1. The ABC’s and 123’s of Property and
Casualty Insurance – Part 1
Welcome to the ABC’s and 123’s of Property and Casualty insurance - Part 1. Were you
confused beyond confuzzlement in your pre-license training course with all of the different
ABC’s and 123’s thrown at you to remember for each section? We thought so and that is why
we have created this section for your review. We have straightened out your ABC’s &123’s and
housed them in one place. You will need to keep them straight and know the terms coming up
like the back of your hand on exam day. Just read and re-read the information below until it
sticks. Be sure to take breaks and repeat this process throughout the week leading up to your
exam day.
Don’t worry if you are having trouble memorizing the facts, definitions and coverages below in
pure definition form at first. All of this content has been strategically woven into test question
format for your review coming up in the Ultimate Study Guide and Study Lounge Sessions
portion of this course. You will be learning while reviewing designed tests in addition to this
outline.
Just like a musician warms up before a concert by practicing, you too should warm up during
each study session by reviewing this document along with part 2, in order to adequately prepare
for your exam. Please read this section over and over again. You’ll be really glad you did come
exam day.
There will be a short quiz to take following your review of this document.
Famous Court Cases you may be tested on:
Paul versus Virginia
Court case that decided Insurance would be ​regulated by the States
Southeastern Underwriters Decision

2. Court case that decided Insurance is regulated ​by the Feds
The McCarran-Ferguson Act of 1945
The McCarran-Ferguson Act allows for the business of Insurance to be ​Regulated primarily at
the State level and overseen at the federal Level
Department of Insurance (DOI) Structure:
NAIC – The National Association of Insurance
Commissioners
• NAIC​ Helps to reach Uniformity Between States
• ​NAIC ​Works with Legislature to Change Laws (​Insurance Codes)
Insurance Code
Document of State laws regulating insurance (The Insurance Commissioner’s job is to enforce
the code)
Insurance Commissioner
• ​Commissioner Jones​ is an ​Elected Official
• Elected by the voting public
• ​Commissioner Jones ​is a​ ​Member of the​ ​NAIC
• If the Commissioner resigns, dies or is disabled, the interim commissioner is
appointed by the governor

3. • ​Enforces but cannot change the​ laws/​code​ (Laws/code may only be changed at
the State Legislative level - by the State Legislature).
Why you need to pass this test before you can begin
your new career or get that well deserved promotion:
TENS – “ Thou Shall Not Transact Without a License!”
​T ​Do not ​T​ransact without a license
​E ​ Do not ​E​xecute without a license
​N ​Do not ​N​egotiate without a license
​S​ Do not ​S​olicit without a license
Domicile, Admitted, Non Admitted, Surplus Lines
Brokers and how they interrelate:
Domicile “ Home” of an insurer/insurance company

4. Domestic​ – in home state
Foreign​ – out of the state
Alien​ – out of the country
Admitted
Insurance company that has a certificate of authority
Non-admitted
Insurance company does not have a certificate of authority
Surplus lines broker
Represents non-admitted companies
• Must post a $50,000 bond
Special lines surplus lines broker
Represents non-admitted insurers
• Posts a $5,000 bond
IGA
Insurance Guaranty Association only available to admitted companies
• Protects policyholders in the event their insurance company goes insolvent

5. • Minimum claim $100, Maximum obligation is $500,000
Types of Insurers:
Stock Insurer
Non-participating policies
• Owned by shareholders
• Shareholders receive taxable dividend (when declared)
Mutual Insurer
Participation policies
• Owned by policyholders
• Policyholders receive tax-free dividends (when declared)
Reciprocal Insurer/Inter-insurance Exchange
Unincorporated/Attorney-in-fact
Fraternal Insurer
Charitable
Captive Insurer
Parent company owns smaller companies

6.
Lloyds of London
Syndicates/physical facilities. Not an insurer but a syndicate (memorize this
Other Industry Titles:
Insurance Adjuster
Assists in settling claims on behalf of an insurance company
Typically an employee of an insurance company therefore does not need a license
Public Insurance Adjuster
Assists an insured in settling claims with an insurance company
• Must be licensed
Exclusive licenses
Bail/title/mortgage guarantee
Temporary insurance contracts and their functions:
Binder
Temporary insurance contracts issued while the actual policy is being produced by the insurer

