Sec 12.3 Fire Insurance

1. Sec 12.3 Fire Insurance • Objectives • Define the terms policy, face value, and premium. • Find the annual premium for fire insurance • Use the coinsurance formula. • Understand multiple carrier insurance • List additional types of insurance coverage.

2. Has anyone ever had their house damaged by fire?

3. Were you satisfied with the way the insurance company handled the claim?

4. Were you satisfied with the way the insurance company handled the claim? It has been said, you never know how good your insurance company is until you use it!

5. Policy • a contract between the owner of a building and a fire insurance company Definitions

6. Policy • a contract between the owner of a builder and a fire insurance company • Face Value • the amount of insurance provided by an insurance company Definitions

7. Policy • a contract between the owner of a builder and a fire insurance company • Face Value • the amount of insurance provided by an insurance company • Premium • the charge for providing insurance to the policy holder Definitions

8. What factors would influence the amount an insurance company charges for insurance?

9. What factors would influence the amount an insurance company charges for insurance? • Type of construction of building ie frame, brick or stone.

10. What factors would influence the amount an insurance company charges for insurance? • Type of construction of building ie frame, brick or stone. • Location of building.

11. What factors would influence the amount an insurance company charges for insurance? • Type of construction of building ie frame, brick or stone. • Location of building. • Type, quality, and location of fire protection.

12. Underwriter • a company which insures an insurance company. Underwriters also play a major role in determining insurance premiums.

13. Underwriter • A company which insures an insurance company. Under writers also play a major role in determining insurance premiums. • Underwriters assign categories to different building types. These categories are usually described by letters--A, B, C, etc.

14. Underwriter • A company which insures an insurance company. Under writers also play a major role in determining insurance premiums. • Underwriters assign categories to different building types. These categories are usually described by letters--A, B, C, etc. • Underwriters also rate the quality of fire protection in a given region. Such ratings are known as territorial ratings.

15. Those of you whose homes were damaged by fire, was the whole house destroyed?

16. Those of you whose homes were damaged by fire, was the whole house destroyed? If you pay attention to the news media, you may notice that with many structure fires, only a portion of a building and it’s contents are destroyed.

17. Those of you whose homes were damaged by fire, was the whole house destroyed? If you pay attention to the news media, you may notice that with many structure fires, only a portion of a building and it’s contents are destroyed. 80% Coinsurance Clause In order to be “fully” insured, the face value of the insurance policy must be at least 80% of the Fair Market Value of the building.

18. If you pay attention to the news media, you may notice that with many structure fires, only a portion of a building and it’s contents are destroyed. 80% Coinsurance Clause In order to be “fully” insured, the face value of the insurance policy must be at least 80% of the Fair Market Value of the building. If the face value of the policy is less than 80% of the Fair Market Value, then the insurance company will only pay for part of the loss.

19. 80% Coinsurance Clause In order to be “fully” insured, the face value of the insurance policy must be at least 80% of the Fair Market Value of the building. If the face value of the policy is less than 80% of the Fair Market Value, then the insurance company will only pay for part of the loss. Amt Ins. Comp. Amt. of Amt of Policy Pays = Loss x ------------------------- 80% of market value

20. Example 1 Papa Joe’s Pizza Place has a market value of $184,000. The business is insured for $135,000 and suffers a fire loss of $52,000. Find the amount of the loss paid by both the insurance company and the insured—assume that Papa Joe’s policy included an 80% coinsurance clause.

21. Example 1 Papa Joe’s Pizza Place has a market value of $184,000. The business is insured for $135,000 and suffers a fire loss of $52,000. Find the amount of the loss paid by both the insurance company and the insured—assume that Papa Joe’s policy included an 80% coinsurance clause. We must first determine whether Papa Joe was “fully” covered. In order to be “fully” covered, the face value of Papa Joe’s policy must be at least 80% of the market value of his business. 80% x $184,000 = $147,200 Face value of policy = $135,000

22. Since the face value of the policy is less than 80% of the market value, the insurance company will only pay PART of Papa Joe’s loss—Papa Joe must pay the rest. Let’s now determine the amount of the loss paid by the insurance company. Amt. Paid by Ins. Company Amt. Paid by = $52,000 - $47,690.22 = $4,309.78 Papa Joe

23. How much would the insurance premium be to insure Sinclair Community College?

24. How much would the insurance premium be to insure Sinclair? Suppose a tornado came thru and “leveled” Sinclair? How much might it cost to re-build Sinclair?

25. How much would the insurance premium be to insure Sinclair? Suppose a tornado came thru and “leveled” Sinclair? How much might it cost to re-build Sinclair? It is not uncommon for a business to have fire insurance policies with several companies. Why?

26. Suppose a tornado came thru and “leveled” Sinclair? How much might it cost to re-build Sinclair? It is not uncommon for a business to have fire insurance policies with several companies. Why? Perhaps the building or company is so large that no one insurance company wants to assume the entire risk by itself, so several companies agree to provide a portion of the coverage--thus sharing the risk. When this occurs, the insurance coverage is divided among multiple carriers.

27. Perhaps the building or company is so large that no one insurance company wants to assume the entire risk by itself, so several companies agree to provide a portion of the coverage--thus sharing the risk. When this occurs, the amount of loss paid is divided amongst the carriers. Note When an insurance claim is made against multiple carriers, the amount of loss paid by each carrier is proportional to the amount of coverage provided.

28. Note When an insurance claim is made against multiple carriers, the amount of loss paid by each carrier is proportional to the amount of coverage provided. For example, if Company A provides 40% of the total coverage while Company B provides the remaining 60%, then when the policyholder suffers a covered loss Company A pays 40% of the loss with Company B paying 60% of the loss.

29. For problems involving multiple carriers: Amt paid by Amt. of Coverage provided by Co. A Co. A = Loss x ------------------------------------ Total amt of coverage

30. For problems involving multiple carriers: Amt paid by Amt. of Coverage provided by Co. A Co. A = Loss x ------------------------------------ Total amt of coverage Amt paid by Amt. of Coverage provided by Co. B Co. B = Loss x ------------------------------------ Total amt of coverage etc, etc, etc . . .

31. Example 2 Find the amount paid by each insurance company. Assume that any coinsurance requirement has been met. The ACME Company suffers a fully insured loss of $450,000. Company A provides coverage of $80,000, Company B provides coverage of $120,000, and Company C provides coverage of $60,000.

32. Example 2 Find the amount paid by each insurance company. Assume that any coinsurance requirement has been met. The ACME Company suffers a fully insured loss of $450,000. Company A provides coverage of $80,000, Company B provides coverage of $120,000, and Company C provides coverage of $60,000. Amt. of Loss Paid by Comp. A

33. Amt. of Loss Paid by Comp. B We may minimize any round-off error by finding the amount of loss paid by company C in the following manner. Amt. of Loss Paid = $450,000 - $138,461.54 - $207,692.31 by Comp. C = $103,846.15

34. Note Fire insurance protection is usually included as part of a homeowner’s insurance policy. The insured property is covered against various “perils”--fire being considered a “peril”. Hail or tornadoes are other examples of “perils”.

35. Hwk. Sec 12.3 Even.