Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
60 Cards in this Set
- Front
- Back
|
Risk
Peril Hazard |
Risk: Possibility of suffering harm, loss, or injury.
Peril: Cause of the loss. Hazard: Increases potential for loss Risk = Loss of home Peril = hurricane, flood, tornado, fire Hazard = Oily rages in garage next to space heater. |
|
|
Risk Management Process: Steps
|
1. Identify and establish risk management goals - risk management policy statement;
2. Gather pertinent data to determine risk exposures - learn everything about client; all assets and activities potential risk; ID current insurance policies; Data survey form. 3. Analyze and evaluate the information to identify risk exposures facing the client. - 3 types of risk exposure 4. Develop or construct a risk management plan - determine appropriate risk treatment methods - most appropriate way to treat the risk? 5. Implement recommendations 6. Monitor recommendations for needed changes |
|
|
3 Types of Risk Exposure
|
1 - Loss of Asset, loss of use of asset
2 - Risk of Liability - through contract law, loan, contractual obligation 3 - Risk of Liability - through tort law, boating accident, malpractice |
|
|
Chapter 2: Rules and Elements
3 Basic Rules of Risk Management |
1 - Don't Risk more than you can afford to lose: small losses are small; some losses are devastating and something must be done to protect - insurance
2 - Consider the Odds: If loss is certain insurance too expensive; Ex: Cost to insure life of 120 year old, Cost to insure something that is highly unlikely is low 3 - Don't risk a lot for a little: Don't risk the value of home in order to not pay for homeowners insurance (relatively cheap) Large Loss Principle - Probability that a loss may or may not occur less important than the possible size of the loss. |
|
|
Evaluation of a Exposure - The underwriting process
|
Insurance company gathers as much info as possible when considering writing coverage
> see if exposure meets requirements of insurable risk > is it practical for insurer to provide insurance against the risk > determine how insurance should be priced |
|
|
Pricing Analysis
2 Assumptions for evaluating loss statistics |
Risk and Price analysis done by actuaries...
Use several different factors to determine what company must charge for coverage Anticipated loss most important pricing factor... 2 Assumptions... 1) Element of insurable risk is met 2) Adverse selection can be controlled |
|
|
Elements of Insurable Risk
|
> Must be sufficiently large number of homogeneous exposure units to make losses reasonably predictable. (Law of Large Numbers)
> Loss must be definite and measurable > Loss must be fortuitous or accidental > Loss must not be catastrophic Insured must be geographically diverse - hurricane could be catastrophic to insurance company in one area. |
|
|
Underwriting - purpose and implications for client.
|
Insurance company must setup gatekeeper mechanisms
Certain employees screen insurance applicants to see if they meet underwriting guidelines, done by insurance agent. Helps protect against adverse selection Practical implication of underwriting... Planner must be able to explain reasons for situations that seem out of ordinary. Definite limitations on amount of insurance regardless of what they are willing to pay. Don't want to encourage death or arson for profit. |
|
|
Adverse Selection
|
People that expect loss want insurance more than people that don't expect loss.
Unhealthy people want insurance more than healthy people. Health insurance companies want to minimize number of high risk candidates, goal is to have pool of insureds that represents the average of the population, not skewed toward the unhealthy population. |
|
|
Post - Selection Underwriting
|
Insurance company can review insured's actions, risk factors, and claims history to determine whether to continue providing coverage or cancel it.
Controversial... People concerned with having auto insurance canceled for filling claims. |
|
|
Chapter 3: Application of Risk Management Principles
Methods of Handling Risk Risk Control |
Risk Control - minimize the risk of loss.
