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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.
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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. • To support the principal of indemnity an insurance contact uses • Actual Cash Value (ACV) method • Replacement cost (RC) less depreciation • Fair market value • Broad evidence rule • Other Insurance Provisions • Exceptions to the Principle of Indemnity • Valued policy (or agreed value) • Valued policy law • Nebraska – Fire, Tornado, or Lightening, • Replacement cost
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 • Statements made by an applicant • cf: Innocent misrepresentation • Concealment • Intentional failure to disclose a material fact • Warranty • 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 • Consideration • By insured • By insurer • Legally competent parties • Legal Purpose • Legal Form • Some insurance policy provisions and attachments must be approved by regulator before being marketed
Property - Casualty Offer Submission of application with a down payment Acceptance Binder Life Offer Submission of application with a down payment Issuance of a life insurance policy Acceptance Conditional premium receipt Insurance as Contracts 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 insurer’s 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.
