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51 Cards in this Set
- Front
- Back
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Indemnity
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Insurer promises to restore insured to approximate position prior to loss; stated differently, insured should not profit from loss
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Actual Loss
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contract indemnity does not mean all covered losses are paid in full bc deductibles. dollar limits on paid amount and other contractual provisions amt paid may be less than actual loss
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2 fundamental purposes of indemnity
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1. to prevent insured from profiting from a loss
2. reduce moral hazard |
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Exception to "reduce moral hazard" of indemnity
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Exceptions
“Valued Policies” –EX: Life ins., Art ins. Replacement cost insurance –EX: New ipod instead of 2 year old ipod value |
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Actual Cash Value
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replacement cost less depreciation basic method for indemnifying insured is based on actual cash value of damaged property at time of loss
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Courts methods to determine actual cash value of loss
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1. replacement cost less depreciation
2. fair market value 3. broad evidence rule |
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Replacement Less Depreciation
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actual cash value; to determine actual value of property in property insurance
considers inflation & depreciation of property values over time replacement cost is the current cost of restoring damaged property with new property w/new material of like kind & quality depreciation deduction for physical wear, tear, age, economic obsolescence |
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Replacement Less Depreciation example
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Couch burns in fire Couch bought 5 yrs ago, couch 50% depreciated, similar couch today cots $1000. Under actual cash value Sarah will collect $500 for loss bc replacement cost if $1000 and depreciation is $500 or 50%. If paid full replacement $1000, then principle of indemnity would be violated
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Broad Evidence Rule
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determination of actual cash value should include all relevant factors an expert would use to determine value of property
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Broad Evidence Rule relevant factors
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replacement cost less depreciation, fair market value, present value of expected income from the property, comparison sales of similar property, opinions of appraisers
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Exceptions to Principle of Indemnity
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*valued policy
*valued policy laws *replacement cost insurance *life insurance |
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*valued policy
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policy that pays the face amount of insurance if a total loss occurs. used to insure antiques, fine arts, rare paintings, family heirlooms (difficult to determine actual value @ time of loss, insured & insurer agree on value of property when policy first issued
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*valued policy laws definition
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law that exists in some states that requires payment of face amount of insurance to insured if a total loss to real property occurs from a peril specified in the law
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*valued policy laws example
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EX: generally laws apply only to real property, and the loss must be total; building insured for $200K may have actual cash value $175K. If total loss from fire occurs, face amt $200K would be paid. Actual cash value < Paid by insured means principle of indemnity violated
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*valued policy laws history
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to protect insured from an argument w/insurer if an agent had deliberately overinsured property so as to receive higher commission
importance of valued policy has declined over time bc inflation in property values Underinsurance is now the problem - results in inadequate premiums for insurer and inadequate protection for insured |
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*replacement cost insurance
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no deduction for physical depreciation in determining amount paid for a loss
EX: 5 yr old roof tornado damage = current cost replacement $10,000 Replacement Cost Policy you'd receive $10,000 |
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Insurable Interest
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The insured must be in a position to lose financially if a loss occurs.
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Purpose of Insurable Interest
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Prevent Gambling
To help measure amount of loss in property insurance Reduce moral hazard (e.g., life ins. on “Jack”) See Stranger Owned Life Insurance |
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Insurable Interest: Property Insurance
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Property Insurance (contract of indemnity)
At the time of the loss –You might not have an insurable interest at time of purchase of insurance contract (e.g., ocean marine, where a good (like a car) does not become yours until it is loaded onto the ship) |
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Insurable Interest: Life Insurance
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Life Insurance (not a contract of indemnity)
Only At the time of purchase NOT necessary at time of death (e.g., divorced) |
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Principle of Insurable Risk
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can't buy insurance for an item that which you don't have insurable interest in : financial/insurable interest
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Example of Insurable Risk
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key man in business - company will buy life insurance in other people
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Insurable risk: Lief Insurance
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Insurable interest only required @ beginning
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If you close on a home on Monday, insurance was bought 2 days before so damage would not be paid out
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property/casualty insurable interest required @ time of loss
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Subrogation
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Insurer takes the place of the insured in seeking indemnity from another person.
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Subrogation: When and how does it happen?
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After payment of a loss to insured
Insurer attempts to recover payment from the responsible party. –Neighbor burns leaves and fire damages your house |
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Purposes of Subrogation
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Helps to reduce insurance premiums
Recoveries are reflected in ratemaking process Those who cause losses are held accountable Reduces moral hazard and morale hazard Insureds are prevented from double-collecting Also helps to limit losses from moral hazard Helps to reduce insurance premiums |
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Subrogation: if insurance pays for damages then...
