Friday, January 30, 2009

Overview of Standard Title Insurance Forms (part 1)

The predominant title insurance forms are the American Land Title Association (ALTA) policies. The American Land Title Association has developed standardized title insurance policies since 1929. Standardization of forms occurred because of lender demand for predictable forms that would not need to be read and negotiated. In 1929 the association developed a loan policy. In 1959 the ALTA adopted an owner's policy. The ALTA adopted new uniform title insurance policies in 1962:

The ALTA Owner's Policy Standard Form A 1962. This policy included insurance against a lack of right of access but did not insure against unmarketability of the title and excluded refusal of any person to purchase lease or lend money. The policy included a coinsurance provision.

The ALTA Owner's Policy Standard Form B 1962. This policy also insured against unmarketability of the title.

The ALTA Standard Loan Policy, Revised Coverage 1962. This policy included insurance against unmarketability of the title, lack of right of access and "any statutory lien for labor or material which has now gained or hereafter may gain priority over the lien of said mortgage upon said estate." The policy excluded coverage of mechanic's liens arising from construction on the land contracted for and commenced after Date of Policy and not financed in whole or in part by mortgage proceeds which the insured had advanced or was presently obligated to advance.

The ALTA Loan Policy, Additional Coverage 1962. This policy also insured against assessments for street improvements under construction or completed at the Date of Policy which have "now gained on hereafter may gain" priority over the mortgage. This coverage is now offered by ALTA Endorsement No. 2 and is a standard provision in the CLTA filing of the ALTA Loan Policy.

Tuesday, January 27, 2009

Single Risk Limits of Title Insurance

Statutory single risk limitations also vary, but frequently are approximately one-half of surplus and reserves, a large amount in comparison to other lines of insurance. The justification for this approach lies in the small amount of capital invested in the industry and the sparse "likelihood" of a complete loss. The likelihood that loss and defense costs will equal or exceed policy limits is considered very small, since claims on policies probably occur between one in 500 to 1000 policies issued (typically closer to the latter) and loss and expense equal or exceeding policy limits probably occurs in about 1-3% of those claims.

Given the additional review by various counsel on commercial transactions, this likelihood should be lower on those transactions. The aggregate capacity of the title insurance industry to insure a single risk frequently is less than $1,000,000,000, although both the industry surplus and the industry statutory premium reserves exceed this amount. Net liquid assets available to pay claims do not always justify the large title policy retention limits by title insurers.

Because of the disparity between available net liquid assets and statutory limits on risk retention, some insureds will impose their own formulas or checklists to determine the allowable risk retention by a title insurer.

Monday, January 26, 2009

Overview of Title Insurance

Title insurance typically is defined as insurance against defects in, or liens or encumbrances on the title. In many jurisdictions, title insurers may insure title to real estate, while in some, they also may insure title to personal property, or proper execution of notes or other obligations. Most states prohibit title insurers from guaranteeing debts or other obligations, or prohibit title insurers from undertaking other types of insurance. These prohibitions were enacted in response to the failures in the 1930s of title insurance companies because they guaranteed mortgage loans.

Viewed from one perspective, title insurance may be considered a misnomer: the policy is an attempt to reconcile abstracting information and an insurance product but does not, by its express terms, represent the status of title. The most commonly used title insurance contracts, the American Land Title Association (ALTA) policies, do not purport to represent the condition of title. Rather, they are indemnity contracts against actual monetary loss because of title matters, such as defects, liens, and encumbrances. Nevertheless, there has been a widespread conflict over the issue of whether the contract terms of indemnity generally prevail, or whether extra contractual liability for negligence will be recognized.

This issue may be restated: shall the contractual limitation on damages (including the stated limit of insurance) prevail based on the contract, charge of premium for stated insurance, and dedication of statutory premium reserve; or shall the "expectation" of the insured result in liability for consequential damages, without an absolute limit on loss. In approximately one-half of the states no recognized answer (statutory or case law) exists; in the remaining jurisdictions, opinion is roughly split in half, with some states rejecting liability for negligence under the policy and/or commitment (or binder or preliminary report) and other states allowing the cause of action.

Whatever the result of that debate, title insurance is often described as "unique." It constitutes an attempt at risk avoidance, with a substantial part of title insurance cost generally allocated to search, evaluation/examination, or clearing underwriting objections. Consequently, losses and attorney's fees incurred by the major title insurers have recently been between 3% and 7% of their total operating income. State law often codifies this risk avoidance approach: A title examination of some sort is required by statute in a number of states; similarly, many states require application of sound underwriting practices as a condition to issuance of the policy.

