6.

Legal Principles in Insurance Contracts

BUS 200 Introduction to Risk Management and Insurance Fall 2008 Jin Park

Overview

Fundamental Principles of Insurance Contracts Insurance as contracts Characteristics of Insurance Contracts

Fundamental Legal Principles of Insurance Contracts

1. Principle of indemnity 2. Principle of insurable interest 3. Principle of subrogation 4. Principle of utmost good faith

Principle of Indemnity

Insurance pays no more than the actual amount of the loss suffered by insured. Actual Cash Value (ACV) method

To support the principal of indemnity an insurance contact uses

Other Insurance Provisions

Valued policy (or agreed value) Valued policy law Replacement cost

Replacement cost (RC) less depreciation Fair market value Broad evidence rule

Exceptions to the Principle of Indemnity

Nebraska Fire, Tornado, or Lightening,

Principle of Insurable Interest

The insured must be in a position to financially suffer if a loss occurs.

Timing of an Insurable Interest

Property-Casualty Insurance Life Insurance

Why?

Principle of Subrogation

Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party wrongdoer for a loss paid by the insurer. The insurer is entitled only to the amount it has paid under the policy. No subrogate against its own insured. Exception:

Life insurance and Individual health insurance.

Why?

Principle of Utmost Good Faith

A higher degree of honesty is imposed on an insurance contract, especially on the insurance applicants.

It is supported by three legal doctrines

Representation

Concealment Warranty

Statements made by an applicant cf: Innocent misrepresentation Intentional failure to disclose a material fact A statement of fact or a promise made by the insured, which is part of the insurance contract and must be true if the insurer is to be liable under the contract.

Why?

Insurance as Contracts

Elements of contract

Agreement

Offer and Acceptance By insured By insurer

Consideration

Legally competent parties Legal Purpose Legal Form

Some insurance policy provisions and attachments must be approved by regulator before being marketed

Insurance as Contracts
Property - Casualty Offer

Life Offer

Submission of application with a down payment

Acceptance

Binder

Submission of application with a down payment Issuance of a life insurance policy Conditional premium receipt

Acceptance

Note: Giving a quotation to a prospective insured is deemed as mere solicitation or invitation to make an offer.

Characteristics of Insurance Contracts

1. Personal Contracts 2. Aleatory Contracts 3. Contracts of adhesion 4. Conditional contracts 5. Unilateral contracts

Characteristics of Insurance Contracts

1. Personal Contracts

Insurance provides protection for an insured Assignment provision

In P/C insurance, cannot be transferred In life insurance, freely reassigned.

2. Aleatory Contracts

A contract whose value to either or both of the parties depends on chance or future events, or where the monetary values of the parties' performance are unequal.

The insurer's obligation depends on uncertain events Premium paid by Insured

< Claim paid by Insurer

Characteristics of Insurance Contracts

3. Contracts of adhesion

Insurance contracts are drafted by an insurer and an insured must accept or reject all the terms and conditions.

4. Conditional contracts

An insurers obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions.

5. Unilateral contracts

Only one party makes a legally enforceable promise. Insureds are not legally forced to pay premium or renew the policy.