Insurance Test 3

*Know how to compute an actual cash value problem *Page 167

*youre gonna know what they purchase it for, replacement cost, and depreciation for test You must only do the replacement cost - depreciation not what they actually paid for it

What are the characteristics of insurance contracts

-Aleatory -Unilateral -Conditional -Personal -Contract of adhesion

What are the purpose of a deductible is to

-Eliminate small claims that are expensive to handle and process -Reduce premiums paid b the insured -Redice moral hazard and attitudinal hazard

What are the three major types of insurance contracts

-Excluded Perils -Excluded Losses -Excluded Property

A contract is voidable if representations is

-Material -False -Relied on by the insurer

Declarations in property insurance contain:

-Name of the insured -Location of property -Period of protection -Amount of insurance -Premium and deductible information

What are the two basic forms of an insuring agreement in property insurance

-Named Perils Coverage -Open-perils or special coverage

What are the laws that govern the actions of agents and the relationships to insureds

-No presumption of an agency relationship -An agent must be authorized to represent the principal -A principal is responsible for the acts of agents acting within the scope of their authority -Limitations can be placed on the powers of agents

5: A drunk driver ran a red light and smashed into Kristen's car. The cost to repair the car is 8,000. She has collision insurance on her car with a 500 deductible a) Can Kristen collect from both the negligent driver's insurer and her own insurer

-No; Principle of subrogation -How much will insurer give her: 7,500 -Go after the negligent party for: 8,000 -Insurer then will cover her 500 deductible

What are the requirements of an insurance company

-Offer and acceptance of the terms of contract -Consideration- value that each party gives to the other -Competent parties with legal capacity to enter in a binding contract -Have legal purpose

How can an insurable interest be supported

-Ownership of property -Potential legal liability -Serving as a secured creditor -Contractual rights

What is the purposes of insurable interest

-Prevents gambling -Reduces moral hazard -Measure the amount of insured's loss

What are the three supported

-Representations -Concealment -Warranty

What are the purposes of subrogation

-To prevent the insured from collecting twice for the same loss -To hold the negligent person responsible for the loss -hold down insurance rates

What is the purpose of indemnity

-To prevent the insured from profiting from a loss -Reduce moral hazards

Methods in determining actual cash value

1) Replacement cost - depreciation 2) Fair market value 3) Broad evidence rule

What are the exceptions to the principles of indemnity

1) Valued policy 2)Valued policy law 3)Replacement cost insurance 4)Life insurance contract

2. A manufacturing firm incurred the following insured losses, in the order given, during the current policy year Loss Amount of loss A 2,500 B 3,500 C 10,000 How much would the company's insurer pay for each loss if the policy contained 1. 1000 straight deductible 2. 15,000 annual aggregate deductible

1. a) 1,500 (2,500-1000) b) 2,500 (3,500-1,000) C 9,000 (10,000- 1,000) 2. a) Get paid nothing (haven't reached 15,000) b) Get paid nothing (haven't reached 15,000) C)They will pay 1,000 (16,000 - 15,000)

4: Megan owns an antique table that has a current market value of 12,000. The table is specifically insured for 12,000 under a valued policy. The table is totally destroyed when a tornado touched down and damages Megan's home. At the time of loss, the table had an estimated market value of 10,000/ How much will Megan collect for the loss?

12,000 *She had it insured under a value policy

Which policy has the lowest deductible in an elimination (waiting) period

90 day deductible because it has a longer waiting period

A type of aggregate deductible that is found in basic medical expense and major medical insurance contracts

Calendar-year deductible

* A property insurance contract that encourages the insured to insure the property to a stated percentage of its insurable value

Coinsuranc clause

Clause requires the insured to pay a specified percentage of covered medical expense in excess of the deductible

Coinsurance clause in health insurance *Have to add back in deductible

**Pro-rate liability example Company a: 300,000 --------- = 60% of 100,000 loss 500,000 Company b. 100,000 --------- 500,000 = 20% of 100,000 loss Company c: 100,000 --------- = 20% of 100,000 loss 500,000

Company A = 60,000 Company B= 20,000 Company C= 20,000

*If you were to keep a certain statement to yourself without the insurance company asking this is an example of

Concealment

*______ is intentional failure of the applicants for insurance to reveal a material fact to the insurer

Concealment *Not representing anything (they don't ask)

When the policy owner must comply with all policy provisions to collect for a covered loss

Conditional

Provisions in the policy that qualify or place limitations on the insurer's promise to perform

Conditions

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

Contract of adhesion

Example 10.4 and 10.5 *Each pays equal no matter what amount for each round

Contribution by equal share *Should label this by company that pays the least amount of insurance to the most

Statements that provide information about the particular property or activity to be insured

Declarations

______ is usually the first page of the policy

Declarations

A provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable

Deductible

Insurance contracts typically contain a page or section of

Definitions

A stated period of time at the beginning of a loss during which no insurance benefits are paid