Risk avoidance - Business doesn't want windows broken in, don't have windows. Don't want to be injured playing sport, don't play sport. Risk Reduction - Business wants windows but still concerned, reinforce windows/put up bars. Want to play sport, wear protective clothing. Variation to Reduction - Risk Sharing: Business partners, loss limited to amount invested. |
|
|
Risk Financing
|
Risk Retention: Potential loss small, can be covered out-of-pocket. Or Cost to transfer risk high, insurance expensive
Risk transfer: Insurance. Risk of loss transferred to insurance company for small fee/premium. Risk Matrix page 21 |
|
|
Risk Management Matrix
|
High Severity and High Frequency = Risk avoidance / reduction
Low Severity and High Frequency = Risk retention / reduction High Severity and Low Frequency = Risk Transfer Low Severity and Low Frequency = Risk Retention |
|
|
Self Insurance
Requirements |
Same as risk retention
Requirements... > Org has enough homogeneous exposure units to make loss predictable. Exposure units somewhat geographically diverse, avoid catastrophic loss. Potential loss can be covered out of cash flow. > Adequate funds accumulated to cover plan losses > Self insurer can self administer insurance functions, analysis of potential claims, payments to providers, able to determine claim validity, work as efficiently as insurance company could > Be able to competently manage investment of self-insurance fund ....Few funds large enough to self-insure. Most buy supplemental insurance to protect against catastrophic losses. Stop loss policy limit... maximum claims self-insurance company willing to pay in a year |
|
|
Self Insurance
Advantages |
> Reduces cost by eliminating insurance company profit
> Eliminates selling costs of insurance company > Avoid state taxes on insurance premiums |
|
|
Self-Insurance
Disadvantages |
> Business must obtain complete objectivity on kinds of risks it can afford to take, must do its own underwriting.
> Could have to pay higher income taxes, premiums paid are tax deductible. Cost to run self-insurance plan not tax deductible, cost to pay for loss is. > Company normally will save money if it can provide itself same service as insurance company, at lower cost. |
|
|
Sources of Self-Insurance Savings
|
> Save money through self insurance if it shows a better loss experience than that which the insurance company uses to compute its rates
> Save money through more efficient admin of the program, reduce overhead > Achieve superior investment returns than insurance company. > Exclude certain unwanted benefits that may be mandatory in insurance plan. Because of ERISA |
|
|
Risk Retention Groups
Requirements Members |
Liability Risk Retention Act of 1986 increased demand for these "mini-insurance companies"
Insurance too expensive of not available for some specific industries...so they formed their own mini insurance agency. Requirements: > Be willing to engage in all activities of insurance company 1) Invest own capital 2) set up insurance operations (underwriting, admin, claims) 3) find willing reinsurance companies 4) Price product efficiently Can only write insurance for member shareholders... Members: Persons engaged in business / activities that share similar position of liability. Must prepare feasibility study... includes rating structure Capital needs projected financial statements cost allocation methods Prove it can provide quality underwriting, minimum number of participants, minimum premium volume, ability to make long term commitment. |
|
|
Purchasing Groups
|
Not insurers but group with similar risk exposure that form organization to purchase insurance on group basis.
Groups do not have to invest capital, submit feasibility study, or make long term commitments. Insurance companies issue master policy to group, with certificates to members. Master policy contain aggregate limit...if loss within group exceeds limit no insurance left for group. Not excluded from state guaranty funds Popular among professional groups (doctors and lawyers) and organizations (day cares and municipalities) that carry high level of risk. Purchasing group doesn't guarantee lower fees, but makes more accessible. |
|
|
Torts
Definitions Examples |
When someone causes physical, emotional, or financial harm to another.
Wrongdoer = tortfeasor Intentional or unintentional Civil or private Not the same as breaking a law = criminal law |
|
|
Intentional Torts
|
No insurance for liability from intentional torts...
Assault Battery Libel Slander False Arrest False imprisonment Invasion of privacy Trespass - trespasser= on property without right/consent; Licensee = come onto property with knowledge of owner, but for no benefit to owner (door-to-door salesmen) Invitees = Been invited by owner for some purpose (delivery man) on premises open for public admission (church) |
|
|
Unintentional Torts
4 Primary elements of tort |
Activities that involve some degree of negligence (not harmful intent)
1) General duty to use reasonable care not to injure others 2) There is unexcused breach of that duty (negligence) Any loss will be evaluated and potential damages assessed 3) Breach of duty must be cause of loss or damage 4) Must be proximate cause, negligence directly related to loss or damage |
|
|
Collateral Source Rule
|
Tortfeasor liable for full damages caused, regardless of other sources of reimbursement available to victim.
