Contents
1111
Preface xiii
Chapter 1 FUNDAMENTALS AND TERMINOLOGY
Chapter Objectives
Introduction
Insurance Defined Financial Definition Legal Definition Loss, Chance of
Loss, Peril, Hazard, and Proximate Cause Loss ChanceofLoss Peril and
Hazard Proximate Cause Risk Risk Management The Mathematical
Basis for Insurance A Mathematical Example of an Insurance System's
Operations Building Blocks of an Insurance Premium Four Basic
Components Cash Flow Underwriting The Benefits and Costs to Society
of Insurance Systems Costs Benefits Arson: Who Really Pays for
Insnred Losses Summary Review Terms Review Discussion
Questions Research Assignment Suggestions for Further Study 18
Chapter2 INSURABLE LOSS EXPOSURES
Chapter Objectives
Introduction
Gambling and Speculative Risks Ideally Insurable Loss Exposures
A Large Group of Similar Units Exposed to the Same PeriKs) Losses Must be
Accidental and Beyond the Insured's Control Losses Must be Definite,
Measurable, and of Sufficient Severity to Cause Economic Hardship
Catastrophic Losses When Only the People Most Exposed to Loss Want
Coverage, Insurance Becomes Unfeasible Risk Classification
Subsidization Adverse Selection Principles ofRisk Classification
Important Social Issues AIDS (Acquired Immune Deficiency Syndrome)
Automobile Insurance Pension Benefits Conclusion Branches of
Insurance Summary Review Terms Review Discussion
Questions Research Assignment Suggestionsfor Further Study
Chapter 3 RISK MANAGEMENT 1: ESSENTIALS
Chapter Objectives
Introduction
The Risk Management Function Risk Management Staff Statement of
Objectives and Principles The Risk Management Process Step One:
Identification and Measurement of Exposures Direct Property Losses
Loss oflncome Liability Losses Loss ofKey Personnel Estimation of
Maximum Loss Emergency Planning-Disastor Recovery Step Two: Loss
Control and Risk Financing Loss Control Risk Financing Step
Three: Regular Review of the Risk Management Program Chicago Tunnel
Collapse: A Risk Management Problem Summary Review Terms
Review Research Assignment: Case Study Suggestions for Further
Study Appendix: Personal Risk Management
Chapter 4 RISK MANAGEMENT 2: ADVANCED TOPICS
Chapter Objectives
Introduction
Risk Management Information Systems (RMIS) Loss Data Other
Information Deductibles and Policy Limits Financial and Other
Considerations British Petroleum: A Case Study Intemational Risk
Management Identification and Measurement of Exposures Development
and Implementation ofPlans Regular Review and Evaluation Foreign
Insurance Financial Risk Management Summary Review
Terms Review Discussion Questions Research Assignment
Suggestions for Further Study Case Study: Blue Star Airlines
Introduction The Story The Risk Management Process Facts and
Assumptions Assignment
Chapter 5 PRIVATE INSURANCE COMPANIES
Chapter Objectives
Introduction
Two Different Types of Insurance Companies Mutual Insurance
Companies Stock Insurance Companies Stock Versus Mutual: A
Consumer's Viewpoint Demutualization Lloyd's of London
Lloyd's ofLondon Is an Insurance Market Lloyd's History Typical
Transaction Lloyd's and the Risk Management Function American
Lloyds Other Legal Forms of Insurance Companies The Reciprocal
Exchange Fratemal Insurers Savings Bank Life Insurance Blue
Cross and Blue Shield Health Maintenance Organizations (HMOs) and
Preferred Provider Organizations (PPOs) Industrial Organization
Insurance Industry Summary Review Terms Review
Discussion Questions Research Assignment Suggestions for
Further Study Appendix: Insurance and Private Enterprise: The Potential