7. • Good for 90 days/usually 45-60
• Only agents may bind coverage
• Never used in life/disability
• Binders are unconditional
{Do you remember “Trapper Keeper Notebook Binders” from the 1990’s weren’t those
AWESOME!! ​Binder = 90 days​. Binders are Unconditional, good for 90 days/ usually
45-60, only agents may bind coverage, Never used in life/disability}
Covering note/conditional receipt
Conditional receipts (basically binders for life insurance but not actually a binder because those
are never used in life/disability insurance)
• Good for 90 days
• May be extended 60 days/total 150 days
Important Definitions, Coverages and Acronyms:
Insurance
Insurance ​is the ​Transference of Risk

8. Risk is transferred…
​From: The insured customer (Insured)
​To:​ The insurance company (Insurer)
• Insurance is technically a transference of risk in the form of a contract whereby the
insurer (insurance company)undertakes to indemnify another against loss, damage, or
liability arising from a contingent or unknown event.
Indemnity
To restore one to the same financial condition that existed prior to experiencing or suffering a
loss. Indemnity means to restore or to make whole. Indemnity is fundamental and is the
principal of insurance. Indemnity does not mean a gain (please remember this) Indemnity is
simply “getting back to where things were” prior to a loss occurring. Example. Insureds
(customer’s) car is hit in a parking lot while the insured is shopping. Car is fixed by the
insurance company (insurer). Fixing the dent = indemnity. As the car is “just as it was” not
better, just the same as it was prior to the loss occurring.
• Indemnity is the principal of insurance.
Subrogation
Subrogation is basically substitution of rights. It is the transference of an insured's claim rights
of financial recovery, to a third party. Ex: an insured is rear ended. Their insurance company
(insurer) settles the claim, even though the accident was proven not to be the insured's fault.
After paying said claim, the non-fault driver’s insurer then asks their insured to sign a notice of
subrogation that basically says: I have been paid (indemnified) for this claim (my loss) and I sign
over my rights of subrogation (right to collect again) to my insurance company.
This is done so that the non-fault representing insurer, who has paid out on said claim, may then
be paid back through subrogation, by the at-fault driver's insurer.
By the insured (non-fault driver) signing over their claim rights after being indemnified by their
insurer, the principle of indemnity is followed. For by signing over rights of subrogation after

9. indemnification (being paid for a loss) prevents an insured from collecting twice on a claim. So in
essence subrogation supports indemnity, the principle of insurance
• Subrogation supports indemnity
Insurable Interest
Having a legitimate economic or financial interest in the preservation of the life or the property
that is the subject of insurance
• In the property and casualty field, insurable interest must be proven at the time of
application and at the time of the loss
• In the life and health insurance field, insurable interest must be proven only at the time
of application
Law of Large Numbers
The larger the number of similar risks that are combined in a group, the more predictable will be
the future expected losses.
• Cannot be used to predict individual losses or profits
There are 2 Main Types of Losses:
Loss
Reduction in the quantity, quality, or value of an asset
Such as property, liability, or human.
• Remember! Perils cause loss.
1. Direct Loss

10. • Direct physical loss, damage, or destruction to property (i.e fire)
2. ​Indirect Loss
• Expenses that becomes apparent after a direct loss (i.e water damage restoration
following a kitchen fire)
• Other examples include business income, extra expenses, rental car reimbursement,
and additional living expenses following a covered loss.
Essential Contract Elements:
CLAC – The Four Elements of a Contract
​C C​onsideration (Payment from insured must be submitted)
​L L​egal Purpose* (Blood, Love, or Money) “Can I buy this product?”
​A A​greement (Signature)
​C C​ompetent Parties (Not intoxicated or demented)
Different Policy Types:
Monoline Policy

11. A single line of coverage
• Examples: A stand alone workers compensation policy.
Modular or Package Policy
2 or more coverage parts or modules
• Examples: Commercial general liability, commercial auto liability and commercial
umbrella liability all included together on one policy form.
How Policies are Structured:
DICE – The Five “ Sliced and Diced” Parts of an
Insurance Policy
​D D​eclarations page
​I I​nsuring agreement / clause
C C​onditions (payment due, length of coverage)
E E​xclusions (excluded perils, persons or property)
D Definitions​ (key contract terms explained clearly for the insured)
Common Policy Conditions Include:
• Cancellation