This is to keep tortfeasor from benefiting from farsightedness of victim. Victim that maintains insurance. |
|
|
Subrogation clause
|
Part of insurance policy that prevents collateral source rule from violating principle of indemnity (victim reimbursed for loss, not profit from it)
Gives insurer right to collect from tortfeasor up to amount the insurer paid the victim. |
|
|
Survival of tort actions
|
The right to sue generally survives the death of either the victim or tortfeasor
|
|
|
Res Ipsa Loquitur
|
"The thing speaks for itself" name given to circumstantial evidence in certain situations
Requirements: >accident caused by something under the exclusive control of defendant > accident involved event that does not ordinarily happen in the absence of negligence > plaintiff does not contribute to the accident |
|
|
Attractive Nuisance
|
Something about a property that is attractive and dangerous to minors... Swimming pool
High degree of care imposed on owner to discover children on property and protect them |
|
|
Negligence Per Se
|
Duty or standard of care owed by the defendant is determined by reference to a statute.
Speeding through school zone and hit a kid = negligence per se Speeding through school zone and hit adult = only negligence |
|
|
Absolute Liability
|
Imposed when someone held responsible for damages, even where no negligence in usual sense of word.
Usually when someone causes extra-hazardous situation through his or her activities (keeping wild animals, blasting) Employers held liable for acts of employees under this concept. Strict Liability = manufactured product deemed defective, product liability issues. |
|
|
Vicarious Liability
|
Held liable for acts of another (Person's child, employee, or agent)
|
|
|
Sources of Liability
|
Asset lose of lose of use...
Financial liability to third parties Every contract entered is a liability |
|
|
4 Legal Defenses to Liability
|
Assumption of the risk = Party recognizes and understands the danger in an activity and voluntarily chooses to encounter it, another cannot be held responsible for injury.
Contributory Negligence = Any negligence on part of injured party that contributes to injury, then another party cannot be held liable. Strictest approach Comparative Negligence = Alt to Contributory, reduces defendants liability in proportion to injured party's contribution to total negligence causing the injury. Last Clear Chance = Modification to contributory negligence rule. Contributory negligence on part of injured party will not bar recovery if other party, immediately prior to incident, has last clear chance to prevent it, but failed to seize the chance. Ex: Diver negligently pulled out in front of another car, 2nd car had chance to avoid but failed to do so. 2nd driver could be held liable. |
|
|
How much liability?
|
Liability judgements not determined by amount of assets or insurance.
Judgement can claim all of insurance, all your assets, and have future income garnished as well. How much insurance? Clients with little assets may not need much, clients with a lot of assets would want sufficient insurance to cover. |
|
|
Risk management for the Planner
|
If client thinks you have failed to meet the requirements of good planning you could be help liable for malpractice.
Must be careful in your practice... Avoid anything contrary to letter and intent of the contract Establish standard procedures / checklists Errors and Omissions insurance |
|
|
Risk management for Clients
|
Must have adequate personal information on client...
All business and personal activities could have a liability associated with them. Driving the scouts to camp is a liability A business with windows has a liability of the windows being broken in. |
|
|
Contracts
Requirements of an enforceable contract |
Offer and acceptance
Consideration: act or payment for the act. With insurance - insurance company's promise is act; insured's payment is consideration. Legal Object: Purpose of the contract. Cannot be illegal. Competent Parties: If one person was incompetent when contract was signed, the incompetent person can back out, but the competent person cannot. Legal Form: Some contracts must be in a form prescribed by law. Real property must have title, transfer of title must be in writing. Under most circumstances a oral contract is enforceable. Contract is a promise or set of promises for breach of which the law gives a remedy. |
|
|
Unilateral vs Bilateral Contract
|
Bilateral: Both parties have made enforceable promises.