for Eastern Europe Introduction Why Insurance? Why Private
Insurance? Competition and Efficiency Essential Requirements of a Free
Enterprise (Capitalist) System The Requirements ofa Private Insurance
System Difficulties Starting a Private Insurance System in Eastern Europe
The Future
Chapter 6 INSURANCEOCCUPATIONS
Chapter Objectives
Introduction
Insurance Agents and Brokers Agency Law Insurance Brokers
Licensing Requirements Property and Liability Insurance Agents and
Brokers Life Insurance Agents and Brokers An Insurance Agent's
Duties Loss Adjuster Employees, Independent Adjustment
Bureaus, and Public Adjusters Adjusters Are Agents Underwriter
Property Insurance Underwriting Life Insurance Underwritmg
Underwriting and Privacy Actuary Attomey Finance
Other Occupations Summary Review Terms Review
Discussion Questions Research Assignment Suggestions for
Further Study Appendix: Legal Issues Involving Insurance Agents and
Brokers Case 1 Case 2 Appendix: The Ethical Choice
Introduction Vocabulary Ethical Norms Three Practice Cases
Suggestions for Further Study
Chapter 7 THE INSURANCE MARKET: THE ECONOMIC PROBLEM
Chapter Objectives
Introduction
Economic Theory Supply and Demand Historical Problems The
Insurance Consumer The Consumer's Choice: Company, Agent or Broker,
Policy, Amount, and Price Consumer Protection: The Role of the Courts,
the Law, and the Insurance Commissioner The Courts The Law
The Insurance Commissioner Summary Review Terms
Review Discussion Questions Research Assignment
Suggestions for Further Study Appendix: Further Consideration of
Supply and Demand Elasticity of Supply and Demandfor Insurance
Shifting Supply and Demand Curves 170
Chapter 8 INSURANCE REGULATION
Chapter Objectives
Introduction
Insurance Regulation The Reasons for Insurance Regulation
Solvency Unequal Knowledge and Bargaimng Power Prices
Promotion ofSocial Goals The History of Insurance Regulation Paul
v. Virginia Armstrong and Merritt Investigations South-Eastern
Underwriters Association (SEUA) The McCarran Act State or Federal
Regulation? State Insurance Regulation The National Association of
Insurance Commissioners (NAIC) Repeal of P.L.-15 Both Sides ofthe
Argument Regulated Activities Legal Reserves and Surplus
Regular Audits and Solvency Testing Guaranty Funds Rate
Regulations Investment Activities Policy Form Approval and Expense
Limitations Qualifications or Licensesfor Companies, Agents, Brokers, Loss
Adjusters, and Company Officers Consumer Complaints Taxation
Summary Review Terms Review Discussion Questions
Research Assignment Suggestions for Further Study Appendix:
The McCarran Act (P.L.-15)
Chapter 9 INSURANCE CONTRACTS
Chapter Objectives
Introduction
Contract Terminology Binder Conditional Receipt Elements of
a Valid Contract Offer and Acceptance Consideration
Capacity Legal Purpose Distinguishing Characteristics of Insurance
Contracts Principle ofIndemnity Insurable Interest ActualCash
Value Subrogation Contract ofAdhesion The Personal Feature
Utmost Good Faith (Latin: Uberrimae Fidei) The Entire Contract and
Incontestability Clauses The Aleatory Feature Discharge of Insurance
Contracts Summary Review Terms Review Research
Assignment Suggestions for Further Study Appendix: Cases for
Dscussion Material Misrepresentation Contract of Adhesion: The
Metpath Case Breach ofWarranty: General Chicken Case
Chapter 10 BASIC PROPERTY AND LIABILITY INSURANCE CONTRACTS
Chapter Objectives
Iritroduction
Standard Policies Basic Parts of an Insurance Policy