12. • Changes
• Examination of an insured's books and records
• Inspections and surveys
• Premium payment due date
• Transfer of rights/assignment with prior consent of the insurer
Different Policy Limits Types:
General Aggregate Limit
Cumulative total a policy will pay for all claims during a policy period
• Usually two times the General Liability / Liability limit.
Single Limit/Combined Single Limit:
Single-Limits are essentially the same as combined single limits. They are both limits of liability
represented by a single number. Single Limit/Combined Single Limit is/are the maximum amount
of $ the insurer (insurance company) is contractually obligated to pay for damages whether it be
resultant from physical damage, property damage or a combination of both. Example: $300,000
personal liability limit written on an H03 policy form.
Split Limits:
Split limits are a combination of single limits and combined single limits and are typical in
personal auto insurance. This liability limit type is listed by three numbers, such as 100/300/50.
The limits are essentially split 3 ways just as there are 3 numbers represented between slashes
100/ represents ($100,000 per person maximum per accident/occurrence), 300/ represents
($300,000 per occurrence or accident maximum), and /50 represents ($50,000 total for property
damage).

13. Sublimit
A limit imposed on a specific type of loss within the policy maximum. Example a homeowner’s
policy will typically come standard with 10% of coverage A’s single limit as a sublimit to pay for
debris removal in the event of a loss. So a home insured with a coverage A $500,000 single
limit would have a $50,000 sub limit for debris removal.
Different Types of Risk (Remember insurance is the
transference of Risk:
Risk
Uncertainty or chance of a loss occurring
2 Main Types of Risk
Pure risk
• Possibility of loss only
Speculative risk
• Possibility of loss or gain
Managing Risks:
STARR – The Five Methods of Risk Management
​S ​S​hare risk (coinsurance 80/20)

14. ​T ​ T​ransfer risk (from Insured to Insurer)
​A ​A​void risk (no swimming pool)
R R​educe risk (add a fence, alarm, or sign)
​ R R​etain risk (self insure)
Causes of loss, Hazards and how they interrelate:
Peril
Cause of a loss (i.e. fire, lightning, wind, smoke damage)
Hazard
Increases the likelihood of a peril occurring or the severity of a loss.
Hazard = increases peril (Ex: A shopping center floor wet after being cleaned and left open to
the public without a caution wet floor sign increases the likelihood of a slip and fall accident.
That is why cones or slip and fall signs are used. They are instruments of hazard reduction (peril
reduction).
PMML – The Four Types of Hazards
P P​hysical hazards (Explosion)
M M​oral hazards (Dishonesty, Theft)
M M​orale hazards (DUI, Recklessness)

15. L L​egal hazards (Attorney fees, Court costs)
Different ways insurance coverage forms are written:
Cause of loss form
Policy form that lists perils covered in the contract (another name for named peril contract)
Named peril coverage form
A form that lists covered perils, such as basic form or broad form (H02 and DP2 are common
named policy forms
All risk/open peril/special form
A policy form that only lists perils that are excluded
As an insurance professional you will have Fiduciary
Responsibility:
Fiduciary
Insurance professionals have a fiduciary responsibility with the handling of clients (insureds $).
• Commingling/embezzling money is a form of theft. Commingling = Theft
• When premium refunds are sent from the company (insurer) must be delivered no later
than 25 days

16. • When premium refund are sent from the agent of record = must be delivered no later
than 15 days
Misrepresentation/twisting
When an agent is lying about a product in effort to induce a sale
• The penalty for Misrepresenting/Twisting is a Misdemeanor. Misrepresentation = Theft
• Punishable by a $10,000 Fine and/or up to 1 year in jail
Concealment
Withholding of material information or truth by an insured during the formulation of an insurance
contract.
• The insured may rescind the insurance contract (cancel as if the policy never existed if
concealment is determined) if concealed information is found to be material information
as to the formulation of the insurance contract.
Who is eligible for insurance or a claim settlement:
Insurable interest:
An interest by the insured person in the value of the subject of insurance, including any legal or
financial relationship. Insurable interest usually results from property rights and potential legal
liability (i.e your house, your car, your spouse, not your neighbor's house, neighbors car, or
neighbor's spouse)

