3.2 Frequently Used Terms and Definitions Copy
Hazards
A hazard is anything that increases the seriousness of a loss or the likelihood that a loss will occur due to a peril.
Risk
A risk is the uncertain potential for loss. Perils are things that cause losses. Hazards are catalysts that trigger or advance perils.
Physical hazard
Physical hazards arise from material, structural, or operational features of a risk situation. Seriously worn automobile tires would be a physical hazard.
Moral hazard
Moral hazards arise from a person’s habits which increase the possibility of loss. Dishonesty, such as intentionally setting a fire in order to collect the insurance, is an example of a moral hazard.
Morale hazard
Morale hazards arise from human carelessness or irresponsibility.
Negligence
Negligence is a failure to do what a reasonable and prudent person would do under given circumstances and it is one of the most commonly insured perils. Negligence may consist of an act or a failure to act. For negligent liability to exist, four elements must be present:
- Legal duty
- Standard of care
- Proximate cause
- Actual loss or damage
Defenses
Even when negligence is proven, legal defenses exist which could possibly eliminate or reduce a person’s legal liability.
Assumption of risk
If someone understands a danger and voluntarily assumes the risk, a court may disallow recovery against a negligent party.
Contributory Negligence
Contributory negligence is a common law defense that denies recovery to an injured party who contributed to the loss by failing to meet standards required for self-protection.
Comparative Negligence
More than two-thirds of the states have adopted a less harsh version of contributory negligence known as comparative negligence. Where this is in effect, it is a statutory defense against negligence. Generally, the defense of comparative negligence reduces injury and damage awards proportionally when the plaintiff and defendant were both negligent.
Intervening Cause
When an independent action breaks the chain of causation and sets in motion a new chain of events, this intervening cause becomes the proximate cause and may also serve as a defense against liability.
Statue of Limitations
Another defense can be found in the statutes of limitations enacted in various states. Such laws provide that certain types of lawsuits must be filed within a specified time of the occurrence to be valid under the law.
Types of Damages
Compensatory– Compensatory damages reimburse the injured party only for losses that were actually sustained.
Punitive Damages- Intended to punish the defendant and make an example out of him or her to discourage others from behaving the same way.
Absolute Liability– Absolute liability is imposed by law on those participating in certain activities that are considered especially hazardous.
Strict Liability- Strict liability is most commonly applied in product claims. If a claimant can prove that a product was defective and that the defect caused the injury, the manufacturer can be held strictly liable.
Vicarious Liability– There are times when a person may be held responsible for the negligent act of another person. This is called vicarious liability, or imputed liability.
Cause of Loss(perils)
*A peril is the cause of loss*
Direct loss- Direct loss means actual physical damage, destruction, or loss of property. Fire damage and stolen merchandise are examples of direct physical damage or loss.
Consequential or Indirect loss– Indirect losses are those that result from direct losses, and occur as a consequence of direct loss.
Loss Valuation
Actual Cash Value
Many losses are reimbursed on an actual cash value basis. Actual cash value or ACV is usually calculated by determining the item’s replacement cost (what it would cost to buy a replacement) and subtracting an amount for depreciation. Here is what it looks like written as a formula:
ACV = REPLACEMENT COST – DEPRECIATION
Replacement Cost- The replacement cost for covered losses, with no allowance for depreciation.
Functional Replacement Cost– Some policies pay losses on a functional replacement cost basis, where damaged property is repaired or replaced with less expensive, but functionally equivalent materials. This method is used most frequently for losses to antique, ornate or custom construction.
Market Value– Occasionally, the property is insured for market value, or what it could be sold for at the time of the loss. Market Value is different from ACV or replacement cost.
Valued Policy- For certain hard-to-value items, the insurance company will issue a valued or agreed amount contract.