Declarations Insuring Agreement Deductibles Definitions
Exclusions Endorsements Conditions Fraud Suspension of
Coverage Cancellation Other Insurance Duties After a Loss
Appraisal Salvage Claims Payment Conclusion
Summary Review Terms: Review Case for Discussion:
Vacancy Clause Research Assignment Suggestions for Further
Study 235
Chapter 11 HOMEOWNERS INSURANCE
Chapter Objectives
Introduction
A General Description of the HO Insurance Policies Policy Layout
Declarations Definitions Section 1-Property Coverages
Additional Coverage Section 1--Perils Insured Against in the Broad
Form,HO-2 Specified Perils HO-2: Section 1-Exclusions
Ordinance-or-Law Exclusion Other Exclusions Section 1--
Conditions Loss Settlement Replacement Cost and Coinsurance
Reasonsfor the Coinsurance Requirement Mortgage Clause Section
2--Liability Coverages Section 2--Exclusions Claims Not Couered
Arisingfrom Bqdily Injury or Property Damage , Sections 1 and 2--
Conditions Endorsements Reduction of Insurance Resulting from
Previous Losses Summary Review Terms Review
Practice Questions Research Assignment Suggestions for Further
Study Appendix: Buying Homeowners Insurance 264
Chapter 12 THE PERSONAL AUTO POLICY
Chapter Objectives
Introduction
The Tort Liability System and Automobile Insurance: A Review Case The
Personal Auto Policy Layout Definitions Part A--Liability Limit
ofLiability Insureds Exclusions Part B--Medical Payments
Part C--Uninsured Motorist Coverage Coverage under the PAP
Contact or No-Contact Rules The State's Response to Uninsured Motorists
Underinsured Motorists Part D--Damage to Your Auto Loss
Settlement Part E--Duties After an Accident or Loss Part F--General
Provisions Summary Review Terms Review Practice
Questions Research Assignment Suggestions for Further Study
Chapter 13 COMMERCIAL PROPERTY INSURANCE
Chapter Objectives
Introduction
Commercial Insurance Commercial and Personal Property Ihsurahce
Property and Marine (Transportation) Insurance Commercial Package Policy
The Insurance Services Office (ISO) Building and Personal Property
Form Property Covered Property Excludedfrom Coverage Perils
Covered Fire Insurance History Definition ofFire Reporting Formts
Business Income Coverage Additional Forms Property Insurance
Rating Transportation Insurance Ocean Marine Insurance Inldnd
Marine Insurance Aviation Insurance Automobile Property Insurance
Business Automobile Insurance Summary Review Terms
Review Discussion Questions Research Assignments
Suggestions for Further Study
Chapter 14 GENERAL LIABILITY INSURANCE
Chapter Objectives
Introduction
Legal Background CategoriesofTorts (Civil Wrongs) Negligerice
Lawsuits Establishing Negligence and Damages Defenses in a Negligence
Suit The Relationship Between Negligence and Legal Liability Insurance
Questions ofFact Legal Judgements Ethics and Liability Insurance
Social Host Liquor Liability: An Example The Facts Categories
of Liability Insurance Business General Luability Insurance Business
Liability Umbrella Policies Automobile Liability Insurance Summary
Review Terms Review Discussion Questions Case for
Discussion Research Assignment Suggestions for Further Study 328
Chapter 15 SPECIAL LIABILITY INSURANCE
Chapter Objectives
Introduction
Claims-Made and Occurrehce Policies Claims-Made Policies Occurrence-
Basis Policies Environmental Impairment Liability Insurance History
Risk Management Strategy Insurance Principles and EIL Coverage
Products Liability Insurance Risk Management Strategy The Continuing
Controversy Professional Liability Insurance Wfut Is a Professional?
