Finance 350 Chapter 9

conditional contract

An insurance contract is a conditional contract. The insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions.

Legal Purpose

An insurance contract must be for a legal purpose; an insurance policy that promotes something illegal is contrary to the public interest and cannot be enforced.

In life insurance, the insurable interest must exist...

at the inception of the policy. It is not a contract of indemnity but a valued policy that is a stated sum upon the insured's death.

In property insurance, the insurable interest must exist...

at the time of the loss. 1) property insurance is mostly contact of indemnity. if insurable interest does not exist, the insured does not have any financial loss. indemnity would be violated if payments were made. 2) you may not have insurable interest in the property when contract is first written but may expect to have it in the future

To be legally enforceable, an insurance contract must meet four requirements:

offer and acceptance, exchange of considerations, competent parties and legal purpose.

unilateral contract

only one person makes a legally enforceable promise. (an insurance contract is a unilateral contract). Only the insurer makes a legally enforceable promise to pay a claim or provide other services to the insured.

Express authority

powers specifically conferred on the agent. normally stated in an agency agreement between the agent and the principal.

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. This is true in property insurance.

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.

Fair market value

the price a willing buyer would pay a willing seller in a free market.

Replacement cost insurance

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

subrogation purposes

1) Subrogation prevents the insured from collecting twice for the same loss, 2) used to hold the negligent person responsible for the loss, 3) helps to hold down insurance rates.

An agent's authority comes from three sources:

1) express authority, 2) implied authority, 3) apparent authority

Property and Casualty insurance that supports insurable interest

1) ownership of property, 2) potential legal liability, 3) secured creditors, 4) contractual right

The courts have used a number of things to determine actual cash value...

1) replacement cost less depreciation 2) fair market value 3) broad evidence rule

Law of Agency include

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) limitations can be placed on the powers of agents.

insurance contracts must be supported by an insurable interest for the following reasons..

1) to prevent gambling, 2) to reduce moral hazard, 3) to measure the amount of the insured's loss in property insurance

Two fundamental purposes of the principle of indemnity

1) to prevent the insured from profiting from a loss. 2) to reduce moral hazard

Exceptions to the principle of indemnity

1) valued policy, 2) valued policy laws, 3) replacement cost insurance, 4) life insurance

Valued Policy

A policy that pays the face amount of insurance if a total loss occurs.

Warranty

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

Legally competent

The parties must have legal capacity to enter into a binding contract.

agency agreement

contract between an insurance agent and an insurance company that describes the powers, rights and duties of the agent.

Concealment

intentional failure of the applicant for insurance to reveal a material fact to the insurer. Contract is voidable at insurer's option.

Aleatory Contract

is a contract where the values exchanged may not be equal but depend on a certain event. This is what insurance contracts are. (not commutative).

commutative contract

is one in which the values exchanged by both parties are theoretically equal. (not insurance, ex. real estate).

contract of adhesion

the insured must accept the entire contract, with all of its terms and conditions.

Principle of insurable interest

the insured must be in a position to lose financially if a covered loss occurs.

exchange of consideration

the insured's consideration is payment of the premium plus an agreement to abide by conditions specified in the policy. The insurer's consideration is the promise to do certain things as specified in the contract.

Principle of indemnity

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

estoppel

the loss of a legal defense because of previous actions that are now inconsistent with that defense.

Material

If the insurer knew the true facts, the policy would not have been issued or it would have been issued on different terms.

Valued Policy Laws

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.

conditional premium receipt

A receipt given to the applicant for life insurance; if the applicant is found insurable according to the insurer's underwriting standards, the life insurance becomes effective as of the date of the application, or in some premium receipts, the date of the application or the date of the medical exam, whichever is later.

Apparent Authority

A situation where a reasonable third party would understand that an agent had authority to act. This means a principal is bound by the agent's actions, even if the agent had no actual authority, whether express or implied.

Innocent misrepresentation

An unintentional misrepresentation. It can also make the contract voidable by the insurer if the insurer relied on the fact.

Exceptions to subrogations

Does not apply to life insurance contracts, the insurer cannot subrogate against its own insureds.

Representations

Statements made by the applicant for insurance. Insurance contract is voidable if the representation is 1) material, 2) false, and 3) relied on by the insurer

Implied authority

The authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement.

Waiver

The voluntary relinquishment of a known legal right. ex. missing information in an application but issuing a policy anyways.

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.

Binder

a temporary contract for insurance that can be either oral or written. Used in property and casualty insurance. The agent may be able to give a binder but in some cases they cannot without approval from the company.

actual cash value

replacement cost less depreciation

The principle of utmost good faith is supported by...

representations, concealment, and warranty

principle of reasonable expectations

stated that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions.

Subrogation

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance. Stated differently, the insurer is entitled to recover from a negligent third party any loss payments made to the insured.