FINA 3240 -A Corporate Property Liability Insurance

FINA 3240 -A Corporate Property & Liability Insurance Chapter 2 : Property / Casualty Coverages (Brown & Lennox) I. III. IV. V. VIII. IX. Introduction Automobile Insurance [Ch. 22 and 23, Rejda (2014) ] Homeowners Insurance [Ch. 20 and 21, Rejda (2014) ] Tenants Package Workers Compensation Fire Insurance Marine Insurance Liability Insurance Limits to Coverage

II-a. Auto Insurance (USA & Canada) (More details can be found in Ch. 22 and 23 of Rejda’s text. ) Introduction Liability insurance and medical benefits often compulsory to a minimum defined amount (financial responsibility limits). Coverage is for ph, immediate family and invited driver. Wear and tear, depreciation, rust etc. not covered. If auto used commercially, must buy commercial auto. Fall 2016 2/44

Automobile Insurance (USA & Canada) A. Liability Insurance Ph covered if you injure third party (Bodily Injury-BI) or property damage (PD). Ph’s own property not covered in auto policy (look to Homeowners). If needed, I. C. provides legal defense (and pays). I. C. pays for damages up to policy limit (note damages + legal defense costs may exceed policy limit). I. C. may cease defense when damage payment reaches policy limit. No coverage if ph intentionally causes loss. Fall 2016 3/44

Automobile Insurance (USA & Canada) A. Liability Insurance No coverage if loss covered by W. C. (Workers’ Comp. ). Some basic coverage usually compulsory to drive (although may drive “bare” i. e. no insurance). Higher limits available voluntarily for extra premium. BI vs. PD limits may differ (normally PD < BI). Also in BI, may be a per-person limit and/or per occurrence limit. Premium variables: • Fall 2016 limit of coverage; territory where car is garaged; use of auto (e. g. pleasure, commute, business); driving record of ph. (DR); demographic characteristic of ph (e. g. , age, sex) if allowed 4/44

Automobile Insurance (USA & Canada) B. Medical Benefits Called medical benefits in tort (or at fault) jurisdiction; personal injury protection (PIP) in a no-fault jurisdiction; and accident benefits in Canada Usually compulsory. Pays for medical benefits for you and family if ph liable. If no-fault state, pays for you and family in any accident (i. e. , you don’t sue the person at fault). PIP provides defined levels of benefits (to limits) for income replacement; medical care; rehab, home care; survivor’s benefits No coverage if it is under W. C. Fall 2016 5/44

Automobile Insurance (USA & Canada) B. Medical Benefits No fault insurance • • • tort (at-fault) claims are costly and inequitable no-fault – your I. C. pays for your claims and damages (i. e. , you don’t have to sue) liability (BI/PD) premium down; PIP premium up advantage: total premium should be lower (avoid legal costs) disadvantage: one-size-fits-all benefits (e. g. , a pianist losing a finger gets very little compensation) several kinds of no-fault – – • Fall 2016 e. g. , verbal threshold no fault - if death, T & PD or disfigurement, you can sue; otherwise it’s no-fault e. g. , dollar threshold no fault police still decide who is at-fault as premiums will rise if so. Most policies cover events in all Canada and U. S. (but usually not Mexico) 6/44

Automobile Insurance (USA & Canada) Uninsured and Underinsured Motorist Coverage (UM & UIM) Needed in tort jurisdiction At fault driver may flee, have no insurance, or lower limit If you are more fully insured, your I. C. pays to your limit (like no-fault) An incentive to buy larger limits of liability Fall 2016 7/44

Automobile Insurance (USA & Canada) C. Collision and Other than Collision (OTC) Optional coverage Usually a deductible (e. g. , $500) I. C. pays balance to repair or replace up to limit of actual cash value of car • • Fall 2016 avoids cost of small claims provides financial incentive to prevent claims 8/44

Question: Mr. Brown has a car accident in a tort state. Brown, who is at fault, injured a Ms. Jones who sues for $1, 500, 000 and wins. The following costs are to be paid: Mr. Brown’s car $ 14, 000; Ms. Jones’ car $ 17, 000; To Ms. Jones’ Suit $1, 500, 000; Lawyer’s Fees $ 24, 000 Mr. Brown has an auto policy with the XYZ Insurance Co. He has a $1, 000 Liability coverage and a $500 deductible Collision coverage. How much does this claim cost the XYZ Insurance company? Fall 2016 9/44

Automobile Insurance (USA & Canada) C. Collision and Other than Collision (OTC) Subrogation • • Fall 2016 In tort jurisdiction Once ph paid, I. C. assumes legal rights of ph I. C. can sue at-fault driver to recover payment If successful, ph gets deductible back Ph can sue for deductible (only) if I. C. decides not to sue result: collision premium down; liability premium up (點解？) note: liability is compulsory and collision is not. 10/44