17. • People – proven only at time of inception
• Property – proven at inception and claim
​Insurance Concept: “ PERSON” vs. “ NATURAL
PERSON” :
A. “ Natural Person”
• In California, a Solicitor/Producer is the only title that is considered a “Natural
Person”.
• The Solicitor/Producer is a Natural Person because he or she sells insurance
exclusively as an individual employee of an Agent or Broker.
B. “ Person”
• On the other hand, Agents, Brokers (and others) are often are owners or partners in
their firms. In California, these titles are defined as “Persons”.
• Agents and Brokers do not act exclusively as individuals and therefore are not
defined as “Natural Persons”.
​Summary​:
• ​Person​ = Firm, Group or Partnership (Agent, Broker, MGA, Life Agent, etc.)
• ​Natural Person​ = Individual Employee (Solicitor/Producer only)

18. ​Important Exam Reminder:
A ​Solicitor/Producer​ is the ​One and Only​ position​ defined as “Natural Person”.
Insurance Company/Professional(s) Structure:
Parts of Insurance Company
Actuarial​ is responsible for keeping an insurance company financially stable or sound
Claims​ is responsible for indemnifying insureds for covered losses by fulfilling the
promissory portion of the insurance contract between the insured and insured
Marketing/Sales​ ​helping to ensure the continuity of business by increasing market
share by driving growth and bringing in premium dollars through policy and program sales.
Underwriting​ ​is a risk selection process
​The Seven Titles of Insurance Professionals:
Please Note:
• Each Titled Position ​Must be Licensed​.
• Each Titled Position has a ​Fiduciary​ Responsibility.

19. A Fiduciary is One Who Handles or Supervises the Funds or Affairs of Another… The position of
Fiduciary is a position of trust.
1. MGA (Managing General Agent) (“ Person” )
A ​Managing General Agent​ must be licensed.
A M​anaging General Agent​ has fiduciary responsibility.
• An ​MGA​ Hires, Trains and Terminates Brokers and Agents
• An ​MGA​ Collects and Submits Premium Payments from producing agents
• An ​MGA​ Assists in the Claims Process.
• A ​Managing General Agent​ May negotiate reinsurance contracts
2. AGENT (“ Person” )
An ​Agent ​must be licensed.
An ​Agent ​has fiduciary responsibility.
• ​Agents ​are appointed by the Insurer.
• “​Exclusive Agents​” are appointed by Only One Insurer.
• ​Agents ​represent the Insurer and do not represent the Insured.
• ​Agents​ Must be appointed and may have binding authority
• ​Agents ​are paid in Commissions.
• ​Agents ​cannot charge a Policy Fee.

20. • ​Agents ​cannot cannot transact life or disability insurance
• ​Only Insurers​ are allowed to charge a policy fee.
​3. BROKER (“ Person” )
A ​Broker ​must be licensed.
A ​Broker ​has fiduciary responsibility.
• Brokers ​represent the Insured (customer) and secures coverage.
• Brokers ​are paid in commissions.
• Brokers​ Post a $10,000 bond and cannot bind coverage
• Brokers​ are allowed to charge Broker Fees.
• Brokers​ May not transact life or disability insurance
4. LIFE AGENT (“ Person” )
A ​Life Agent​ must be licensed.
A ​Life Agent​ has fiduciary responsibility.
Remember: ​Only ​Life Agents​ may ​Sell Life Insurance​.

21.
5. LIFE & DISABILITY ANALYST (“ Person” )
A ​Life & Disability Analyst​ must be licensed.
A ​Life & Disability Analyst​ has fiduciary responsibility.
• ​L & D Analysts​ compare and recommend policies on behalf of the Insured.
• ​L & D Analysts​ cannot sell insurance, thus avoiding a conflict of interest.
(​Life & Disability Analysts​ are allowed to charge a fee for their services.)
​6. SOLICITOR / PRODUCER = (“ Natural Person” ) <<
Remember this!
A ​Solicitor/Producer​ must be licensed.
A ​Solicitor/Producer​ has fiduciary responsibility.
• ​Solicitors ​work as Individual Employees of an Agent or a Broker.
• ​Solicitors ​may not have Ownership of an Agency.
• ​Solicitors ​are the only individuals referred to as Natural Persons.
7. Personal Lines Licensee
Limited personal lines sales only