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then wrongful party pays you. In subrogation insurance is able to keep $ that party pays you. If the amount the wrongful party pays, more then you can keep difference
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Subrogation: homeowner's insurance
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getting paid 2x for same loss violates policy of indemnity
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How do insurance companies help with loss?
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They help through process (ex. car accident > lawyers, rental car, etc)
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Subrogation example
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ex: backing out of the party and another car backs into you. you take insurance $, so your insurance company has the right to subrogate against other party
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Hold harmless agreement but insurance decides to subrogate against wrongful party...
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insurance co asks for agreements from other company to alter risk profile via underwriting a waiver for subrogation; must be completed @ inception -- sometimes requires addtl premiums
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Principle of Utmost Good Faith aka
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Bad faith claim
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Utmost Good Faith
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A higher degree of honesty is expected from both parties to the contract
If insurance co finds out you lied, they can cancel the claim & insurance co is not required to pay claim |
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Justification for utmost good faith
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High degree of information asymmetry
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Representations of utmost good faith
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Statements made by applicant for insurance
–E.g., eyes are brown; 6’3”; etc. “Material misrepresentation”—one that would have caused insurer to deny application or issue on different terms –Non-smoker, etc. Material misrepresentations may cause contract to be voided by insurer (pay attention to Insights in book—e.g., driving tickets—”I forgot”!) |
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Utmost Good Faith: Concealment
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Element of deceit - happens frequently @ policy renewal period
•Silence when there is an obligation to speak •Utmost good faith imposes duty to voluntarily divulge material information otherwise insurer can void contract •Generally involves an element of deception |
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Utmost Good Faith: Test for Concealment
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•Did the insured know of a certain fact?
•Was the fact material? •Was the insurer ignorant of the fact? |
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Utmost Good Faith: Warranties
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•A warranty creates a condition in a contract
•Any breach of warranty, even if not material, will allow the insurer to void the contract |
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Utmost Good Faith: Warranties example
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shopowner is bad part of town (break ins)
*invest in alarm system- insurance company now requires shopowners to warrant alarm system *you decide to sell alarm system later *AFFIRMATIVE = exists @ contracts inception; promises nothing a/b future *PROMISSORY = condition to continue throughout lifetime |
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Utmost Good Faith: Types of Warranties
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•Promissory – condition to continue throughout contract period
•Affirmative – exists at contract’s inception; promises nothing about the future |
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Material representation
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If an Insured breaches the Principle of Utmost Good Faith, a claim may be denied for “Material Misrepresentation, Material Concealment or Breach of Warranty.”
Material to whether they provided to the loss ex: lie about location of car for insurance ex: lie about where you live - legally they can cancel policy claim |
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Not material
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color of car, height of driver of car are NOT material
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Breach of utmost good faith from side of insurance co
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insurance company does not pay = bad faith claim
in policy, there are instructions how to sue insurance co The Insured can sue them! •Commonly referred to as a ‘bad faith claim’ •Used when the insured feels the insurer is not acting in ‘good faith’ •Used to force insurance companies to perform according to the contract |
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Requirements of an Insurance Contract
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Offer and Acceptance
*General Rule: Applicant makes offer, insurer accepts… *insurance co can make no offers w/o application/consideration *insured tells insurance co what they want then insurer provides quotations, then binds Binder: temporary contract *binds until policy is issued until such time that policy is issued –Agents have power to bind many insurance contracts Consideration *something for something in return Insurer vs. Insured Competent Parties Legal Purpose |
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Legal Characteristics of Insurance Contracts:
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Aleatory—Unequal (monetary) values
Unilateral—One party’s promise enforceable Conditional—Required provisions Personal—Assign your auto policy when you sell your car? Contract of Adhesion-- “Take it or leave it”, except for endorsements /riders. |
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Legal Characteristics of Insurance Contracts: Aleatory
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unequal (monetary values)
*values could be unequal *could not have any claims or just paid 2 months premium, but claim causes insurance co to pay out completely |
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Legal Characteristics of Insurance Contracts: Unilateral
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one party's promise enforceable
*no premium paid/policy cancelled *as long as premiums paid on time, insurance company required to pay claims *insurance co can cancels claims w/ 3-4 months notice so insured can find replacement |
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Legal Characteristics of Insurance Contracts: Conditional
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requires provisions
*section in policy tells conditions that need to be met, answering questions for claims processing |
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Legal Characteristics of Insurance Contracts: Personal
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insurance cannot be sold to another person -> insurable interest of property/item
*different risk profile |
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Legal Characteristics of Insurance Contracts: Contract of Adhesion
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take it or leave it
*for endorsement/riders *no changes to contract *if court declares point unclear - benefit is to insured/buyer |
