III IC-29 cheat sheet

Insurable interest requires a lawful, financial relationship such that the insured gains from preservation and loses from destruction of the subject; it must exist at policy inception for life insurance and at the time of loss for property insurance.

Pure risk involves only loss or no loss (fire, liability, premature death); speculative risk involves gain or loss (stock market, gambling) and is generally not insurable.

Law of large numbers: as the number of similar independent exposure units increases, actual loss experience converges toward expected loss, which is why insurers pool many homogeneous risks.

Adverse selection is the tendency of higher-than-average risks to seek or retain coverage; insurers counter it through underwriting, exclusions, waiting periods, and experience rating.

Moral hazard is a change in behavior caused by the presence of insurance (carelessness, arson); morale hazard is indifference to loss (leaving doors unlocked).

Risk transfer shifts the financial consequence of loss to the insurer; risk retention (deductibles, self-insurance) leaves part of the loss with the insured.

Elements of an insurable risk: large number of similar exposure units, accidental and measurable loss, determinable and calculable probability, and losses that are not catastrophic to the insurer as a whole.

Indemnity principle: property and health insurance restore the insured to approximately the pre-loss financial position, no better; life insurance pays a stated amount because human life value cannot be precisely measured.

Utmost good faith obligates both parties to disclose material facts; a material fact is one that would affect the insurer's decision to accept or rate the risk.

The McCarran-Ferguson Act (1945) reserves regulation of the business of insurance to the states; federal antitrust law applies only to the extent states do not regulate.

State insurance departments are headed by an insurance commissioner (appointed or elected); the National Association of Insurance Commissioners (NAIC) drafts model laws and regulations but has no direct enforcement power.

Primary goals of regulation: insurer solvency, fair and equitable treatment of policyholders, availability and affordability of coverage, and consumer protection through market conduct oversight.

Solvency surveillance uses risk-based capital (RBC): a formula compares a company's total adjusted capital to its authorized control level; ratios below thresholds trigger company or regulatory action.

The NAIC Insurance Regulatory Information System (IRIS) applies financial ratio tests to annual statements to flag companies needing closer examination.

Guaranty associations pay covered claims of insolvent insurers up to statutory limits, typically funded by assessments on solvent member insurers in the same line.

Licensing requirements apply to insurers (certificate of authority), producers (state license), and adjusters; continuing education and prelicensing education are common conditions of renewal.

Rate regulation generally requires rates to be adequate, not excessive, and not unfairly discriminatory; prior-approval, file-and-use, and use-and-file are common filing systems.

Market conduct examinations review sales practices, advertising, claims handling, and producer conduct; unfair trade practices acts prohibit misrepresentation, rebating, and twisting.

Term life insurance provides pure death benefit protection with no cash value; level term, decreasing term, increasing term, and annually renewable term differ in how the face amount or premium changes.

Whole life insurance is permanent, level-premium coverage with guaranteed cash value, guaranteed death benefit, and policy loan privileges; premiums are typically payable for life or to age 100/121.

Universal life separates the policy into a cash value account and a cost-of-insurance deduction; flexible premiums and adjustable death benefits are subject to a no-lapse guarantee or sufficient cash value.

Variable life and variable universal life cash values are invested in separate accounts (subaccounts) and are not guaranteed; the producer must hold a securities license and the buyer receives a prospectus.

Endowment and limited-pay products compress premium payments into a shorter period; a Modified Endowment Contract (MEC) arises when premiums exceed the 7-pay test, causing LIFO taxation and a 10% penalty before age 59½.

Policy loans accrue interest and reduce the death benefit and cash value if unpaid; if a policy lapses with an outstanding loan, the loan amount may become taxable income.

Nonforfeiture options on a lapsed cash value policy: cash surrender, reduced paid-up insurance, and extended term insurance.

Settlement options for the death benefit include lump sum, interest only, fixed period, fixed amount, and life income (with period certain or joint and survivor variants).

