Why has Warren Buffet always liked insurance?
because buyers pay up front and pay premiums
Float
helped fund Berkshire Hathaway's expansion
of indemnity
states that the insured should not profit from a covered loss, but should be restored to same financial position before the loss
two purposes of principle of indemnity:
1. to prevent the insured from profiting from a loss
2. reduce moral hazard (if dishonest policyholders could profit from a loss, might deliberately cause losses)
Exceptions to the Principle of Indemnity
1. valued policy
2. Valued policy law
3. replacement cost insurance
4. life insurance
valued policy
pays the face amount of insurance if a total loss occurs
replacement cost insurance
There is no deduction for physical depreciation in determining the amount paid for a loss
life insurance contract
a valued policy that pays a stated sum to the beneficiary upon the insured's death
How to courts determine actual cash value
1) replacement cost - depreciation
2) fair market rule
3) broad evidence rule
Actual Cash Value
method for indemnifying based on actual value of the property at the time of the loss
replacement loss less depreciation
- used for P/C
- actual cash value is defined as replacement less depreciation
fair market value
the price a willing buyer would pay a willing seller in a free market
Broad evidence rule
the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property
Broad evidence rule relevant factors include:
- replacement cost less depreciation
- fair market value, present value of expected income from the property
- comparison sales of similar property, opinions of appraisers
- and numerous other factors
What are valued policies typically used to insure
antiques, fine art, rare paintings, and family heirlooms
valued policy law
a law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law
What is the original purpose of valued policy law?
to protect the insured from a dispute with the insurer if an agent had deliberately overinsured property for a higher commission
What are the downsides of valued policy law
- can lead to overinsurance
- moral hazard increases
Replacement cost insurance is based on the recognition that
payment of actual cash value can still result in substantial loss because few budget for depreciation
Why is life insurance an exception to indemnity?
- valued policy
- actual cash value is meaningless in determining value of human life
- a specific amount must be purchased before death
Principle of Insurable Interest
states that the insured must be in a position to lose financially if a covered loss occurs
to be legally enforceable, all insurance contracts must be supported by
an insurable interest
purposes of insurable interest
- to prevent gambling
- to reduce moral hazard
- measure the amount of insured's loss in property insurance
If the loss payment cannot exceed the amount of one's insurable interest,
the principle of indemnity is supported.
An insurable interest can be supported by (P/C):
-Ownership of property
-Potential legal liability
-Serving as a secured creditor
-Contractual rights
Life Insurance Insurable exists
- in life insurance for people who voluntarily insure their lives
someone who purchases life insurance on another's life must have an
insurable interest in that persons life
- business firm insuring life of key employee
pecuniary (financial) interest
financial interest that me result in financial loss if death occurs
When must an insurable interest exist
1) P/C at the time of loss
2) Life: Only at inception of the policy not at the time of death
Why must insurable interest exist at the time of loss in P/C?
1) most property insurance contracts are indemnity
2) you may not have an insurable interest in the property when the contract is first written but may expect to have an insurable interest in the future
Subrogation
the insurance company's is entitled to recover any loss payments made to the insured from a negligent third party
subrogatoin does not apply unless the insurer
makes a loss payment
Purposes of Subrogation
1. Prevents the insured from collecting twice for the same loss
2. Used to hold the guilty person responsible for the loss
3. Helps to hold down insurance rates
In subrogation the insurer is only entitled to
the amount it has paid under the policy
Under subrogation the insured cannot
collect twice for the same loss
What does the principle of subrogation reinforce?
the principle of indemnity
Exceptions to Subrogation
1) Subrogation does not apply to life insurance contracts because it is a valued policy
2) subrogation does not give the insurer the right to collect against the insured; even if the insured is negligent
Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts
- roots in ocean marine insurance
What is the principle of utmost faith supported by?