Coverage Clause Claims Settlement Types of Professional Liability
Coverage Employment Practices Liability Americans with Disabilities Act
(ADA) Nuclear Liability Insurance Summary Review Terms
Review Discussion Questions Research Assignments
Suggestions for Further Study Appendix Case Study: Sexual
Harassment Case Study: Americans with Disabilities Act (ADA) 353
Chapter 16 BONDING, CRIME INSURANCE, AND REINSURANCE
Chapter Objectives
Introduction
Surety Bonding Introductory Terminology The Reasons for Surety
Bonding The Uifference Between Suretyship and Insurance Underwriting
Bonds Types of Bonds Crime Insurance Reinsurance
Introductory Terminology Reinsurance Arrangements Reinsurance
Coverage Reasons for Reinsurance Reinsurance and Risk Management
Providers of Reinsurance Concluding Comments Summary
Review Terms Review Discussion Questions Research
Assignment Suggestions for Further Study 368
Chapter 17 LIFE INSURANCE POLICIES
Chapter Objectives
Introduction
Three Ways Life Insurance Is Distributed Group Life Insurance
Industrial Life Insurance Individual Life Insurance Term Insurance
Types of Term Life Insurance Uses of Term Life Insurance Whole Life
Insurance Cash Values Types of Whole Life Policies The Uses of
Whole Life Insurance Reasonsfor Saving with Life Insurance A Whole Life
Ledger Sheet Buy Term and Invest the Difference: The Consumer's
Viewpoint Universal Life Insurance Universal Life Insurance Policies
Universal Life Insurance Death Benefits Uses of Universal Life Insurance
Ledger Sheetfor Universal Life Insurance Variable Life Insur'ance
Summary Review Terms Review Discussion Questions
Research Assignment Suggestions for Further Study Appendix
Endowment Life Insurance 391
Chapterl8 ANNUITIES
Chapter Objectives
Introduction 394
Definitions Classification of Annuities Method ofPremium
Payment Beginning of Benefits Promises Purchased Number of
Annuitants Determination of Annuity Benefits Uses of
Annuities Types of Benefits Taxation of Annuities Withdrawal
before Liquidation Withdrawals in Liquidation Summary Review
Terms Review Discussion Questions Research
Assignment Suggestions for Further Study 406
Chapter 19 LIFE INSURANCE PLANNING
Chapter Objectives
Introduction
The Economic Value of the Human Life The Needs-Based Purchase of
Life Insurance Life Insurance Planning Planning Process The
Early Adult Years Life Insurance Planning: A Case Study Insurance for
Wiues, Children, and College Students Life Insurance Planning: The Middle
Years Life Insurance Plahning: The Later Years Wills Federal
Estate Tax Business Uses of Life Irisurance Funding Business
Continuation Agreements with Life Insurance The Taxation of Life
Insurance Death Proceeds Living Benefits: Dividends, Savings, and
Accelerated Death Benefits Summary Review Terms
Review Discussion Questions Research Assignment Facts and
Data Suggestions for Further Study
The
Chapter 20 STANDARD LIFE INSURANCE CONTRACT PROVISIONS
ANDOPTIONS
Chapter Objectives
Introduction
Insured, Owner, and Beneficiary Beneficiary Designation General
Life Insurance Policy Provisions Grace Period The Reinstatement
Provision The Incontestable Clause he Entire-Contract Proviswn
Misstatement-of-Age Provision Annual Apportionment of Divisible Surplus
The Suicide Clause and Other Restrictive Clauses Four Options Providing the
Insured with Choices Dividend Options Nonfbrfeifure Options
Policyholder Loans Settlement Options Available Riders and Options
The Guaranteed-Insurability Option The Waiver-of-Premium Option The
Double-Indemnity Option Summary Review Terms Review
Discussion Questions Research Assignment Suggestions for Further
Study 445
Chapter 21 SIMPLIFIED LIFE INSURANCE MATHEMATICS
Chapter Objectives
Introduction
Mortality Tables The 1980CSO Other Mortality Tables Interpretation
ofMortality Tables Some Simplifying Assumptions Single-Prenuum,
One-Year Term Insurance Smgle-Premium, Five-Year Term Insurance