"I promise to paint the fence; you promise to pay me $75." Unilateral: Only one party makes enforceable promise. "If you paint the fence; I will pay you $75" Insurance is unilateral contract. Insurance must pay a claim; if you stop paying premiums insurance company just cancels policy. |
|
|
Negotiable Instruments
Contract for services |
Bilateral: Both parties have made enforceable promises.
"I promise to paint the fence; you promise to pay me $75." Unilateral: Only one party makes enforceable promise. "If you paint the fence; I will pay you $75" Insurance is unilateral contract. Insurance must pay a claim; if you stop paying premiums insurance company just cancels policy. Negotiable instruments are legally binding contracts if meet requirements in form. Instrument must contain unconditional promise to pay definite sum of money to the bearer. Check is a form of negotiable instrument, binding because of its form...formal contract. Contract for services: Determined by substance of the agreement, as opposed to form, considered an informal contract aka simple or parol contract. |
|
|
Implied Contract
|
Arises when member of public reasonably believes a person has authority or knowledge to act in a certain manner.
|
|
|
Laws of Agency
|
Legal relationship between two people...
Principal = boss, increases liability. Agent = acts on principal's behalf, increased responsibility Power of attorney = express authority Implied authority = telephone call from client, "take care of the matter for me" No legal difference in implied and express authority |
|
|
Apparent Authority:
|
A third party believes that an agent is acting on the authority of the principal either by the principal recognizing the agents actions or not rejecting the actions.
Planner working with client, working with implied authority to act on behalf of the insurance agent. |
|
|
Professional Liability:
|
Liability of Financial Planner in their practice...
Client wishes to engage in planner's services and planner willing to provide them for a fee. When planner fails to conduct himself in professional manner and cause harm to another, the planner can be considered negligent. |
|
|
Professional Liability:
Elements that must be present for planner to be considered negligent... |
> Legal duty to conform to certain standards of conduct...(SEC, NASD/FINRA, CFP Board)
> Failure to conform to those standards > Causal connection between action and resulting harm > actual loss, damage, or harm |
|
|
Professional Liability best practices
|
All recommendations, exceptions, alternatives, and risks discussed with client should be put in writing.
Write down notes of all phone calls and meetings. Due diligence: suitability test; planner must match the client with the most suitable product. Reading prospectuses, doing research, talking to wholesalers, Many planners purchase Professional Liability insurance. |
|
|
Resolving Contract disputes
|
First step: Determine what the parties intended...using the parol evidence rule. When contract put into writing it cannot be overruled by prior verbal agreements. Does not apply to subsequent changes.
|
|
|
Doctrine of Waiver
|
A party by their actions has voluntarily relinquished or surrender a known right. Assumes that parties, with full knowledge of material facts do, or fail to do, something that is inconsistent with their rights under contract or inconsistent with an intention to rely on such rights.
Ex: Home owner policy requires homeowner to seal broken windows with plastic to protect from further damage. If owner fails to put up plastic, further damage occurs, and insurance company covers claim. Then insurance company couldn't reject the same claim in the future from same client. |
|
|
Doctrine of Estoppel
|
Prevents party from asserting a right to which he or she would otherwise be entitled where, because of the party's own actions or behavior, he or she misled someone, who relied on the understanding created thereby to his or her own detriment.