Automobile Insurance (USA & Canada) C. Collision and Other than Collision Salvage • • • once ph paid, I. C. owns car (in case of total write off) I. C. gets any salvage value If salvage > claim paid, ph gets the extra (i. e. , I. C. cannot profit) Premium variables: • Fall 2016 type of vehicle (value and damageability and cost to repair); use (e. g. , business/commute/pleasure); territory where garaged; driving record of ph (DR); demographic characteristics of ph, if allowed 11/44

Automobile Insurance (USA & Canada) C. Other than Collision (OTC) covers perils like hail, fire, vandalism, stone chips, etc. not covered: wear and tear, road damage to tires, collision Comprehensive: covers all perils except those excluded Special Perils: covers only those perils specified Premium variables: • • type of vehicle (including damageability and repairability) territory where garaged NOTE: personal attributes (class or DR) not matter All risks – combo of collision + OTC (rare) OTC deductible (e. g. , $50) usually < Collision deductible (e. g. , $500) Fall 2016 12/44

II-b. Motor Car Insurance (HK) Under the Motor Vehicles Insurance (Third Party Risks) Ordinance, Chapter 272 of the Laws of Hong Kong, the user of a motor vehicle on the road must insure his liability for death or bodily injury of third parties with an authorized insurer. The common forms of “Motor” insurance policies include: (a) Act Only, (b) Third Party Only, (c) Third Party, Fire and Theft, and (d) Comprehensive. Several Q&As listed in the Hong Kong Federation of Insurers website: www. hkfi. org. hk 「除外責任」會否影響受傷第三者的賠償？甚麼是「無索償獎勵」？如何決定汽車「全保」的投保額？如何決定汽車保險的賠償金額？汽車失竊應如何索償？汽車零件被竊應如何索償？ Fall 2016 13/44

II-b. Motor Car Insurance (HK) Fall 2016 14/44

III-a. Homeowners Insurance (USA & Canada) (More details can be found in Ch. 20 and 21 of Rejda’s text. ) A. Coverage A (Dwelling) Covers damage to house by named perils (or non excluded) up to a set limit. Covered perils vary by location (e. g. limited earthquake coverage in California). Not covered: dwelling left empty 30+ days; nuclear accidents; acts of war; building used for business or farming; loss resulting from intentional criminal acts of ph What is covered: doctrine of proximate cause -loss is covered only if a covered peril is the “proximate” cause (it initiates an unbroken series of events) of a covered consequence. Fall 2016 15/44

III-a. Homeowners Insurance (USA & Canada) A. Coverage A (Dwelling) [Example 2. 1] A homeowner dwelling policy has a deductible of $250 for claims up to $1, 000. Between $1, 000 and $2, 000, the deductible disappears linearly so that for claims of $2, 000 or more, there is no deductible. Determine the payment that would be made to the policyholder on a claim of $1, 200. Fall 2016 16/44

III-a. Homeowners Insurance (USA & Canada) A. Coverage A (Dwelling) There is subrogation (same legal basis as in auto) Coinsurance: if you carry less than "full" coverage (usually at least 80% of market value at time of loss) then your claim is reduced pro rata. If coverage = C; coinsurance % required = %C; market value = MV and damage = D then payment P = , if C < (%C)(MV), up to policy limit. Fall 2016 17/44

III-a. Homeowners Insurance (USA & Canada) A. Coverage A (Dwelling) [Example 2. 2] A homeowner has a house valued at $300, 000, but has insured it for $200, 000 with an insurer that requires 80% of full coverage before it reimburses losses in full. If coverage is less than 80% of full coverage, then any loss is reimbursed on a pro-rate basis of what would have been paid had the 80% requirement been met. The homeowner has a kitchen fire estimated at $40, 000 on a replacement cost basis. How much will the insurer pay toward reimbursing the homeowner for this loss? Fall 2016 18/44

III-a. Homeowners Insurance (USA & Canada) A. Coverage A (Dwelling) Arguments in favor of coinsurance • • • encourages insurance to value premium becomes equitable since it equals E[$L] overall rate level is lowered (limits anti-selection) Arguments against coinsurance • • • Fall 2016 not well understood by ph ph only penalized if there is a claim C% variable penalizes those who buy 100% coverage coinsurance creates legal disputes between I. C. & ph If inflation is repaid, ph may fall under C% unintentionally C% variable is like a recommendation to buy <100% ph only penalized if there is a claim 19/44

III-a. Homeowners Insurance (USA & Canada) B. Coverage B (Other Structure) Coverage for garage and out -buildings Policy limit normally 10% of Coverage A Can get more if pay extra Buildings used for business or rent not covered. Coverage normally for replacement cost (if C% met) If coverage is pre-set “actual cash value” then no need for coinsurance clause. Fall 2016 20/44

