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24 Cards in this Set
- Front
- Back
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Characteristics of insurance
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Insurance policy is a contract so it possesses all the legal requirements of a non-insurance contract. Therefore there has to be an offer, acceptance, consideration etc. However insurance contracts often contain some unique provisions of their own. Insurance is a contract of: indemnity, utmost good faith, adhesion, insurance represents the exchange of unequal amounts, conditional contract and nontransferable. |
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Contract of indemnity |
Indemnity provides insured should not profit. Covered losses paid in relation to the loss. There is no requirement that the amounts exchanges by the insured and the insurer are equal in value in an insurance policy. Over indemnification may be a moral hazard. "Other insurance" provision prevents multiple sources of recovery. E.x. if you own a building and have insurance on it from two separate companies, you may profit twice for the same loss. Collateral source rule - defendant's responsibility is no reduced just because victim has insurance. If negligent driver causes accident, they are still responsible even if other driver is insured. |
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Contract of indemnity pt.2 |
Insurance does not necessarily pay full amount to restore insured suffering a loss. Policy limits and deductibles exist (risk retention). Some insurance policies violate indemnity. Agreed value (valued) policy - insurer agrees to pay a pre-established dollar amount in the event of an insured total loss (artwork, antiques) fair market value may not represent the dollar amount agreed upon. |
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Utmost good faith |
Utmost good faith is an obligation to act with honesty and to disclose all relevant facts. An insurer may deny a claim if insured has misrepresented or concealed (misrepresentation by silence) a material fact (a fact which expression would reasonably result in a different decision). Insurance is vulnerable to fraud, concealment and misrepresentation due to information asymmetry (one party having info that other party doesn't have). Fraud is the misrepresentation of key facts of a claim. Build-up is the intentional exaggeration of an otherwise legitimate claim. Insurer will try to avoid this by gathering as much info up front as they can. With respect to misrepresentation, insurers need not prove intent. Misrepresentation of a material fact by the insurance applicant will make he contract voidable (not void) by the insurer. |
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Contract of adhesion |
Contract of adhesion is a contract in which the insured must either accept the agreement as written or reject it (no negotiation). Details of the contract are prepared solely by the insurance company (insurer has an advantage so courts may rule in favor of insured if there's an ambiguous clause in the policy). Courts tend to interpret ambiguities in favor of the insured. Courts have reasonable expectations doctrine - ambiguous clause interpreted the way an insured would reasonably expect. |
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Unequal amounts |
Insurance contracts do not require that amounts exchanged are equal in value. Premium paid and promise of indemnity are typically not equal. However, amounts exchanged are typically considered equitable (fair) because premiums charged are proportional to expected losses. Premium paid for an insurance contract should represent the insured's share of the estimated losses the insurer must pay. |
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Conditional and nontransferable |
Insurance policies are conditional contracts. Insurer obligated to pay losses only if insured has fulfillment all policy conditions (paid premiums, have to let inspectors check on the property, and notify insurer in a timely manner). In addition, insurance policies are generally nontransferable because they're considered personal contracts. Insurance policy cannot be transferred to buyer when insured property is sold, unless policy transfer is approved by insurance company. If you sell your house, the person buying the house needs to get their own insurance policy (can't use yours). Life insurance is generally transferable. You may sell it, give it away or put it into a trust. But property/liability policies are nontransferable. Insurers are allowed to transfer policies to other insurers; the written consent of the insured is not required. Plus, usually it is to the insured's benefit to have their policy assigned to a more stable insurer. |
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Insurance policies |
The structure of an insurance policy can be either self-contained or modular. Regardless of self-contained or modular, insurance policies can be monoline (one line of business covered) or package (two+lines) policy. The form(s) used to make up an insurance policy can be either pre-printed or manuscript (developed originally from pre-printed forms and are more customized for insured). Can also be either standard (generally pre-printed) or nonstandard (manuscript). In addition, various types of other documents can be incorporated into a policy (endorsement, rider). |
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Insurance policy structure |
Self-contained policies contain all provisions within one document. Appropriate for insuring loss exposures similar among many insureds. E.x. personal auto policy (all contained in one place, simple and straight forward, a lot of the same language across the board). Self-contained policies: monoline (one coverage e.x. errors and omissions policy, only covers liability). Package (homeowners policy, covers both liability and property). |
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Insurance policy structure pt.2 |
Modular policies combine multiple forms. Loss exposure typically unique. Modular policies: monoline (commercial property policy, may involve many forms but they are all for property coverage). Package (commercial policy with both property and liability coverage). |
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Insurance policy structure pt.3 |
If insured has many different exposures needing coverage, is it best to get them all covered on one modular policy, or should they each get their own self-contained policy? Modular is better.