Sunday, January 25, 2009

Insuring against Independent Contractor Exposure

The hiring of an independent contractor carries with it unique risks of legal liability. If the contractor's employee is injured on the job, he or she is entitled to workers' compensation from the contractor but may also bring a common law claim against the principal (the party who hired the contractor). This claim against the principal may be premised on three theories: The principal itself was at fault; the contractor's fault implicates the principal's liability (the principal is vicariously liable); or the principal is strictly liable under a safe workplace statute.

A fault-based theory of liability may include allegations that the principal directed the contractor to perform work in a certain manner, with disastrous results. However, much of the principal's exposure arising out of its employment of the contractor is vicarious in the broad sense based on a theory of inherently dangerous work or violation of a safe workplace statute. Many times the distinction between fault-based and vicarious liability is fuzzy at best, as in claims of negligent hiring or negligent supervision.

While these exposures are covered by general liability insurance, the principal would rather not deplete its own liability coverage for risks ultimately premised on the contractor's own negligence. The principal may attempt to shift the cost of these risks back onto the contractor through use of broad indemnity or hold harmless agreements. These agreements have two fundamental weaknesses: (1) The contractor may become bankrupt or otherwise lack the financial means to pay, and (2) enforcement of the agreement may be limited by statute or judicial decision.

Accordingly, the principal may wish to back up the promises contained in the indemnity agreement with insurance coverage. The principal has a variety of ways to shift the insurance coverage for independent contractor exposure from itself to the contractor.

Saturday, January 24, 2009

Structure of Commercial General Liability CGL Policy

The general structure of a CGL policy is that it begins with a broad grant of coverage in a clause called the "insuring agreement." The insuring agreement lists the types of losses covered by the policy and may define those losses.

The insuring agreement is immediately followed by a list of exclusions. Exclusions negate coverage otherwise granted under the insuring agreement. There are two reasons for exclusions. First, the loss may not be insurable because coverage would be either contrary to the principles of insurance, illegal, or in violation of public policy. All three objections would apply to providing insurance coverage for an insured murderer. Similarly, a simple breach of contract action by a subcontractor seeking to get paid for work it had performed may not be the type of claim for which a contractor may expect coverage (unless the breach of contract action arose out of property damage or bodily injury).

Second, and of more importance, exclusions preclude the CGL policya general liability form of insurancefrom providing coverage for types of losses that are covered by other, narrower forms of insurance policies. This second purpose of exclusions, then, is to preclude redundant coverage and to compel the insured to purchase the type of policy intended to cover the specific kind of loss.

Some exclusions contain exceptions. The purpose of exceptions is to return coverage to a subset of losses otherwise excluded by the exclusion. One must remember, however, that an exception, in and of itself, does not create coverage unless that coverage would otherwise first exist by means of the insuring agreement.

An important point to understand about exceptions and the coverage they generate relates to the concept of "ambiguity." The function of an exception is to narrow the scope of an exclusion. Exceptions are read seriatim and do not modify any other exclusion. Thus, an exception in one exclusion may not be read together with another exclusion to generate an ambiguity in the contract.

The analysis of a coverage issue, then, follows the following format:

Is the type of loss included within the insuring agreement? If yes,

Is the type of loss covered by an exclusion? If yes,
Does that exclusion contain an applicable exception?

If the answer to the final question is "yes," then there is coverage for that type of loss.

Note that this three-step analysis determines only whether the type of loss is covered. All sorts of "generic" reasons may exist for denying coverage, even if there is coverage for the type of loss; for example, the claimant is not an "insured," or the insured failed to give timely notice of the claim to the insurance company. As a general rule, these generic reasons for denial of coverage apply to any insurance claim and do not raise questions unique to the issue of insurance of construction worksite personal injury claims. Accordingly, these generic reasons for denial of coverage will not be discussed in this book.

Friday, January 23, 2009

The Function and Mechanics of Insurance

The function of insurance is to transfer, in exchange for the payment of a premium, the risk of a financial loss occurring on the project. Insurance covers losses that are predictable but also unexpected (or fortuitous) and unintentional. Construction projects as a general rule engender two types of insurable risks: bodily injury (including death) and property damage. Only bodily injury coverage will be discussed.

Insurance coverage, otherwise applicable, will be denied if the insured failed to provide the insurer with timely notice. Notice should be provided twice: once when the accident occurs and then again when a lawsuit is filed against the insured. Notice must be provided as soon as practicable. The insurer then evaluates whether to provide coverage. In deciding whether it has a "duty to defend," the insurer must examine the complaint and the surrounding circumstances to see whether any potential covered loss is included therein (regardless of what the insurer views as the ultimate merits of the claim).