Based on idea that when one of two innocent person must suffer, he who occasioned the loss must bear it. From insurance / plastic wrapping broken windows example the insurance company would be estopped from asserting its contractual right to deny claim because it previously waived the right to do so. Ralph wishes to setup his home as office. He intends to put large amount of computer equipment in home to support business. He writes insurance agent to inform her of the new computer equipment, she tells him that it would be covered under the homeowner's policy and no additional coverage would be needed. Ralph buys $20,000 of computer equipment and he home is then struck by lightening, destroying computers. Since insurance company was aware of the addition of computer equipment they would be forced to pay claim even though they didn't raise his coverage. |
|
|
Parol Evidence Rule
|
When parties put agreement into final, complete, binding, written contract (in absence of fraud, mutual mistake, duress, or the like), any evidence, whether oral or written, of prior understandings will not be admitted to contradict the writing.
|
|
|
Equitable Remedies
|
Once court has decided what the understanding was between the parties, or at least what it feels is fair under the circumstances, it may implement its decision by using contract remedies.
Rescission and reformation are two forms of remedies. |
|
|
Rescission vs Reformation
|
Rescission= Cancel contract outright from beginning. Party seeking relief must show fraud, impossibility, misrepresentation of material fact, concealment in application, or mutual mistake as to a material fact.
Generally sought by insurer, required to return premiums. Reformation = Contract changed to express original intentions of the parties. Must be shown there is a mutual mistake, duress, or related misconduct. Makes the contract conform to what was originally intended. Overstating death benefit on contract by mistake, when originally agreed on much smaller amount. |
|
|
Waiver Provision
|
Helps protect the insurer in insurance contracts.
Sometimes agents may unintentionally / negligently promise coverage not normally included in insurance contract to the detriment of the insurance company. Waiver provision states the only certain principals of the company can change the writing in a contract or make certain exceptions. |
|
|
Adhesion
|
Insurance contracts are policies of adhesion.
One party writes contract, other party has no say in matter. Must accept or reject the contract. If you wrote the contract you are stuck with any ambiguities in contract. |
|
|
Chapter 5: Contracts of Insurance
Terms: Aleatory Conditional |
Aleatory Contract: One where outcome is controlled by chance, and dollars the change hands generally substantially unequal.
Conditional: Insurance contracts are conditional in that the insurance company pay on the condition that a covered loss occurs. |
|
|
Indemnity:
|
When one person suffers a loss, they should be made whole. But insured shouldn't profit from loss.
Indemnity supported by various policy provisions: > Requirement for insurable interest > Payment of "actual cash value" > "Other insurance" provisions > Provision of subrogation |
|
|
Subrogation
|
Prevents you from profiting when payments are made from insurance companies. Insurance company has right to go after responsible party to seek repayment for loss, before you can also go after the responsible party on a civil claim.
|
|
|
Personal Contract
|
Insurance contracts are personal contracts
Nature of the risk may change as a result of the transfer. Contract cannot usually be transferred without permission. Benefits can often be transferred. |
|
|
Utmost Good Faith
|
If applicants for insurance had to prove or if insurance company had to every fact on application cost of doing business would increase dramatically.
Insurance company must take some information from applicant "in good faith" Can make three claims if they believe Good Faith was not maintained 1. Misrepresentation = false statement, material 2. Warranties = mistake 3. Concealment = failure to provide material information. |
|
|
Legal Requirements of Enforceable Contract
|
Offer and Acceptance: Offer made by one party, accepted by other party
Consideration: Each party must give the other something of value, Insured pays premiums, insurer binds coverage. Legal Object: Contract must not be contrary to public policy, Can't be for something illegal. Competent Parties: Parties must be capable of signing contract. Minors can enter legal contract, but can also void contract till act of majority. Legal Form: Contract must satisfy legal requirements specifying its form, Sale of land must be in writing, etc. |
|
|
Void and Voidable Contracts
|
Void Contract is not enforceable. Lacks one or more preceding requirements of enforceable contract.
Voidable contract: one party has the option of voiding the contract, but other party is bound. Minor can void contract till they reach 18. |
|
|
Insurance Contract Sections and Provisions - 4 sections
|
Declarations: Info provided by the applicant.
Insuring Agreement: ID's what is insured, for what amount, under what conditions. Exclusions: ID's circumstances / situations that would preclude company from paying a claim when a loss occurs. Conditions: States rights and duties of both parties. |
