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With property and casualty insurance such as

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With property and casualty insurance (such as automobile or homeinsurance), generally the only person(s) who can acquire insurancecoverage is the person(s) who actually owns the property that is to beinsured.EXAMPLEAnna, age 23, purchased an automobile and registered it in her name. Can she savemoney by having her father purchase insurance on the automobile?No.Anna’s father cannot insureproperty that he does not own. The only person whocan purchase insurance on Anna’s automobile is Anna, because she legally owns theautomobile.For a contract to be valid, the parties entering into the contract must havethe legal capacity to enter into a contract. An individual over the age ofmajority has the capacity to enter into a contract and to be heldresponsible for the terms of that contract.
Module 11: Insurance34Copyright © 2020 The Financial Advisors Association of CanadaContract componentsP&C contracts cover the risks of certain perils occurring to the insured.Most contracts coverspecified perils, otherwise known asnamed-perilpolicies. This means that the insurance benefit is paid only in the eventthat the loss is incurred as a result of one of the specific perils named inthe policy. For example, a home insurance contract that names fire andtheft may not pay to replace the basement floors in the event of a flood.A contract might also coverall perils, otherwise known as acomprehensivepolicy. This provides a benefit in the event of any costs associated with aloss, with some stated exceptions or exclusions. An all-perils contract isgenerally more expensive than a specified-perils contract, due to thebroader nature of the coverage and the increased risk to the insurancecarrier.A P&C policy might use one of three methods to value the losses and pay abenefit:Salvage valueActual cash valueReplacement costAsalvage valuebenefit is the least valuable of the three options. Thispolicy benefit pays only the value of the item at the end of its useful life,which can usually be assumed to be nothing or very little. A laptop can bedepreciated so much that there is nothing left to salvage, for example. Thecarrier pays the benefit to the insured, who is not required to replace theitem.
Module 11: Insurance35Copyright © 2020 The Financial Advisors Association of CanadaActual cash valuetakes into account depreciation, age, wear-and-tear andobsolescence of the insured item that has been lost or damaged. In thiscase, the insurance carrier pays the insured for the value of the insureditem and the insured can spend the money as he or she pleases.Alternatively, an insured may opt for an insurance policy that covers anylosses based on thereplacement cost. In this case, the claim settlementamount does not make any deduction for depreciation, age, wear-and-tearor obsolescence. The carrier provides reimbursement based on the cost ofa replacement item. Under this option, most carriers require that the lostor damaged item be repaired or replaced with an item of similar kind andquality.

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Term
Winter
Professor
Ryan
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