Risk Management - Chapter 9

Actual cash value supports the principle of indemnity because it is designed to prevent profiting from insurance.

How does the concept of actual cash value support the principle of indemnity?

Actual Cash Value

What is indemnification based on?

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.

Estoppel

A representation of fact made by one person to a second person that is reasonably relied upon by that second person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation. Based on the legal doctrine of __________, an insurer legally may be required to pay a claim that it ordinarily would not have to pay.

Warranty

A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects.

Misrepresentation

A statement that is material, false, and relied on by the insurer.

Material Misrepresentation

Allows the insurer to void the policy.

Waiver

Defined as the voluntary relinquishment of a known legal right. The insurer voluntarily __________ a legal right under the contract, and in so doing cannot later deny payment of a claim by the insured.

The normal rule for determining actual cash value is replacement cost less depreciation. However, some courts have ruled that fair market value should be used to determine the actual cash value. Finally some states use the broad evidence rule to determine the actual cash value.

How is the actual cash value calculated?

The contract is conditional.

In order to collect, a number of duties must be complied with, such as giving prompt notice of loss and submitting proof of loss.

Insurance is a contract of adhesion.

Insurance is not bargained. Rather, the policy is offered on a "take-it-or-leave-it" basis, and any ambiguity is construed against the insurer.

Broad Evidence Rule

Means that the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property.

Principle of Insurable Interest

Means that the insured must stand to lose financially if a loss occurs.

Replacement Cost Insurance (Policy)

Means there is no deduction for depreciation in determining the amount paid for a loss.

The insurance contract is unilateral.

Only the insurer makes a legally binding promise. Most ordinary contracts are bilateral, and either party may be sued for breach of contract.

Valued Policy

Pays the face amount of insurance in the event of a total loss.

Valued Policy Law

Requires payment of the face amount of insurance if a total loss to real property occurs from a peril specified in the law.

Agent

Someone who has the authority to act on behalf of a principal (the insurer).

Representations

Statements made by the applicant for insurance.

Principle of Indemnity

States that the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss.

Principle of Subrogation

Taking over another person's right to recover in a legal action against a negligent third party.

Concealment

The intentional failure of the applicant for insurance to reveal a material fact to the insurer.

The insurance contract is aleatory.

The values exchanged are not equal. If a loss occurs, the insured may recover an amount in excess of the premiums paid. In a commutative contract, theoretically, there is an equal exchange of values.

1. There is no presumption of agency. There must be evidence sufficient to establish that a person has authorized someone to act on his or her behalf. 2. The agent must have authority to bind the principal. There are three sources of such authority: (1) Expressed authority (2) Implied authority (3) Apparent authority 3. The principal is responsible for acts of an agent who is acting within the scope of his or her authority. Accordingly, the principal can be bound by contracts that the agent has entered into and is also liable for the agent's torts.

What are the 3 general rules of agency that govern the actions of agents, and their relationship to insureds?

1. Expressed authority 2. Implied authority 3. Apparent authority

What are the 3 sources of authority that enable an agent to bind the principal?

1. Valued Policy 2. Valued Policy Laws 3. Replacement Cost Insurance 4. Life Insurance

What are the 4 exceptions to the principle of indemnity?

1. There must be an offer and acceptance. 2. There must be consideration to support the contract. 3. There must be competent parties. 4. To be enforced, the contract must be for a lawful purpose.

What are the 4 requirements that must be met for a valid insurance contract?

1. Ownership of property 2. Potential Legal Liability 3. Serving as a Secured Creditor 4. Contractual Rights

What are the four items that can support insurable interest?

The legal effect of a material concealment is the same as a misrepresentation—the contract is voidable at the insurer's option.

What is the legal effect of a material concealment?

Insureds are indemnified when they are restored to approximately the same financial position they were in before the loss occurred.

When are insureds indemnified?

Valued policies are used to insure valuable property, such as antiques, fine arts, rare paintings, and family heirlooms. Because of the difficulty of determining the actual value of the property at the time of loss, the insured and insurer both agree on the value of the property when the policy is first issued.

Why is a valued policy used?

An insurable interest is required in every insurance contract to prevent gambling, to reduce moral hazard, and to measure the amount of the insured's loss in property insurance.

Why is an insurable interest required in every insurance contract?

It is used to support the principle of indemnity by preventing an insured from collecting twice, once from the insured and a second time from the negligent party.

Why is subrogation used?

A property insurance contract is personal.

__________ characteristics of the insured influence the insurer's willingness to issue a policy. Accordingly, these contracts can be validly assigned only with the consent of the insurer. A life insurance policy is not a __________ contract and can be freely assigned.