Risk
is the uncertain possibility for a loss whenever more than one outcome is possible.
Pure Risk
No possibility of gain only a chance for loss
(insurance deals with pure risk only)
Speculative risk
Involves possibility of gain or loss, like gambling
the presence of insurance must not create a speculative risk.
Perils
cause or potential of a loss)
Accident,fire explosion, negligence, and theft are common perils
Insurance policies cover such perils as Fire, Wind, hail Theft, Liability, Collision,ext.
Exposure
Is being subject to the possibility of a loss because of a risk environment or characteristics.
Example: a dwelling exposure to hail damage can vary according to the locations in the state, a surgeons exposure to liability lawsuits.
Indemnity
Indemnifies the insured for covered losses. It is to Restore and Insure to the same financial condition they where prior to the loss.
Direct Loss
Actual Physical damage to the distortion of insured property.
Indirect Loss
Not a direct loss, but results from one like loss of INCOME following the direct covered loss of a cafe shop caused by the peril of fire, for example Certain types of indirect losses are covered by some policies, if covered by a covered loss, are treated
Hazard
is any condition that increases the chance or severity of a loss due to a covered peril. Policies do not cover hazards; Examples are Vacancy, faulty wiring, storing combustibles, over insurance. Three types of Hazards:
Physical Hazard
Arises from material, structural, or operational features of risk situations. Examples are seriously worn tires, old shingles on a roof
Moral Hazard
(illegal hazard)- Intentional losses such as:
Fraud, dishonesty, arson, murder
Example- a person stages an accident to collect insurance.
Elements of an Insurable Risk
Loss Definite and Definable: Definite as to time and place to prevent fraudulent claims. The loss must be measurable as represented by properly values and limits of liability.
Loss must be accidental: not insurable if caused by intentional acts of the ins
Types of Insurers
Admitted (authorized) Companies- insurer has been granted a Certificate of Authority from the state ( approved by commissioner of Insurance)
Non Admitted ( Unauthorized)
Companies - such companies do not qualify for a certificate of authority. They do not meet all required for admitted, but they can conduct business in the state. They are also known as Surplus Lines Insurance.
Domestic Insurer
A company organized under the laws of a particular state.
Foreign Insurer
Organized under the laws of another state, such as Iowa.
Alien Insurer
Organized under the laws of another country, such as Mexico.
Elements of a Legal Contract
Agreement ( offer and Acceptance)
Results only when one party makes an offer and the other party accepts
Agreement (Offer and Acceptance)
Results only when one party makes an offer and the other party accepts.
In property and casualty insurance, the applicant makes an offer by completing the application.
The company then either accepts the risk, rejects it, or possibly modifies it through u
Competent Parties
For a contact to be valid each party must be legally competent.
Minors, Insane people, and people under the influence of drugs and alcohol are not considered legally competent. 18 is the legal age in Texas.
Legal Objective
A contact must have legal purpose to be valid.
It must be consistent with public policy.
Consideration
Each party must give up something of value to each other.
In the insurance contract, the premium paid by the insured is the consideration.
The insured's consideration is the promise to pay a covered loss.
Aleatory
One party to the contract stand to gain more than the other; there is a chance for an uneven consideration (one sided contract).
An insured could recover a large sum even though he/she paid a much smaller premium.
Adhesion
The insurer draws up the contract and the insured adheres to it on a take it or leave it basis; insured has little or no input into the policy language.
This is why ambiguities are interpreted in favor of the insured by the courts.
Adhere to the contract
Unilateral
Means that an act is exchanged for a promise.
The insured pays a premium; the insurer promises to pay future covered losses.
Contract is binding on one party only; in the insurance company making a binding promise.
Utmost Good Faith
Both parties to the contact promise to act in the utmost good faith, especially at time of application and at the time of loss.
Conditional
When a loss occurs, certain conditions must be met by the insured in order to make the contract legally enforceable (prove insurable interest and submit proof loss, ECT.)
Misrepresentations
A false written or oral statement insured or insurance company.
Warranties
Once an applications is make a part of the policy all statements on it become warranties.
Are statements that an insured or insurer make which become a part of the policy.
Concealment
A failure to disclose known facts.
Policy may be void, if proven the insured intentionally concealed a material fact.
Waiver
Is known as voluntarily giving up a known right.
May be intentional, unintentional, direct, or indirect.
Estoppel
Is involuntarily giving a right. Right is actually taken from you.
If an agent ignores a policy violation and in effect, waives the violation, the insurer is then stopped from using the violation as grounds for denying coverage.
Lloyd's Associates
Not an insurance company, may be compared to a stock exchange.
Provides a meeting place and clerical services to its members who actually transact the insurance business.
Reciprocal
An unincorporated insurer, individuals who through an "attorney in fact" provide insurance among themselves.
Insurance is provided through an inter exchange of indemnity agreements.
Mutual Companies
They have no stockholders.
Policyholders own the companies; have voting rights, and share profits that are distributed in the forms of policy dividends.
Represent about 30% of liability and property and 50% of life insurance.
Stock Companies
Leading type of insurance.
Stockholders own companies and share profits and losses.
Companies have pre set fixed premium rates.
Reinsurance
Insurance for insurance companies.
One company cedes with the reinsurer thus further spreading the risk.
Adverse Selection
Selection against the insurance company.
The tendency of more poor risks to buy and maintain insurance than good risks.
Avoidance
Eliminates the exposure.
Refuse to accept the risk, such as when an underwriting refuses an application for insurance.
Reduction
Loss control.
Reducing the possibility or seriousness of a risk.
(For example: by establishing quality control programs, or installing sprinkler systems, fire doors, seat belts.
Retention
When an insured assumes all or part of a risk.
(Examples: Self insurance, coinsurance, and deductibles.
Transfer
By obtaining insurance.
Sharing
When risks are pooled and chance of loss is sharing.
Reinsurance and partnerships are examples of sharing risks.