If the insurer concludes that the claim is covered, it will assume the insured's defense. If it has doubts as to coverage, it may assume the insured's defense but reserve the right to contest coverage at a later date. Finally, the insurer may refuse to defend against the lawsuit on the ground that the claim does not allege a covered loss. At this point, the insured will sue the insurer for breach of contract and seek a "declaratory judgment" from the court that the lawsuit is, in fact, within the insurer's duty to defend. Alternatively, the insurer may be the one seeking a declaration of its duty under the policy.

Thursday, January 22, 2009

Interaction between Insurance and Law

Insurance developed and spread as a result of society’s needs and demands. For example, marine insurance was followed by life insurance and shortly afterwards in the seventeenth century by fire insurance. Since then, human progress has been marked by developments in the insurance field and a variety of branches in the following classes of insurance sprang up, each forming a subject of its own: property insurance, machinery, loss of profits, engineering, motor, liability, aviation, credit, electronic equipment, off-shore structures and, most recently, space equipment. Each of these branches of insurance represents a milestone in the history of mankind.

However, the fact that insurance was itself available has influenced developments in other facets of society, forming dialogue between insurance and, for example, law or finance. This can be seen very clearly in the development of the law of negligence. The following extract, concluding a chapter on negligence, from The Discipline of Law by the great jurist and writer of the twentieth century Lord Denning, illustrates this point:

During this discussion I have tried to show you how much the law of negligence has been extended; especially in regard to the negligence of professional men. This extension would have been intolerable for all concerned—had it not been for insurance. The only way in which professional men can safeguard themselves—against ruinous liability—is by insurance…. The policy behind it all is that, when severe loss is suffered by any one singly, it should be borne, not by him alone, but be spread throughout the community at large. Nevertheless, the moral element does come in. The sufferer will not recover any damages from anyone except when it is that person’s fault. It is only by retaining that moral element that society can be kept solvent.

It is doubtful if developments in the laws of contract and negligence would have occurred in this complicated and intensely commercial world of ours without the help of insurance, which has truly shaped some of the relationships in society.

In contrast, it is important to note that there is the view that insurance against tortious liability should be considered unacceptable because it permits the individual to escape from the financial responsibility of negligent acts.

Wednesday, January 21, 2009

Who Pays for Falling Trees?

During a ferocious hurricane, one of the trees on Joan Fletcher's property came crashing down on the house of neighbor, Mark Tyson. Whose home insurance pays for the damage?

The answer may surprise you: Mark's Generally, the rule is that the property owner whose house has been damaged by a tree is the one who files the claim with the insurance company. As long as the tree was in good health, and no one could have predicted its fall, then Joan is off the hook. Since in this case, the tree fell down on Mark's house because of a hurricanean uncontrollable natural disasterJoan can't be held responsible.

But what happens when a tree falls down because it was damaged of diseased? Then the situation becomes a lot more complicated. In this case, the property owner can try to hold the tree owner liable for the damages. If the property owner does sue he tree owner, then the tree owner's insurance policy will pay for the defense and the damages, up to the policy limit.

So what should you do if you suspect that your neighbor's tree is damaged and is in danger of falling on your house? The best plan is to have qualified person inspect the tree. If your expert determines that there is a problem, then he or she should write a letter to the tree owner, return receipt requested. This way, if the tree owner doesn't do anything to take care of the problem, and the tree does fall on your house, you're in the best shape to win a case against the tree owner.

If you're the one with the potentially problematic trees, then you should do everything possible to protect yourself against an expensive lawsuit from your neighbor. Have your trees maintained or examined each year, and consider taking them down if the expert finds a problem. If you don't want to take them down, then protect yourself with an umbrella policy that provides secondary coverage for legal liability, well above the homeowner's policy. This way, if worse comes to worsethe tree falls, and your neighbor suesyour insurance company will be covering the damages.

Tuesday, January 20, 2009

Tips for Taking Inventory

Set aside one day to go through your home and list everything you might want to insure. Think about what you would need if a fire consumed everything you had. What would you have to replace to restart your life? If you can't set aside a full day, do it in a couple of evenings. Take your inventory room by room. Don't forget what's in the closets, drawers, and under the bed.

Here are some tips for taking inventory

* Take pictures of each room. You might want to photograph specific items that are valuable. Consider using a video camera for taking inventory. (Don't forget to include the camera in the inventory!)

* List the things in your closets and drawers, and items stuck under the bed or inside linen cheats. Make special note of jewelry and expensive gear you might use for skiing or other special occasions.