III-a. Homeowners Insurance (USA & Canada) C. Coverage C (Personal Property) For personal property in house + contents. Policy limit usually 40 or 50% of Coverage A Borrowed property in house is covered Some “inside limits”: cash (e. g. $1000); jewelry, art etc. • if you want full coverage you must list each item, prove its worth, and pay extra premium (called scheduled coverage) • benefit paid is pre-set scheduled amount only Your personal property covered away from home Fall 2016 21/44

III-a. Homeowners Insurance (USA & Canada) D. Coverage D (Loss of Use) Provides living expense if forced out and reimbursement for loss of rental income limit normally 20% of Coverage A Fall 2016 22/44

III-a. Homeowners Insurance (USA & Canada) E. Liability Insurance In Section II of policy You are covered if you get sued I. C. will defend I. C. can settle without ph permission Claim payment limited by policy Liability limit Cost of defense is over and above claim payment. I. C. can end defense once claim payment = policy limit Also provides limited medical payments to injured 3 rd party on a no-fault basis Fall 2016 23/44

III-a. Homeowners Insurance (USA & Canada) F. Rate Variable Geographic location (distance to fire hall, probability of hurricanes, earthquakes etc. ) Construction Value May exclude some perils if cost too high Discounts for security system; sprinklers etc. Fall 2016 24/44

III-b. Household Contents & Building Insurance (Hong Kong) Several Q&As listed in the Hong Kong Federation of Insurers website: 「樓宇火險」與「家居財物保險」有甚麼分別？怎樣計算「家居財物保險」的投保額及賠償額？家居空置一段時間，是否需要事先通知保險公司？如果因為疏忽發生家居意外而損毀了鄰居的財物，應怎麼辦？大廈「公眾責任保險」的承保範圍包括甚麼？ • Look for The Incorporated Owners of Albert House case in Legal reference System. What happened? Fall 2016 25/44

IV. Tenants Package For renters Mostly for personal possessions Fall 2016 26/44

V. Workers Compensation A. Background Prior to 1895 workers had to sue e'er for compensation. Tough to prove e'er negligence prior to 1895 • • • doctrine of contributory negligence: if e'ee contributed to accident at all, then no claim fellow-servant doctrine: if another e'ee was negligent, then e'er not guilty assumption-of-risk doctrine: if e'ee aware of inherent danger, then no case. Workers comp shifted to no fault • • Fall 2016 e'er is liable regardless of who's at fault costs are limited by W. C. legislation (set in each state and province) 27/44

V. Workers Compensation B. Objectives of W. C. Broad coverage of workers for occupational injury and disease Substantial protection against loss of income Sufficient medical and re-hab services Encouragement of safety (eg. Experiencerated refunds) Efficient and effective delivery of benefits and services Fall 2016 28/44

V. Workers Compensation C. Admin and Eligibility Canada -W. C. is run by provincial Board (How about if HK runs a centralized Employee Compensation Board? ) U. S. - e'er must: • • buy private insurance self-insure use state W. C. fund 5 states have monopolistic state funds Usually not covered: farm labor, domestics, casual e'ee's, e'ee's of very small firms Fall 2016 29/44

V. Workers Compensation C. Admin and Eligibility R. R. workers in interstate commerce and seaman in u. s. Merchant Marine come under Federal E'ee's Liability Act (similar provisions and benefits) For injury or sickness to be covered: • • • Fall 2016 worker must be in a covered occ. injury or disease arose out of and in the course of job not covered: driving to and from work ; e'ee intoxication; intentional self-inflicted injuries 30/44

V. Workers Compensation D. W. C. Benefits Normally unlimited medical care (40% of claims by amount) DI after 3 -7 day waiting period, • • • Fall 2016 if disabled long enough, benefits retro to date of injury benefit = f (wage, usually 66 2/3 %, and degree of disability) usually a min and max benefit = f (state AIW) degree of disability: 1. temporary but total; 2. permanent and total (usually = lifetime benefits); 3. temporary and partial; 4. permanent but partial (e. g. loss of one eye) scheduled benefits - loss of limb, eye etc. (benefit is pre-defined $) non-scheduled benefit - e. g. , back injury (benefit is some function of wages) 31/44

V. Workers Compensation D. W. C. Benefits Death benefits including burial allowance + cash income to eligible surviving dependents. Rehab services and benefits. E. Rate Variables U. S. - premium usually e'er pay - all (or pays benefits if self -insured) Premium = f(payroll, industry class) Some states pay part of admin costs Fall 2016 32/44

Employees’ Compensation Dr. Tse’s death during the SARS outbreak: Wiki; Obituary; Movie; Trailer Fall 2016 33/44

