Risk management chapter 9

Law of agency

Imporantent rules of law govern the actions of agents and their relationship toward insureds

Principle of indemnity

States that the insurer agrees to pay no more that the actual amount of the loss; or the insurer should not profit from a loss -Purpose of indemnity: prevent insured from profiting from a loss and to reduce moral hazard.

Fair Market Value

The price a willing buyer would pay a willing seller in a free market. -The fair market value may be below the actual cash value due to several factors: poor location, deteriorating neighborhood, or economic obsolescence of the building.

Principle responsible for acts of agents

The principle is responsible for all acts of agents when they are acting within the scope of their authority.

Exception #3 Life insurance

a valued policy that pays a stated sum to the beneficiary upon the insured's death.

Apparent authority

can bind actions between third parties.

Estoppel

if one person makes a statement of fact to another they can't deny that they ever said it.

Unilateral contract

means that one party makes a legally enforceable promise.

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. -factors include replacement cost less depreciation, fair market value, present value of expected income from the property, opinions of appraisers, and other factors.

Express authority

refers to how specifically conferred on the agent -usually stated in the agency agreement.

The Principle of Insurable Interest

states that the insured must be in a position to lose financially if a covered loss occurs. EX: you have an insurable interest in your car because if it is damaged you will lose financially. -Contracts must be supported by insurable interest.

offer and acceptance in life insurance

- Agent does not have power to bind. -always in writing and the application must be approved by the insurer before the life insurance is in force. - Usual procedure is: applicant fills out application and pays the first premium. A "condition premium receipt" is then given to the applicant. If the applicant is found insurable according to the underwriters standards, the life insurance becomes effective as of the date of the application.

Distinct legal characteristics of insurance contracts.

-Aleatory Contract -unilateral contract -conditional contract -personal contract -contract of adhesion

When must insurable interest exist?

-Property Insurance: Insurable interest must exist at the time of the loss. Ex: if mark sells his house to susan and a fire occurs before the insurance is cancelled, neither person can collect bc mark has no insurable interest. -Life insurance: insurable interest requirement must be met only at the time of the inception of the policy, not at the time of the death.

Purpose of Subrogation

-prevents the insured from collecting twice for the same loss. -Those who caused the loss are held responsible -Helps reduce insurance premiums.

legal doctrine of upmost faith #1 Representations

-statements made by the applicant for insurance. Ex: if you're applying for life insurance you may be asked questions concerning your age, weight, height, state of health. - the legal contract is voidable if the person being insured commits either; material, false, and relied on by the insurer.

Waiver

-voluntary relinquishment of a legal right. Insurer cant wait a fee and then later say they didnt waive it.

Principle of utmost good faith

-what an insurance contract is based on -a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.

Requirements of an insurance contract

1) offer and acceptance 2)Consideration 3)competent parties 4)legal purpose

Exception #3 Replacement cost insurance

There is no deduction for physical depreciation in determining the amount paid for a loss. Ex: if your roof is destroyed in a tornado you would receive the full amount to replace the roof.

Subrogation

the insurer is entitled to recover from a negligent third party any loss payments made to the insured.

Consideration of an insurance contract

the value that each party gives to the other. -the insureds consideration is payment of the premium (or promise to pay) plus an agreement to abide by the conditions specified in the policy.

Authority to represent the principle

An agents power comes from these three sources

pecuniary interest

Ex: a corporation buying life insurance for a salesperson because the firms profit may decline.

No presumption of an Agency relationship

-There is no presumption that one person legally can act as an agent. - They must have a business card, rate data, and application blanks supplied by the insurer.

Reasons contracts must be supported by insurable interest.

-To prevent Gambling -Reduce moral hazard -To measure the amount of the insured's loss in property insurance

legal doctrine of upmost faith #3 Warranty

-a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects. - any breach of the warranty can allow the insurer to deny the payment of the claim. 2 types of warranties 1) promissory: condition to continue throughout contract period 2) Affirmative: exists at contracts inception; promises nothing about the future.

Offer and acceptance in property and casualty insurance.

-applicant for insurance makes and offer, and a company accepts or rejects. - Property and Casualty insurance: offer and acceptance can be oral or written, but most are written. The applicant fills our the application and pays the first premium or promises to pay the first premium. The agent then accept the offer on behalf of the insurance company. A binder may be used as a temporary contract for insurance and can be written or oral. This makes the insurance policy effective immediately. This is typical in home owner insurance and auto insurance. In some cases the agent isn't authorized to bind and the application is sent to the company for review.

Legal purpose of an insurance contract

-contract must be for a legal purpose -insurance contracts that encourages illegal or immoral contrary can not be enforced.

personal contract

-means the contract is between the insured and the insurer. -for property insurance you can not sell property and expect for it to still be insured by the insurance company.

contract of adhesion

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

competent parties in insurance contract

-parties must have legal capacity to enter into a binding contract. Reasons why not competent: insane persons, intoxicated persons, corporations that act outside the scope of their authority. -minors usually lack full legal capacity. -insurers must be licensed in the state and must sell within the scope of its charter.

Elements of upmost good faith

1)Representations 2) concealment 3) Warranty

Exception #1 valued policy

A policy that pays the face amount of insurance if a total loss occurs. -Usually used to insure antiques, fine arts, rare painting, and family heirlooms. -insurer and insured both agree on the value of the property when the policy is first issued.

Aleatory contract

a contract where the values exchanged may not be equal but depend on an uncertain event. You may pay a high premium on house insurance but if your house does burn down you are rewarded the full amount of the house.

Exception #2 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 the peril specified in the law. -prevents possible moral hazard, but examination of the property by the insurer is crucial to prevent fraud.

material

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

Limitations on the powers of agents

insurers can place limitations on the powers of agents. -Done by a nonwaiver clause which typically states that only certain representatives can extend the time to pay premiums.

legal doctrine of upmost faith #2 concealment

is intentional failure of the applicant for insurance to reveal a material fact to the insurer. -the contract is voidable at the insurers option. -the insurer must prove two things about the insured fraud 1)The concealed fact was known by the insured to be material. 2)The insured intended to defraud the insurer

implied authority

refers to the authority of the agent to perform all incidental acts necessary to fulfull the purpose of an agency agreement.

conditional contract

the insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all the policy conditions. -in order to collect for a loss the insured must follow the conditions.

Exception to indemnity

1)valued policy 2)valued policy laws 3)replacement cost insurance 4)Life insurance

Replacement Cost less depreciation

ACV is defined as replacement cost minus depreciation. -traditionally used in property insurance Replacement cost- depreciation = Actual cash value

Actual Cash Value

The actual cash value of the property at the time of the incident. -Ways to determine actual cash value 1)Replacement cost less depreciation 2) Fair market Value 3)Broad Evidence Rule