Riders commonly include waiver of premium, accidental death benefit, guaranteed insurability, term rider, child term rider, and accelerated death benefit (living benefit) for terminal illness.

Major medical policies use a deductible, coinsurance (commonly 80/20), and an out-of-pocket maximum; the insurer pays covered expenses above the deductible subject to the coinsurance split until the maximum is reached.

Coordination of benefits (COB) prevents double recovery when a person is covered by two group plans; the primary plan pays first and the secondary plan pays the balance up to its allowed amount.

The birthday rule determines primary coverage for dependent children of parents who are separated or divorced and both have coverage: the parent whose birthday falls earlier in the calendar year is primary.

Disability income insurance replaces a percentage of earned income (typically 60–70%); key provisions include the elimination period, benefit period, own-occupation vs. any-occupation definition, and residual disability benefit.

Health insurance policy provisions commonly include a free-look period, grace period, reinstatement, incontestability after two years, and a preexisting condition limitation period where permitted.

Accidental death and dismemberment (AD&D) pays a principal sum for accidental death and a capital sum (often a stated percentage) for loss of limb or sight; it excludes illness and, typically, self-inflicted injury.

Health savings accounts (HSAs) require a qualifying high-deductible health plan; contributions are tax-deductible, growth is tax-deferred, and qualified medical withdrawals are tax-free.

COBRA continuation requires employers with 20 or more employees to offer continued group health coverage for a limited period (generally 18 months for termination of employment) at the beneficiary's expense.

Workers compensation provides statutory benefits for work-related injury or disease: medical care, disability income, rehabilitation, and survivor benefits, with liability generally regardless of fault.

Property insurance covers direct damage to or loss of property; casualty (liability) insurance covers the insured's legal obligation to pay damages to a third party for bodily injury or property damage.

The HO-3 special form insures the dwelling and other structures on an open-peril (risk of direct physical loss) basis and personal property on a named-peril basis; HO-5 covers both on an open-peril basis.

Coverage A (dwelling), B (other structures), C (personal property), D (loss of use), E (personal liability), and F (medical payments to others) are the standard homeowners coverage parts, with B, C, and D expressed as percentages of Coverage A.

Coinsurance clause in commercial property: payment = (limit carried ÷ limit required) × loss, subject to the policy limit; the insured shares the penalty for underinsurance.

Replacement cost pays the cost to repair or replace with new property of like kind and quality without depreciation; actual cash value equals replacement cost minus depreciation.

Business income (business interruption) coverage replaces lost net income and continuing expenses during the period of restoration following a covered property loss.

Commercial general liability (CGL) Coverage A covers bodily injury and property damage; Coverage B covers personal and advertising injury; Coverage C covers medical payments.

The occurrence form of CGL responds to injury or damage that occurs during the policy period regardless of when the claim is made; the claims-made form responds to claims first made during the policy period, subject to a retroactive date.

Auto liability coverage is split into bodily injury and property damage limits; split limits state separate maximums per person and per accident, while a combined single limit states one maximum per accident.

Underwriting is the process of evaluating, classifying, and selecting risks; the field underwriter (producer) gathers the initial information and reports material facts to the insurer.

Sources of underwriting information include the application, medical and attending physician statements, inspection reports, credit-based insurance scores (where permitted), motor vehicle reports, and the MIB.

Standard underwriting classifications: preferred (better than average), standard (average), substandard (higher risk, rated up or issued with exclusions), and declined.

In life and health underwriting, the agent's report and the application's medical questions are the primary tools; material misrepresentation on the application can allow rescission during the contestable period.

Physical hazards are tangible conditions (icy steps, faulty wiring); moral hazards involve dishonest intent (fraud, arson); morale hazards reflect carelessness or indifference.

Risk retention and risk reduction are methods of managing risk: retention keeps the loss, reduction lowers the frequency or severity (sprinklers, safety training), and avoidance eliminates the exposure.

In property underwriting, protection class (fire department quality and water supply), construction class, occupancy, and exposure to neighboring risks are central rating factors.