Single-Premium, Whole Life Insurance Leveling the Whole Life Premium
The Cost of Life Insurance and Sales Illustrations A Complex Issue
Traditional Calculation Interest-Adjnsted Method The Sales Illustration
Controversy Summary Review Terms Review Research
Assignment Suggestions for Further Study
Chapter 22 MEDICAL EXPENSE AND DISABILITY INSURANCE
Chapter Objectives
Intrpduction
Background Information Increasing Health Care Costs Medical
Inflation Cost Containment Conunon Contract Provisions Entire
Contract Grace Period Reinstatement Incontestable Clause
Claims Physical Exam and Autopsy Legal Action Change of
Beneficiary Optional Contract Provisions Definitions and Exclusions
Five Kinds of Health Insurance Coverage Basic Medical Expense
Insurance Major Medical Insurance Disability Income Inswance
Medicare Supplement Insurance Long-Term Care Insurance
Demographics The Financial Problem Long-Term Care Policy
Development The Continuing Debate Health Insurance Providers
Summary Review Terms Review Discussion Questions
Research Assignment Suggestions for Further Study
Chapter 23 EMPLOYEE BENEFITS
Chapter Objectives
Introduction
The Goals of the Govemment, Employer, and Employee The Gauemment
The Employer The Employee Insured Employee Benefits
Qualification Rules General Features Group Life Insurance Group
Disability Income Insurance Long-Term Disability Group Health
Insurance Social Problems Health Insurance Providers Health
Insurance Contracts General Provisions ofGroup Health Inswance Contracts
Two Federal Regulations Insured Pension Plans Introduction
Requirements for QuaUfied Plans Federal Regulation ofPension Plans The
Role of Insurance in Pension Plans Profit-Sharmg, 401(k), 4030(b), Keogh, and
Cafeteria Plans Profit.-Sharing Plans 401(k) Plans 403(b) Plans or
Tax-Deferred Annuities (TDAs) Keogh Plans Cafeteria Plans
Individual Retirement Account (IRA) EHgibility for Deductible Contributions
Investment Alternative Rollovers Taxation Summary
Review Terms Review Discussion Questions Research
Assignment Suggestions for Further Study Appendix: Tax Deferral
The Advantages of Tax Deferral
Chapter24 SOCIAL SECURITY
Chapter Objectives
Introduction
Social Insurance Background The History and Philosophy of the American Social
Security System Social Security Js Not a Public Assistance Program Social
Security and Private Insurance Are Different Social Security Is an Insurance System
The Operation of the Social Security Program The Program Is
Compulsory for Almost Every Worker A Tax on Wages Is the Main Source ofFunds
Benefits Are Not Fully Funded Insured Statns and Eligibility for Benefits
Qnarters ofCoverage Calculationof Benefits Categories of Benefits
Retirement Benefits Survivor Benefits Disability Benefits Medicare
(Health Insurancefor the Aged and Disabled) some Current Issues Facing the
Social Security System Will Social Security "Be There"for Young and Middle-
Aged Americans? The Social Security Surplus and the Federal Deficit Other
Criticism Summary ReviewTerms Review Discussion
Questions Research Assignment Suggestions for Further Study
Chapter 25 UNEMPLOYMENT AND WORKERS' COMPENSATION INSURANCE
Chapter Objectives
Introduction
Unemployment Insurance Some Background Information Operations
ofthe Unemployment Insurance Program 1s Unemployment Insurance Really
Insurance? General Provisions ofState Programs Summary-
Unemployment Insurance Workers' Compensation The Problem
The Solution The Purposes of Workers' Compensation Laws Operations of
Workers' Compensation Systems Current Concerns About Workers'
Compensation Summary-Worker's Compensation, Review Terms
Review Discussion Questions Research Assignment
Suggestions for Further Study
Glossary
Appendix A: Homeowner's Insurance Policy
Appendix B: Personal Auto Policy
Appendix C: Sample Whole Life Insurance Policy and Application
Index
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