EC in Hong Kong Watch video “真亦假時假亦真, ” a HK’s EC story 1953: “Workmen’s Compensation Ordinance, ” amended many times afterwards and renamed as “Employee’s Compensation Ordinance. ” The average EC premium in 1999 was 0. 7% of wages. Seriously under-funded, estimated at around HK$2 billion per year. Combined Ratios about 180% ~200% Statutory benefits PLUS unrestricted Common Law right Fall 2016 34/44

Underwriting Profit/loss of Motor & Employees’ Compensation Insurance Fall 2016 35/44

Alternative Methods of Dealing with Workplace Injuries Mandatory Tort Benefits Liability No No Safety Incentives Inadequate if e’ees underestimate risk Compensation Inadequate No Yes Adequate Yes No Adequate with About right labor mkt incentives & regulations Yes Fall 2016 Adequate or excessive Excessive if e’er is negligent; o/w inadequate Excessive if e’er negligent Admin/Dispute Resolution Costs Low High Moderate Highest 36/44

Centralized EC? Employees' Compensation Insurance Residual Scheme Fall 2016 37/44

VI. Fire Insurance For commercial business/property Covers fire, lightening, wind, hail, explosion etc. Usually covers direct loss (damage to property) and indirect loss (loss of income or extra expenses due to loss of property) Fall 2016 38/44

VII. Marine Insurance Ocean marine covers ocean vessels and cargo plus shipowner’s liability (may extend from “warehouse to warehouse”) Inland marine can cover: railroads, trucking, barges, air freight, mail, armored car, etc bridges, tunnels, piers, wharfs, communication equipment etc. personal property floaters for construction equip, agricultural equip, animals, personal jewelry and furs Fall 2016 39/44

VIII. Liability Insurance I. C. provides legal defense to ph (can stop once $ paid = policy limit) Payment of damages up to policy limit Total of 1. + 2. can exceed policy limit Examples: product liability insurance, errors and omissions ins; medical malpractice; professional liability, etc. Fall 2016 40/44

IX. Limits to Coverage (Also see Rejda, Chapter 10: Analysis of Insurance Contract) – A. Deductibles Reasons for • • no claim from small losses - saves admin expense all claim payments reduced => smaller premiums deductible creates economic incentive for ph to prevent a claim ph can use deductible to optimize use of premium Problems with • • • Fall 2016 ph may wish to have claims paid in full (i. e. no risk) can lead to misunderstanding and bad P. R. can make selling more difficult 41/44

IX. Limits to Coverage A. Deductibles Types of deductibles • • • Fall 2016 (1) fixed dollar deductibles, applied to cash claim (2) fixed % deductible: either % of loss or % of policy limit; usually with $ deductible to avoid small claims (3) disappearing deductible (not used much anymore) (4) franchise deductible (or cliff disappearing) – if claim < $n, no payment; if claim $n, no deductible (also rare today) (5) fixed dollar deductible per calendar year (e. g. health or medical expense insurance) (6) elimination period (in DI and sickness insurance): may differ for accident vs. sickness (shorter for accident); if disabled beyond elimination period, benefit may then be paid back to date of disablement (like franchise deduct) 42/44

IX. Limits to Coverage B. Policy Limits Reasons for • • clarifies the I. C. obligation lessens risk (variance) to I. C. : this decreases the probability of insolvency and decreases basic limits premiums principle of indemnity - ph cannot profit from a loss allows ph to choose optimal insurance package for any fixed total premium One policy can have several different limits (e. g. H. O. ) Legal costs + claims payments can exceed policy limit Fall 2016 43/44

IX. Limits to Coverage [Exercise 2. 13] In each of the following cases, what will the insurer pay on a claim of $12, 000? A 20% deductible and a policy limit of $12, 500. A straight deductible of $1, 000 and a policy limit of $10, 000. A linearly disappearing deductible such that a claim of $5, 000 has no loss payment, but a claim of $15, 000 is paid in full. [Exercise 2. 14] A risk averse decision maker is faced with a random loss with a uniform distribution over the interval 0 < X < $10. If he wishes to pay a premium of $2, then the optimal coverage requires a deductible of $d. Assuming no expenses, find d. Fall 2016 44/44

Joint and Several Liability What does it mean? Multiple parties are liable. One cannot pay, then the others are responsible A Hong Kong case In August 1994, an 80 -year-old woman died and 12 other people were injured when a canopy above New Best Restaurant, on the first floor of the Aberdeen building, collapsed due to structural flaws. The collapse resulted in defendants (flat and shop owners) being required to pay damages of HK$33 million in compensation to the victims. The Albert House Incorporated Owners (添喜大廈業主立案法團) met their 15% of the damages but the other four defendants went bankrupt. At the end of the day, the incorporated owners had to share the balance. Back Fall 2016 45/44