Reinsurance transfers part of an insurer's risk to a reinsurer; facultative reinsurance is negotiated per risk, while treaty reinsurance covers a defined class of business automatically.

Loss ratio = incurred losses ÷ earned premiums; combined ratio = loss ratio + expense ratio; a combined ratio above 100% indicates an underwriting loss.

Claim handling steps: notice of loss, investigation, documentation and evaluation, determination of coverage, negotiation, and settlement or denial with written explanation.

Proof of loss is a formal, often sworn statement by the insured documenting the amount and circumstances of loss, usually required within a stated period after the loss.

The insurer's duty to defend is broader than the duty to indemnify; defense obligations arise when a claim is potentially within coverage, even if ultimately groundless.

Subrogation allows the insurer, after paying a claim, to stand in the insured's shoes and pursue the responsible third party; the insured must not impair this right.

Other insurance and pro rata clauses allocate loss among multiple policies; contribution among insurers is typically proportional to the limits each provides.

Actual cash value claims are settled as replacement cost minus depreciation; replacement cost claims may require the insured to repair or replace before full payment.

Appraisal provisions resolve disputes over the amount of loss through independent appraisers; arbitration and litigation are other dispute resolution routes, and bad-faith claims can expose the insurer to extra-contractual damages.

Salvage is property remaining after a loss that the insurer may take or sell to offset claim costs; abandonment occurs if the insured attempts to force the insurer to accept damaged property.

A reservation of rights letter tells the insured that the insurer is investigating or defending under a coverage question without waiving its right to deny coverage later.

A contract requires offer (usually the application), acceptance (the insurer's issuance), consideration (premium and the promise to pay claims), legal purpose, and competent parties.

Insurance contracts are contracts of adhesion (drafted by the insurer), aleatory (unequal exchange of values), unilateral (only the insurer makes an enforceable promise), and conditional (benefits depend on conditions).

Utmost good faith, indemnity, insurable interest, and subrogation are the distinguishing legal characteristics of insurance contracts; contra proferentem construes ambiguity against the drafter.

The entire contract clause states that the policy plus the attached application constitute the whole agreement; no other documents bind the parties unless attached.

Incontestability: after the policy has been in force for a stated period (commonly two years), the insurer cannot contest the policy for material misrepresentation, except for nonpayment of premium.

Grace period allows premium payment after the due date without lapse (commonly 30 or 31 days for life and health); reinstatement restores a lapsed policy upon evidence of insurability and payment of overdue premium.

Waiver is the voluntary relinquishment of a known right; estoppel prevents a party from asserting a right after conduct that induced reliance by the other party.

Declarations describe the insured and the risk; insuring agreements state the promise to pay; conditions set obligations; exclusions remove coverage; endorsements amend the policy.

The principle of indemnity limits recovery to the actual loss; valued policies (as in some inland marine and life insurance) pay a stated amount regardless of actual value.

Fiduciary duty requires a producer handling client premiums or funds to hold them in a fiduciary capacity and remit them promptly to the insurer.

Rebating is offering part of the commission or premium to a client as an inducement; it is prohibited in most states unless specifically permitted by statute.

Twisting is misrepresenting an existing policy to induce its replacement; churning is the repeated replacement of policies to generate new commissions.

Misrepresentation includes false statements about policy terms, benefits, or the financial condition of the insurer; it is an unfair trade practice subject to regulatory action.

Commingling is mixing client or premium funds with the producer's own funds; it is generally prohibited even where trust accounts are not expressly required.

Suitability and needs-based selling require the producer to match the product to the client's financial situation, objectives, and risk tolerance, and to document the recommendation.

Confidentiality obligations restrict disclosure of client health and financial information; privacy rules and, in the U.S., HIPAA and state privacy laws govern handling of protected data.

Errors and omissions (E&O) coverage protects the producer against claims of negligent acts, errors, or omissions in professional services; it does not cover intentional misconduct.

Continuing education, accurate recordkeeping, timely claim reporting, and prompt response to client inquiries are standard professional conduct expectations enforced by state regulators.