22. The Seven Titles of Insurance Professionals
Summary:
1. ​MGA​ (​Managing General Agent​)
2. ​Agent
3. ​Broker
4. ​ Life Agent
5. ​Life & Disability Analyst
6. ​Solicitor / Producer
7. ​Personal Lines Licensee
A Warranty, A Representation & How they interrelate:
Warranty
Statement of fact
Express – in writing
Implied – not in writing
• A ​Warranty ​can be ​Expressed ​or ​Implied ​*
• A ​Warranty ​can be ​Oral ​or ​Written

23. • A ​Warranty ​can be ​Altered ​or ​Withdrawn ​(withdrawn only at time of application)
Representation
* A Representation may qualify as an Implied Warranty.
• Best knowledge or belief/promise
• Oral or in writing
• May be changed before policy goes into effect
• Agrees with its assertions or stipulations
Various Contract Types:
Unilateral Contract
One-sided, only the insurer must live up to their end of the agreement
Contract of Adhesion
Any ambiguity in the contract will be determined in favor of the insured
• Contracts are written on a “Take it or leave it basis”
Aleatory Contract
Based on an uncertain event, unequal results
Personal contract

24. Two party contracts
Utmost good faith
Rely on the representations of either party without any attempts to conceal or deceive
Key definitions in contract formulation:
Concealment
Is the intentional withholding of material information by an insured during the formulation of a
contract. Although concealment is relevant to property and casualty insurance, it is most often
associated with Life insurance contracts. If misrepresentation is discovered at any time during
the policy period it may give the insurer grounds to rescind/flat rate cancel a policy as though it
never existed.
Example: an insured conceals the fact that he is a part time skydiving instructor on weekends
and dies in a skydiving accident six months into a life insurance policy contract. The insurance
company would most likely rescind the life insurance policy purchased and return the premiums
paid to the insured's beneficiary. The insurer has the right to not pay the death benefit on the
grounds of concealment as the insured did not disclose (concealed) his hazardous part time
occupation on the insurance application}
Waiver
They give up a right (Typically waivers of subrogation)

25. Estoppel
Don’t get the right back
{Example: An insurer that has habitually accepted late premium payments from an insured may
be estopped from later canceling said policy on the grounds of nonpayment because the insured
has been reasonably led to believe that late payments are acceptable.}
Loss Types and right to seek damages defined:
Tort
A legal wrong other than a crime or a breach of contract
• Crime is covered under Criminal law
• Breach of contract is covered under Contract law
• Negligence makes up the biggest area of tort law
All about Negligence:
Negligence
{Quick recap of negligence: Negligence is defined as the Failure to do what a reasonable and
prudent person would do in a given situation. Four things must exist in order for someone to be
held liable on the basis of negligence.
• There was a duty to act or not to act
• There was a breach of that duty
• Losses were suffered, bodily injury or property damage
• Negligence was the proximate cause of the damage}

26. Contributory negligence
If you contribute, you collect nothing
• Example: If you contribute more than 50%, you collect 0.
Comparative negligence
Damages are awarded proportionally
• Example: If you contribute 25%, you collect 75%. If you contribute 30%, you collect
70%.
Proximate cause
An uninterrupted chain of events from negligence causes the bodily injury or property damage
Tort Feasor
Someone who commits a tort, someone who is negligent
Gross negligence
Total disregard for authority that causes someone injury or death
Being held liable in different capacities:
Strict liability
Typically deals with product liability.
• No need to prove negligence or intent in Strict Liability cases

27. • The claimant need only prove that the tort (legal wrong other than a crime or breach
of contract) occurred and that the defendant was responsible.
Absolute liability
This is defined as the ability to compensate without regard to fault or negligence.
• An example would be workers compensation. It means to hold the employer
absolutely liable for all injuries to their workers regardless of fault.
Vicarious liability
Someone is responsible for the actions of another.
• Parents are responsible for the actions of their children. Employers are responsible
for the actions of their employees while under their employ.
Assumption of risk
A situation where you know the risks involved yet you still want to engage in the high risk
activity
• Example: You know you could die while skydiving, yet you still want to do it
How claimant awards are settled:
Specific awards
Are very specific as far as money is concerned
• Example: It is exactly known how much a car fender costs to replace, including labor
Special damage