Advantages of modular policies over multiple self-contained policies: w/ modular there's minimal coverage gaps and overlaps (self-contained are many different contracts so there may be some overlapping coverage), modular has consistent terminology and policy language, fewer forms required to satisfy needs, simplified underwriting, reduced adverse selection (people who really need insurance are the only ones buying it, this can be a problem for insurance company), potential for package discounts and generally easier to analyze b/c there aren't as many conflicts with coverage like with many self contained policies where there may be overlapping. |
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Insurance policy forms |
Insurance policy forms can be pre-printed of manuscript forms. Most policies are assembled from one or more pre-printed forms and endorsements. Declarations page adds specific information about insured. Significantly reduces paperwork. Interpreted as contract of adhesion (if it's pre-printed there should be less or no ambiguous language). With pre-printed form, the insurer need not keep a complete duplicate of the entire policy in their files. Insurance advisory organizations disseminate forms to various insurers accompanied by standard endorsements that appeal to a multitude of situations, not someone in need of non-standard forms for their special situation. |
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Insurance policy forms pt.2 |
Characteristics of manuscript forms: nonstandard forms, custom forms developed for specific insured (or small group of insureds) with unique coverage needs, not generally considered contract of adhesion b/c it's customized (insurer and insured develop the policy language together), adapted from wording previously developed and used in standard forms, pre-printed forms, and generally most difficult to interpret in a court of law.
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Endorsements |
Additional attachment to insurance contract that can become part of policy. Endorsements typically modify a basic policy form and therefore usually differ form basic policy provisions (there may be some conflict between endorsement and base insurance contract, in which case the endorsement takes precedence over conflicting terms). Many policies include standard endorsements. Certain states require state-specific endorsements.
Endorsements are usually meant to alter the basics of an insurance policy, which can give rise to possible confusion. As a result something that is handwritten, possibly on the side margin, is interpreted as a more accurate sign of intent than something typed. |
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Provisions |
A provision is a contractual term specifying requirements or clarifying intended meaning. Categories of policy provisions: declarations, definitions, insuring agreements, conditions, exclusions and miscellaneous. |
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Provisions pt.2 |
Declarations (dec section) - contains information on the insured and forms included in policy. Lists parties to the contract, amount of insurance, policy limits and what is covered under the policy, rating information. Includes a statement regarding the policy's free-look provision (typically a 10-day span in which you can pull out of the contract and obtain a refund based on contract terms or state law), however the remaining policy provisions are not usually included on this page. May be one or more paged in length. Very important. Definitions - section defining certain terms. Attempts to reduce real or perceived ambiguity in contract. |
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Provisions pt.3 |
Insuring agreements - promise by the insurer to pay claims under described circumstances (often contains policy provisions relating to the covered causes of losses). Package policies typically contain multiple insuring agreements b/c there are multiple lines. Conditions - conditions that need to be filled, outlines responsibilities of parties. Steps the insured must take in order to receive a claim. Before a loss (conditions precedent) the insured must pay premiums, after a loss (conditions subsequent) the insured must document losses, report loss in timely manner and cooperate with the insurer. Conditions qualify an otherwise enforceable promise made in the policy. |
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Provisions pt.4 |
Exclusions - a statement as to what is not covered under the policy (purpose is to eliminate coverage for loss that most private insurers deem uninsurable due to certain eminent and uncontrollable circumstances). Eliminates coverage for uninsurable exposures (ordinary wear and tear, war). Manages morale and moral hazards (arson). Reduces likelihood of duplication of coverage (if laptop stolen from car, the auto policy will exclude it from the policy so it will only be covered under homeowners). Eliminates coverage not needed by the average insured (e.x. auto policy that excludes coverage for losses as a result of jet fuel explosion). Eliminates coverage that requires special treatment. Assists in keeping the premiums reasonable.
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Provisions pt.5 |
Miscellaneous provisions - may help to establish working procedures for implementing the policy. Do not have the same force as conditions. E.x. Provision describing insured's right to vote for board of directors in a mutual company. |
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Pre-loss policy analysis |
Pre-loss policy analysis relies on scenario analysis to determine appropriate coverage. Not possible to account for every scenario. Conducted by insurers so they are prepared to answer insured's questions and to offer appropriate coverage. Conducted by insureds to verify the policy adequately addresses their loss exposures. Tricky because there are many things that could theoretically happen. |
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Pre-loss policy analysis pt.2
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Pre-loss policy analysis uses the following sources of information: scenarios or past loss experience - primary source of data. Insurance producers or customer service representatives and field underwriters can be of great help b/c they have a lot of experience.
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Post-loss policy analysis |
Involves determination if policy provides coverage after loss. DICE method of post-loss policy analysis: indicates that we would look, in order, at four different policy provisions. Declarations page is reviewed to determine if information provided precludes or avoids coverage. Insuring agreement is analyzed to see if there are provisions regarding the property and cause of loss. |
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Post-loss policy analysis pt.2 |
DICE method cont. Conditions - certain conditions must be fulfilled to enforce policy. Review conditions section to determine if conditions were breached. Coverage triggers and territory restrictions may affect the loss. Rights and duties of both parties must be considered. Post-loss duties impact claim. |
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Post loss policy analysis pt.3
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DICE method cont. Exclusions is analyzed to determine both limits on coverage as well as clarify coverages granted. Review endorsements and miscellaneous provisions to determine exclusions. If claim covered, determine payable amount. |
