Insurance: General Insurance

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loss

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reduction in the
value of an asset

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four ways to manage risk:

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avoid, retain, transfer, reduce

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insurable risks:

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large number of homogeneous units, loss must be ascertainable, loss must be uncertain, economic hardship

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principle of indemnity

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principle of indemnity

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three general types of insurers:

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private commercial insurers, Private commercial service organizations, US gov

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Stock insurers

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A stock insurance company, like other stock companies, consists of stockholders
who own shares in the company. The individual stockholder provides capital for the insurer. In
return, they share in any profits and any losses. Management control rests with the Board of
Directors, selected by the stockholders. The Board of Directors elects the officers who conduct
the daily operations of the business.DIVIDENDS TO SHAREHOLDERS ARE TAXABLE

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Mutual Insurer

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In a mutual company, there are no stockholders. In a mutual company,
ownership rests with the policyholders. They vote for a Board of Directors, which in turn elects
or appoints the officers to operate the company. Funds not paid out after paying claims and not
used in paying for other costs of operation may be returned to the policyholders in the form of
policy dividends. Dividends from a mutual may never be guaranteed and are not taxable.

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Reciprocal Insurers

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Reciprocal insurers are unincorporated groups of people providing insurance
for one another through individual indemnity agreements. Each individual who is a member of
the reciprocal is known as a subscriber. Administration, underwriting, sales promotion, and
claims handling for the reciprocal insurance is handled by an attorney-in-fact.

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Fraternal Insurers

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Fraternal benefit societies are primarily life insurance carriers that exist as
social organizations and usually engage in charitable and benevolent activities. Fraternal insurers
are distinguished by the fact that their membership is usually drawn from those who are also
members of a lodge or fraternal organization. One characteristic of fraternal life insurance is the
open contract, which allows fraternal insurers to assess their policyholders in times of financial
difficulty.

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Reinsurance

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Reinsurance is a form of insurance between insurers. It occurs when an insurer
(the re-insurer) agrees to accept all or a portion of a risk covered by another insurer.

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facultative reinsurance

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A type of reinsurance policy where the reinsurer assesses each risk individually.

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excess of loss basis,

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which means the re-insurer will pay only
the portion of loss that exceeds a threshold

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quota share basis

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the
insurers will share loss on a pro rata or fixed-percentage basis.

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Captive Insurers:

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Captive insurers are formed to serve the insurance needs of their
stockholders while avoiding the uncertainties related to commercial insurance availability and
costs. A captive insurer’s stock is controlled by one interest or a group of related interests who
have direct involvement and influence over the company’s operations. For example, an
association of self insured corporations may purchase reinsurance from a captive insurer that they
control. Most captive insurers are non-admitted alien corporations.

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Excess and Surplus Lines:

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Occasionally, it may be difficult to place a risk in the normal
marketplace. If the risk is very large or unusual in nature, typical carriers may be unwilling to
assume it. For some special risks, the only market may be with specialty carriers. Such business
must be placed through a licensed excess or surplus lines broker, who will attempt to place it with
an unauthorized carrier located in another state or out of the country (such as Lloyd’s of London).

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Government Insurers

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The federal government provides life and health insurance through various
sources. The federal government has offered a variety of military life insurance plans as well as
Medicare for seniors, which is part of Social Security.
Because private insurance policies exclude catastrophic risks, the federal government has stepped
in to provide National Flood Insurance, Federal Crime Insurance, Federal Crop Insurance, and
insurance on mortgage loans. At the state level, governments are involved in providing
unemployment insurance, Workers’ Compensation programs and secondary-injury funds, and
state-run medical-expense insurance plans.

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Authorized vs. Unauthorized Insurers

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Before an insurance company can conduct business it must,
by law, receive the authority to do so. Insurance statutes require a company to secure a license from
the Department of Insurance to sell insurance in a particular state. Once the insurer receives the
license, it is considered "admitted" into the state as a legal insurer, and is "authorized" to transact the
business of insurance. This licensing power is used to regulate company activities. Licenses may be
issued to domestic companies, foreign companies, or alien companies.

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independent rating services

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Best’s Guide, Standard & Poor’s, and
Moody’s

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These two insurance companies don't have to domestic to sell in a state:

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surplus, reinsurance

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captive or exclusive agents

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sell only exclusive policies of a company

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Direct writing companies

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pay salaries to employees whose job function is to sell their company’s
insurance products. In this case, the insurance company owns the expirations and the producers’
business.

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franchise marketing system

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provides coverage to employees of small firms or to members of
associations. Unlike group policies, in which benefits are standard for classes of individuals, persons
insured under the franchise method receive individual policies that vary according to the individuals’
needs.

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Express authority

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an explicit, definite agreement. set forth in his/her contract.

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Implied authority

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not expressly granted under an agency contract, but it is actual authority that the
producer has to transact the principal’s business in accordance with general business practices. For
example, if a producer’s contract does not give her the express authority of collecting and submitting
premium, but the producer does so on a regular basis and the company accepts the premium, then the
producer is said to have implied authority.

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Apparent authority

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authority a producer seems to have because of certain actions taken on his part.
This action may mislead applicants or insureds, causing them to believe the producer has authority that he
does not, in fact, have.

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fiduciary duty

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A fiduciary relationship is developed when a
person relies on, or places confidence, faith, or trust in, another person’s action or advice. A producer, as
a “fiduciary,” has accepted the obligation of acting in the insured’s best interest.

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The producer owes certain general responsibilities to the company:

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loyalty, abeyance, degree of care, accountability for money or property, relate all relevant facts to the company

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In order to be enforceable in court, they must contain four essential
elements

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consideration, offer, acceptance of the offer, Legal purpose and capacity

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Consideration:

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The exchange of something of value between the parties. The client pays the
premium and the insurance company promises to provide coverage. The consideration given between
parties does not necessarily have to be equal.

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Offer:

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This must be clearly communicated. Usually, the offer is made by the client when he
completes and signs the application and writes out his check for the first premium payment.

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Acceptance of the Offer:

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This is usually done when the underwriter approves the application and
issues the policy for delivery.

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Legal Purpose and Legal Capacity:

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Contracts for illegal purposes are unenforceable in court, and,
of course, all parties to a contract must be competent to contract, meaning they must be of age, of
sound mind, and not under the influence of drugs or alcohol.

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Doctrine of Adhesion

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if the insurance contract
language is vague or unclear, any ambiguity will be construed in favor of the insured, since that person
had no chance to change it when she bought it. This is why insurance companies don’t like to go to court,
since they usually lose!

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representations

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truth to the best of the client’s knowledge.

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Doctrine of Utmost Good
Faith

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applies to all parties involved, including the applicant, the producer, and the insurer

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Waiver

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voluntary giving up of a known right

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Doctrine of
Estoppel.

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Once you have knowledgably forfeited a right, you can not assert that right in the future (like in court)

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Concealment

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deliberate omission of a material fact

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Fraud

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deliberate attempt to deceive

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Warranty

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absolute guarantee of truth

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unilateral

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in that only one party to the contract, the insurer, makes an
enforceable promise to pay a covered claim if the premium has been paid

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offer=

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meeting of the minds, mutual of agreement

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aleatory

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the outcome depends upon chance

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three types of hazards:

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a “moral” hazard, which
is presented by a dishonest client; 2) a “morale” hazard, which is presented by a careless client; and 3) a
“physical” hazard, such as a dangerous occupation or hobby.

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New York Standard 165-Line Fire
Policy.

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First sold in the State of New York in 1943, the provisions of this policy have been
incorporated into most property policies sold in this country