* List as many specifics about the items possible. Include serial numbers, the size and make of appliances. and any special features.

* List how much you paid for the item and when you bought it. If you have receipts, attach them to your inventory.

* Update your inventory list every year. Better still, when you purchase something, just add it and the receipt to the inventory list.

* Keep your inventory list in a safe place such as a fireproof container or in a safe deposit box. Your paper list does you no good if it is reduced to ashes in a fire, or if the thief steals the strongbox along with your other possessions.

Monday, January 19, 2009

Don't Overinsure for Your Home

Keep in mind that when you purchase full value replacement cost insurance, your premium is based on the insurance company's appraisal of the value of your house. If you think that their appraisal is too high, you can dispute that. For example, if you purchase a home for $200,000, the insurance company is going to want to sell you $200,000 in homeowner's insurance. The reality is that you've really paid for the house and the property that the house sits on. If the house came along with two acres of property, then you may have actually paid $125,000 for the house and $75,000 for the property. In that case, your house may only cost $125,000 to rebuild and you should only have to pay for a $125,000 replacement cost policy.

If you think you are being asked to pay for more coverage than is necessary to replace your home, check the terms of your mortgage before attempting to dispute it banks usually require a minimum amount of coverage. If you still believe less insurance will be adequate, point this out to the bank and get it confirmed by an appraiser for the insurance company writing the policy. You have reality on your side. That's because the insurance company will not insure your home for more than it would cost to replace. So get the insurance company to provide the appraisal. If you still are not satisfied, ask two more appraisers to value your home. Ultimately, it is not you or the bank who decides the value of your home. It is an appraiser.

Sunday, January 18, 2009

Protecting Your Things in House

A typical homeowner's policy covers only some of the value of your belongings. Normally, coverage is equal to 50 to 70 percent of the value of the house. For example, if you insure your house for $100,000, your belongings will be insured for $50,000 to $70,000, depending upon your insurance company. You can always add to the coverage for your belongings if you pay a higher premium. So, if you own a lot of valuable things that are worth more than $70,000, you will want to consider increasing your belongings coverage proportionately.

The next step is to decide whether you want a policy that covers actual cash value or one for the replacement value of your belongings. Just as with your house, you'll probably be better off with replacement value, although it does cost a little more.

Typical homeowner's policies cover actual cash value. Unfortunately, you may be in for a big surprise when you file a claim because the payout will probably be significantly less than the cost of replacing the item.

Let's say a windstorm lifts a tree from your front yard, blows it through your living room window, and destroys the sofa you bought five years ago for $2,500. You're not worried, though, because you have homeowner's insurance. But if your belongings are covered for cash value, the insurance company values your five-year-old couch at whatever it's worth today, or rather, what you could have sold it for just prior to it being damaged. This is called depreciation.

Depreciation is the decrease in the value of something caused by the object's use. After a certain number of years, the thing may have no value according to the insurance company even though it would cost you a considerable amount to replace it.

Look at that $2,500 sofa. The insurance company may say that your sofa had a "useful life" of five years. So each year, it is worth one-fifth (or $500) less than the year before. After three years, the sofa is deemed to be worth only $1,000. They arrived at this value after doing this simple calculation:

$2,500 minus the depreciation (which is $500 times three years or $1,500) equals $1,000. So all you'd get for that couch is $1,000.

However, if your couch were covered by a full replacement policy, the insurance company would have to buy you a new couch that is comparable in value to the couch you lost when it was brand new. Actually, they have a choice. The insurance company can cut you a check, but they also have the right to repair or replace the couch instead. A policy that pays to replace your belongings costs about 10 to 15 percent more than an actual cash value policy. Seriously consider going the replacement cost route. It may save you a lot of money when you have a claim.

Saturday, January 17, 2009

The Basics of Homeowner's Insurance

The key to understanding homeowner's insurance is to cut through the jargon and answer the questions: "Just what am I insured for and for how much?" But first, let's look at some of the terms you need to learn.

· Replacement value refers to the amount it would cost to replace an insured item today. For example, if you insure your home for the full replacement value and it burns down, the insurance company needs to replace it. Period. So even if you've insured your house for $100,000 but construction costs have risen 25 percent since you purchased your policy, the insurance company will need to cough up $125,000 to rebuild your house.

· Market or cash value means the amount an insured item is worth on the market today. If you insure your house for market value, you need to periodically reassess this amount and adjust your insurance policy accordingly. The reason is that if your house burns down, the insurance company will give you the amount of cash specified in the policy. Take the house in the previous example. If the $100,000 insurance policy had been a cash value policy instead of a full replacement policy, the owner would only have received a check for $100,000 even though it would cost $125,000 to rebuild.

