6' Legal Principles in Insurance Contracts

1
6. Legal Principles in Insurance Contracts

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

2
Overview

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

3
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

4
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

5
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?

6
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?

7
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?

8
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

9
Insurance as Contracts

• 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

Note Giving a quotation to a prospective insured
is deemed as mere solicitation or invitation to
make an offer.
10
Characteristics of Insurance Contracts

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

11
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 lt Claim paid by Insurer

12
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.