legal doctrines of
1) representations
2) concealment
3) warranty
representations
statements made by the applicant for insurance to induce the insurer into an insurance contract
Representations are not part of a contract but are an ________ to the contract
inducement
a contract is voidable if representation is
material, false, and relied on by the insurer
material
if the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms
Misrepresentation (of material fact)
if relied on by the insurer, makes the contract voidable (would not have been issued)
T/F innocent misrepresentation makes a contract voidable
T
T/F the doctrine of material misrepresentation applies to statements made only before a loss
F before and after a loss
concealment
intentional failure of the applicant for insurance to reveal a material fact to the insurer
concealment is still valid even if
1) disclosure of facts causes application rejection or higher premiums
2) has the same legal effects as misrepresentation
To deny a claim based on concealment, a nonmarine insurer must prove:
1) concealed fact was know by insured and material
2) the insured intended to defraud the insurer
Warranty
is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
any breach of warranty can allow the insurer to
deny the payment of a claim
Warranty created a condition of
a contract
Central distinction between warranty and representation
warranty creates a condition of the contract and any breach of warranty will void the contract
express warranty
stated in contract
implied warranty
not found in the contract buy are assumed by the parties to the contract
promissory warranty
Describes a condition, fact, or circumstance to which the insured agrees to be held during the life of the contract
affirmative warranty
one that must exist only at the time the contract is first put into effect
To be legally enforceable, an insurance contract must meet four requirements:
1) offer and acceptance of terms of contract
2) consideration
3) competent parties with legal capacity to enter into a binding contract
4) contract must exist for legal purpose
binder
(P/C) a temporary contract for insurance and can written or oral
- company may still accept offer or reject application
conditional premium receipts
a receipt that binds coverage for life insurance without reference to actual delivery of the policy
What have the courts ruled about ambiguities or uncertainties in the contract?
they are construed against insurer
The principle of reasonable expectations
states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear
exchange of consideration
the value that each party gives to the other
Insured's Consideration
The payment of (or the promise to pay) the premium.
insurers consideration
The promise to pay claims as specified in the contract, conditioned on the occurrence of covered losses.
legally competent
this means the parties must have legal capacity to enter into a binding contract
- insurer and insured must be legally competent and licesensed.
legal purpose
a contract that is legal and enforceable only if it complies with the law and public policy. A contract entered into for an illegal purpose is not binding
unilateral contract
means that only one party makes a legally enforceable promise
most commercial contracts are ________ in nature
bilateral
conditional contract
that is the insurers'. obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions
conditions
provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform
personal contract
the contract is between the insured and the insurer
property insurance insured
the owner of property against loss
The insurer's consent is required before a property insurance policy can be
validly assigned to another party
T/F a loss payment for a property loss can be assigned to another party without insurers consent
T
An insurance contract is
- Aleatory
- Unilateral
- Conditional
- Personal
- Contract of Adhesion
aleatory
values exchanged are not equal
unilateral
only the insurer makes a legally enforceable promise
conditional
policy owner must comply with all policy provisions to collect for a covered loss
personal
property insurance policy cannot be validly assigned to another party without the insurer's consent
Contract of Adhesion
the insured must accept the entire contract with all of its terms and conditions
principle of reasonable expectations
states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear
Important rules of law that govern the actions of agents and their relationship to insureds
1) there is no presumption of an agency relationship
2) an agent must have authority to represent the principal
3) a principal is responsible for the acts of agents acting within the scope of their authority
4) limitation can be placed on the powers of ag
agent
someone who has authority to act on behalf of a principal
agent's authority comes from thee sources
1) actual/express authority
2) implied authority
3) apparent authority
agency agreement
agreement between the agent and the principal that specifies rights and duties of each party
knowledge of the agent is presumed to be
knowledge of the principal with respect to matters within the scope of the agency relationship
How can insurers place limitations on the power of agents?
a nonwaiver clause to the application or policy
Implied Authority
authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement
Apparent Authority
under agency law, apparent authority can be defined as an agent who has the authority to act on behalf of the principal when actions or expressions by the principal to a third party lead a reasonable third party to believe that the principal authorized th
waiver
the voluntary relinquishment of a known legal right
estoppel
Loss of legal defense because of previous actions that are now inconsistent with that defense
type of risk that insurance is used to manage
pure
situations or conditions that increase chance of loss
hazard
predictions in insurance are made by
the law of large numbers
an insurance company cedes some or all risk to another company
reinsurance
types of losses that cannot be statistically predicted
catastrophic loss
Method of risk management that an insurance policy provides.
transfer
when an insurance company takes on too many high risks
adverse selection
type of company that pays dividends to policyholders
mutual
Power received by producer when they sign a contract with a company
power of agency
Group of Agents working together under a corporate or trade selection
agency
company is domiciled in another state
foreign
temporary coverage until a policy is issued or denied
binder
voluntary abandonment of legal rights
waiver
Feature of insurance that means values given by the two parties are unequal.
aleatory
an offer an an acceptance in contract law means
agreement
the insured consideration is both premium and
application
Fundamental Legal Principles in Insurance
1) Indemnity
2) Insurable Interest
3) Subrogation
4) Utmost good faith