of the owner and that amount of money which the owner may borrow on the strength of his or her personal reputation and assets alone. Partnership A partnership is two or more people carrying on a business jointly. Some provinces set a maximum limit to the number of partners a partnership may have. Since more than one person is investing in a business the combined capital of the partners can be used to build a larger business. While provincial legislation usually requires a partnership to be registered, it is not subject to as many legal restrictions and as much paper work as a corporation would be. The partnership is not limited in its liability as a corporation would be. Each partner (unless he or she is a limited partner) is required to contribute to the debts of the partnership to the full extent of their assets. The partnership legally terminates if one of the partners commits a breach of the partnership agreement or becomes mentally incapacitated. This will necessitate dividing of the partnership Page 4 of 7
assets and reforming the partnership. The time and money involved in this process can be detrimental to the business and may force the partnership into bankruptcy. Corporation A corporation is an artificially created separate legal entity. It exists only on paper but legally has the status of a person. A corporation can sue or be sued, hold assets, and incur debts in its own name without involving the assets of its owners (shareholders). A corporation can be recognized by the words limited, incorporated, or corporation (or their respective initials, Ltd., Inc., Corp.) following its name. Since a corporation is deemed to be a separate legal entity and cannot die or be killed, it can theoretically last forever. The transfer of ownership of the business merely requires the transfer of shares of the corporation. Study 7, page 29, before the heading Farmers Liability add section as follows: Garage Liability Coverage Garages, service stations, and parking lots have a garage liability exposure that generally needs at least two separate types of insurance: (1) automobile insurance (2) general liability insurance. Automobile underwriters insure automobile liability generated by garages using the Garage Automobile Policy (SPF 4) or a similar such form depending on the province. The current Insurance Bureau of Canada recommended Commercial General Liability (CGL) wording can be used to provide coverage for garage general liability arising out of premises, products, and completed operations exposures. The policy wording carries an extensive and thorough automobile exclusion to ensure that it does not provide overlapping coverage with the garage automobile policy. The declarations page or coverage summary page must disclose the garage operation. Not all insurers use the current CGL policy wording; some use a modified CGL form with some differences in the automobile exclusion. Premiums are sometimes calculated on the estimated payroll of the insured and are subject to adjustment annually, or, if the insured is operating an open air parking lot, premiums can be calculated on the area of the lot. Some insurers use revenue to calculate premiums. Other possible exposures for garage type risks may include elevators, contractual liability, and any other business or occupational pursuits. Full details of each risk exposure must be reported to the insurer for consideration. Hoists for lubricating and servicing vehicles are covered by the CGL often without an extra premium charge. Study 8, page 16, at the end of numbered list at the top of the page add as follows: A Boiler and Machinery insurance policy is designed to complement a property insurance policy, covering losses that are not covered by most property policies. Page 5 of 7
In the Commercial Property Named Perils Form, the description of the Explosion peril specifies what boilers, pressure vessels, and related equipment are not covered and what perils are not considered explosions within the meaning of this section of the wording. In the Broad Form, those limitations on coverage for boilers and pressure vessels are shown in two exclusions. One of the exclusions appears under Excluded Property (which details what the policy will not insure); the other appears under Excluded Perils. Under Excluded Perils the policy excludes: Loss due to explosion (except for the types of explosion specified in the Insurance Acts) is excluded, as are losses due to collapse, rupture, bursting, cracking, burning out, or bulging of boilers, pressure vessels, and related apparatus. But if fire results from these excluded losses, then loss or damage caused by that fire is covered. Also, tanks of internal diameter 610 millimetres (24 inches) or less used for heating and storing hot water for domestic use are exempt from this exclusion. Study 8, page 16, at the end of the page add section as follows: Flood and Earthquake Most property policies exclude loss arising from the perils of flood and earthquake, however many insurers are prepared to extend coverage to include these perils by separate endorsements subject to underwriting considerations. Flood Insurance Water damage to buildings and contents can arise from a variety of sources one of these is Flood. To extend the fire policy to cover this peril a separate endorsement is required. Flood commonly describes almost any kind of inundation by water. People may speak of their basements being flooded as a result of a burst water pipe or sewer backup. But when added as a named peril to a fire policy, flood generally means waves, tides, tidal waves, and the rising of, the breaking out, or the overflow of any body of water, whether natural or man-made. A body of water would include a watercourse, dam, or reservoir but would not include ordinary surface water from heavy rainfall or rapid snowmelt. The intent is to insure only against direct damage by surface water from particular sources. This endorsement is subject to exclusions that clarify the intent by denying coverage for loss due to the following: Water that backs up through sewers, sumps, septic tanks, or drains Water below ground, including water that puts pressure on, or flows, seeps, or leaks through sidewalks, driveways, foundations, walls, basements, or other floors, or through doors, windows, or other openings in such sidewalks, driveways, foundations, walls, or floors Depending on the risk, the deductible may be substantial, perhaps $5,000. In some cases, the deductible may be expressed as a percentage of the value of the property insured. Page 6 of 7
Earthquake Insurance Earthquakes may cause catastrophic losses. Some areas are more susceptible to them than others. For these reasons, insurers do not include this additional peril with the others, which they often offer automatically on standard forms. A separate wording defines the Earthquake Peril and is attached to fire policies. An earthquake is one of nature s most devastating forces. The initial shock is usually followed by one or more aftershocks, which may occur minutes, hours, or even days later. Insuring against earthquake presents the insurer with particular difficulties: Neither the frequency nor the severity of earthquakes can be accurately predicted, so there is very little statistical information from which credible rates may be developed. Coverage is primarily sought in areas susceptible to earthquake, thus narrowing the insurer s spread of risk. Risk acceptance must be controlled to protect against catastrophic loss. While this is also true of fire insurance, earthquake presents a much greater potential for catastrophe than does fire. Notwithstanding these difficulties, insurance against earthquake is generally available. Rates are based primarily on geographical location, along with building design and construction. Earthquake Damage Assumption Endorsement All shocks within a 168-hour period are considered a single event (as mentioned previously an initial shock may be followed by a series of aftershocks). This affects the application of the deductible. One deductible applies to all damage within the 168-hour period. The 168-hour period does not include damage that occurs before the endorsement takes effect or after the policy expires. The deductible is usually expressed as a percentage of the value of the insured property rather than a flat dollar amount as is common with most other coverages. The deductible percentage usually ranges from 2% to 5%, varying according to construction and geographic location. The disadvantage of this approach is that it requires the full value of damaged or destroyed property to be determined before the amount of the insured s share of loss the deductible can be determined. If the policy is subject to coinsurance, that value may be known if a penalty is to apply. Typically the endorsement is subject to exclusions. The exclusion regarding tidal wave is significant: A tidal wave, or tsunami, is usually caused by an earthquake with its epicentre in the ocean. One of the greatest hazards of an earthquake is the ensuing fire, due, among other causes, to rupture of gas lines. In the common law provinces, the Insurance Acts do not permit an exclusion of fire following earthquake, so such damage is covered under the Basic Fire Policy. The Earthquake Damage Assumption Endorsement is not needed to insure against this peril. Page 7 of 7