28. Deals with lost wages or salary
General damages
Dealing with nonspecific losses, such as pain and suffering or mental anguish.
• There is no specific price on these losses
Punitive damage
Awards using a monetary punishment to set an example to the industry
{Example: In 1992, 79-year-old Stella Liebeck bought a cup of coffee at a McDonald’s drive-thru
in Albuquerque New Mexico and spilled it on her lap after opening it up to put cream and sugar in
it. She sued McDonald’s and a jury awarded her nearly $3 million in punitive damages for the
burns she suffered. Ever notice now at the McDonalds drive through they ask if you want cream
and sugar at time of order, so they may put it in for you. Risk management effectively eliminated
the need for their customers to ever open their hot coffee cup lids, especially while driving.}
Nolo Contendre
If issues a verdict of nolo contendre it means “guilty.”
Insurance Company Ratios:
Loss Ratio
Losses/Premiums
Expense Ratio
Expenses/Premiums
Combined Ratio

29.
Losses and Expenses/Premiums
Claim Settlement options and Valuation types:
Replacement Cost
Cost to replace, rebuild, reconstruct brand new at today’s construction costs, without
depreciation
Actual Cash Value
Replacement cost minus depreciation
Market Value
The value at which an item of property could have been sold for prior to loss
Stated Value or Valued policy
In a partial loss, an insured may receive the full value for a loss as predetermined by their stated
value policy face amount.
• Examples: Fine arts, antique cars
Types of Cancellations and their specifics:
Notices of Cancellation

30. Use this chart to help illustrate the different insurer ​Cancellation​, ​Renewal​ and
Nonrenewal​ notices as well as the advance “ days” notice they require for
Personal Auto, Homeowners and Commercial insurance questions.
Personal Auto Homeowners Commercial
Cancellation for
Non-payment
10 days 10 days 10 days
Notice of
Non-Renewal
30 days 30 days 60 days
Notice of Renewal 20 days 30 days 30 days
Pro-rate/rata cancellation
Insurer keep the earned premium, returns the unearned premium
Short Rate cancellation
Insurer keeps the earned premium, returns the unearned minus an admin charge or fee to cover
overhead expense
Flat Rate cancellation
Flat Rate and Rescind/Recission mean the same thing: when the insurer
Voids the contract and returns all premiums as if the contract never existed}
Agent/Broker may receive a chargeback (They must pay back their commissions to the insurer)
There are 5 Automatic coverage extensions available
only if 80% co-insurance to Value/Worth is met
• Newly acquired or constructed building ($250,000)
• Personal property at a newly acquired location ($100,000)
• Coverage for valuable papers and records (Examples: client files)

31. • Property off-premises ($10,000)
• Outdoor property/Sign ($2,500)
Truckers/motor carrier’s coverage minimum liability:
• Standard $ 750,000
• Certain hazardous materials $ 1,000,000
• Explosives $ 5,000,000
Inland Marine vs. Ocean Marine:
Inland Marine Coverage
Usually written as all-risk, Coverage forms may include:
• Accounts receivable
• Furriers
• Jewelers block
• Contractor’s equipment coverage
• Equipment dealers coverage
• Valuable papers and records coverage
Ocean Marine Coverage
Hull covers ​the ship, engine, and gasoline

32.
Cargo​ covers the products being shipped
Freight ​reimburses the shipping charges
Protection and Indemnity​ is liability that can be added to the hull or the cargo
Jettison​ is to dump cargo overboard to save the ship
Barratry​ is illegal acts by the captain or crew without the ship owner’s knowledge
Inherent Vice​ is something that has a tendency to self-destruct and is not covered (Fruit may
spoil during shipment)

33. Please stop and take a break. Come back in 20 minutes to keep
it fresh. When your mind is clear and you are ready, please
review The ABC’s and 123’s of Property and Casualty Insurance –
Part 2.
Don’t worry if you are bored out of your mind right now we
empathize and promise this course will be more enjoyable once
you learn your ABC’s and arrive at the Ultimate Study Guide
portion of your exam preparation process. You gotta “OWN”
your ABC’s and 123’s before you can effectively learn to
comprehend what you will read ahead with the end game in
mind being to effectively master the language of insurance and
passing your exam.