Elimination (waiting) period

_______ is a written provision that adds to, deletes from, or modifies the provisions in the original contract

Endorsement

______ occurs when a representation of fact made by one person to another person is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation

Estoppel

The _______ has certain additional rights and responsibilities that do not apply to other named insureds

First named insured

Page 191 600,000 ----------- * 1,000,000 800,000

Gets paid 750,000

Courts have ruled that any ambiguities or uncertainties in the contract are instructed against the ______

Insurer

______ summarizes the major promises of the insurer

Insuring agreement

Subrogation does not apply to __________ contracts

Life insurance

______ means that if the insurer knew the true facts, the policy would not have been issued or would have been issued on different terms

Material

*If you have high blood pressure and you answer no in the application this is an example of

Misrepresentation

Where only those perils specifically named in the policy are covered

Named Perils Coverage

The person or persons named in the declarations section of the policy

Named insured

Insurers can place limitations on the power of agents by adding a __________ to the application or policy

Non-waiver clause

When does an insurable interest in life insurance exist

Only at inception of the policy *Value of policy

Which insurance agreement covers more and costs more

Open-Perils

Where all losses are covered except those losses specifically excluded

Open-Perils (special coverages)

When property insurance policy cannot be validly assigned to another party without to insurer's consent

Personal

Under a _________ provision, the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted

Primary and excess insurance

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

Principle of insurable interest -car, home, life, parents, etc.

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

Principle of reasonable expectations

In _______ the insurer is entitled only to the amount it has paid under the policy

Principle of subrogation

When the insurer agrees to pay no more than the actual amount of the lose

Principles of indemnity

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

Principles of subrogation

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

Principles of utmost good faith

Each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property

Pro-rata liability

What is the purpose of coinsurance in health insurance

Reduce premiums and prevent over utilization of policy benefits

If policy conditions are not met, the insurer can

Refuse to pay the claim

Which will cost more in value replacement cost or actual cash value

Replacement cost

What do you pay more for replacement cost or actual cash value?

Replacement cost *Pay no depreciation

2: Ashley Purchased a dining room set for 5000 and insured the furniture on an actual cash value basis. Three years later, the set was destroyed in a fire. At the time of loss, the property had depreciated in value by 50%. The replacement cost of a new dining room set at the time of loss was 6000. Ignoring any deductible, how much will Ashley collect from her insurer

Replacement cost - Depreciation *6000 - 3000 = 3,000

3: Nicholas owns a laptop computer that was stolen. The laptop cost 1000 when it was purchased five years ago. A similar laptop computer today can be purchased for 500. Assuming that the laptop was 50% depreciated at the time the theft occurred, what its the actual cash value

Replacement cost - depreciation cost *250 *If they had replacement insurance how much would it cost = 500

There is no deduction for depreciation in determining the amount paid for a loss

Replacement cost insurance

Statements made by the applicant for insurance

Representations (if the insurance company asks and you lie)

_____ is a provision that amends or changes the original policy

Rider

The insured must pay a certain number of dollars of loss before the insurer is required to make a payment

Straight deductible

The insured cannot impair the insurer's _____________

Subrogation rights

Who is being restricted in the subrogation rights

Third parties

When only the insurer makes a legally enforceable promise

Unilateral

*Pays face amount of insurance if a total loss occurs

Valued policy

Life insurance or an antique from your grandfather is an example of

Valued policy

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

Valued policy law

Voluntary relinquishment of a known legal right

Waiver

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

Warranty

*When is a coinsurance clause required to be met

At the time of a loss

*When does an insurable interest in property insurance exist

At the time of the loss *Contracts

Application Questions 1: Jeff is a book dealer who purchased a building from richard. Jeff obtained a loan from the Gateway bank to purchase the building, which held a mortgage on the building. a) Do any of the following parties have an insurable interest in the building at the time of loss? 1) Jeff 2) Richard 3) Gateway Bank b) Richard told jeff he could save money by taking over Richard's insurance instead of purchasing a new policy. Can richard validly assign his existing property insurance policy to Jeff without notifying the insurer? C) Could Jeff's insurer deny cover for the fire loss

A) -Jeff: Yes, he stands to lose if a financial loss occurs -Richard: No, not his property -Gateway Bank: Yes, the loan B) No; Insurance is a personal contact C) Yes, material concealment D) Jeff cannot collect from the insurance company and the electric company

*What is the fundamental purpose of coinsurance

Achieve equity in rating

In property insurance, indemnification is based on the

Actual cash value of the property at time of loss

When values exchanged are not equal

Aleatory

*Coinsurance clause

Amount of insurance carried -------------------------------- x Loss Amount of insurance required

The question of insurable interest does not arise when

You purchase life insurance on your own life *because insurers assume that you don't want to kill yourself