· Liability is the last concept you need to understand before building the residential portion of your insurance structure. Residential insurance covers your legal liability if someone is injured either on or off your property or in your residence. Liability is one of the most important protections you get with residential insurance. If your neighbor slips on your wet kitchen floor and sues you for negligence, or if you accidentally hit someone with a golf ball after a great tee-off, the liability portion of your residential insurance will cover your legal fees and any damages you must pay up to the amount specified in your policy. More on that later.

Friday, January 16, 2009

Cut Your Homeowner's Insurance Bill

In addition to shopping for the best rate for your homeowner's insurance and raising the deductible, there are a number of other ways you can lower the cost:

* Multiple policies. If you purchase your homeowner's, umbrella, and auto coverage from the same company, you may be eligible for a 5 to 15 percent discount on your premiums.

* Add home security. You can usually get at least a 5 percent discount for installing smoke detectors. Beware of overdoing the security thing, though. Some insurance firms will give up to a 15 to 20 percent discount for sophisticated sprinkler systems and burglar alarms connected to a local police, fire, or private security station. But these systems are not cheap. Compare the cost of installing and maintaining such systems with how much they will save. Often, you may find it's cheaper to raise the level of your coverage than to buy a $1,000 security system. But there are other reasons to install a security systemlike safety and peace of mindreasons that can't be measured in dollars,

* Stop smoking. Some companies offer small discounts, but remember everyone in the household must be nonsmokers. Some health insurance policies will cover the cost of quitting; some HMOs even offer a cash bonus if you quit!

* Home improvements. If you replace the old electrical wiring in your home or overhaul the plumbing, you may be entitled to a discount because your house has become more fireproof. But if you add a new room, you may have to boost your coverage because that will increase the replacement cost of the entire house.

* Age has its privileges. Some companies provide discounts to people who are over 55 years old and retired. Their reason is that retired people stay in their houses more than working people and can thus spot fires more quickly.

Thursday, January 15, 2009

The Insurance Contract in Plain English

An insurance policy is a legal contract, and every contract contains four basic components:

1. One person (or party, in legal parlance) must make an offer, and the other must accept it.

2. Both parties must be of legal signing age and mentally competent.

3. The subject matter or activity covered in the contract must be legal.

4. Each party must assume some obligation toward the other or give something of value like money or a promise to the other.

So how does this work with an insurance contract? The insurance company makes an offer to provide auto insurance, for instance to you. Let's say you sign the insurance policy. Now, assuming you are old enough and not insane, you must follow the rules and procedures in the policy. You must also pay the company some money a premium for the insurance. In return, the company must pay you for certain costs if you have an auto accident and if those costs were spelled out in the contract.

Title Insurance

The bank requires that you buy title insurance when you borrow money from the bank to buy a piece of property The title insurance makes sure that whoever sells you the property has the legal right to do so. The bank wants to protect its equity in the poverty while you are paying down the mortgage.

Thus, when you close on a house typically must buy title insurance from a title insurance company for about for every $1,000 of coverage. The minimum the bank requires is equal to the amount of equity the bank has in your property. That covers bank's risk.

But what about your financial risk, which is equal to the equity you have in the property? For this you can purchase owner's title insurance for about $3.50 per $1,000 of coverage. If a flaw in the title comes to light some 20 years after you've bought your home. the title insurance company forks over the money, even if the value of your property has risen ten times.

Since you only buy this insurance one time when you purchase your propertyit can be very good deal for a lot of protection over a lot of years. On a $120,000 home, you would spend $420 only once for private title insurance that covers your spouse as long as you own it.

Wednesday, January 14, 2009

Stock VS Mutual Insurance Companies

Insurance sales people love to tell you why the insurance companies they represent are the best. Some agents will extol the virtues of being a publicly-held-a.k.a. stock-company. Others will tell you how lucky you will be to have your insurance with a mutual insurance company.

The reality is that the financial health of the company and its operating record in the state where you live are far more important guideposts than whether it's a stock or mutual company. There are small nuances, though. Here are the differences.

* Stock insurance firms. These companies are owned by one or more investors. When the company makes money, the investors may receive a portion of the profits in the form of a dividend. The company's stock may be traded on a stock exchange. As a policyholder, you do not get to share in the profits.

* Mutual insurance companies. These companies are owned by the policyholders. Thus, when you purchase auto insurance from a mutual company, you become a shareholder of that company. You get to share the profits when there are profits.

Most insurance companies are stock firms. Examples are: Allstate, CNA, and Zurich American.

Search This Blog