General Insurance Concepts

ALEATORY

Outcome depends upon chance; the consideration exchanged need not be equal (e.g. the insured may pay years of premiums, but never have a claim)

INSURABLE RISK

PURE RISK; no gain is possible

TYPE OF RISK INSURANCE WILL NOT COVER

SPECULATIVE RISK

PRINCIPLE OF INDEMNITY

States that the purpose of insurance is to restore the insured financially; such policies will pay the amount of the claim or the policy limit, whichever is less (no profit is allowed)

OFFER

must be clearly communicated. Starts when the application and premium is made by the insured (C.L.O.A.C)

CATASTROPHIC PERILS

war, nuclear risk, floods...catastrophic perils are excluded from coverage

AUTHORITIES OF A PRODUCER (3)

1: express 2: implied 3: apparent

Agent/Producers Responsibilities to the Insurance Company (5)

1: loyalty; 2: duty to obey the company; 3: act with the degree of care a reasonable person would exercise under comparable circumstances 4: must account for all property or money belonging to the company that comes into his/her possession 5: must inform his company of all facts pertinent to the agency relationship so the company will be best protected

Open Peril/ All Risk Perils

All Perils (Causes of Loss) are covered except what is EXCLUDED (H03, DP3, Comprehensive)

WARRANTY

An absolute guarantee of truth; if written, such statements are usually required to be notarized

EXPRESS AUTHORITY

An explicit, definite/Written agreement; the authority the principal gives the producer as set forth in their contract (Between Insurer and Agent/Producer)

DOCTRINE OF UTMOST GOOD FAITH

Applies to all parties involved; means truth to the best of the client's knowledge

APPARENT AUTHORITY

Authority a producer seems to have because of certain actions taken on his part (Agent/Producer and Insured/Customer)

EXCESS AND SURPLUS LINES

Brokers who place very large or unusual risk with unauthorized carriers in other states or countries (e.g. Lloyd's of London)

INSURABLE RISKS (Predictable risk)

Calcuable, Large #'s, Uncertian, Economic Hardship; (C.L.U.E)

Peril

Cause of Loss (Fire, Lightning, Wind, etc)

DOMESTIC INSURER

Considered a domestic insurer when incorporated under the laws of the state in which it conducts business

SPECULATIVE RISK

Creates a risk situation and offers the opportunity for gain as well as loss; i.e. gambling; the type of risk that insurance will not cover

FRAUD

Deliberate attempt to deceive the producer or insurance company; fraud is hard to prove, and most insurance companies are reluctant to use it

CONCEALMENT

Deliberate omission of a material fact

TRANSFERRED RISK

Done in 2 ways: transfer of burden to negligent party (sue); transfer risk to insurance company

E&O INSURANCE

Errors and omission insurance covers negligence, error or omission by the insurer or the producer who is the insurer's rep; protect producers from financial losses if insureds sue to recover for their losses due to incorrect advice (error) or failure to inform them of an important issue (omission)

(BACK TO C.L.O.A.C) CONSIDERATION

Exchange of something of value between parties, need not be equal - premium for a promise to cover claims. (C.L.O.A.C)

FIDUCIARY DUTY

Fiduciary relationship develops when a person relies on, or places confidence, faith, or trust in another person's actions or advice

HAZARDS

Increases chance of loss

INSURABLE INTEREST

Insurable risk must involve the possibility of loss only (not gain), and the applicant must have a legitimate interest in the preservation of the property insured

FOREIGN INSURER

Insurer conducts business in a state where it is not resident, it is considered a foreign insurer

AUTHORIZED INSURERS

Insurer is authorized to transact insurance after being "admitted" into the state as a legal insurer, which comes only after being licensed by the state Dept of insurance

ALIEN INSURER

Insurer is incorporated in a country other than the US

LAW OF LARGE NUMBERS

Larger the number of separate risks of a like nature combined into one group, the more predictable the number of future losses of that group is (within a given time period)

WAIVER AND ESTOPPEL

Legal doctrine; relates directly to the responsibility of insurance producers/agents; waiver means giving up of a known right; means once a waiver of a known right has occurred, the party waiving those rights is stopped from asserting that right in the future

PROPERTY AND CASUALTY PRODUCERS

May bind or commit their companies by oral or written agreement

RESTORATION

May take form of payment, repair or replacement (Insurance companies choice)

UNILATERAL

Means only one party to the contract, the insurer, makes an enforceable promise to pay a covered claim if the premiun has been paid

IMPLIED AUTHORITY

Not expressly granted under an agency contract, but is the actual authority the producer has to transact the principal's business in accordance with general business practices (Between Insurer and Agent/Producer)

WHAT E&O INSURANCE COVER

Only losses due to negligence, error or omission; do not cover embezzlement of filing of false financial statements or bodily injury or property damage liability

DIRECT WRITING COMPANIES

Pay salaries to employees whos job is to sell their company's products; in this case, the insurance company owns the expirations and the producers' business

PRODUCER

Person authorized to act on behalf of another person, who is the principal; when a person is empowered to act as a producer for a principal, she is legally assumed to be the principal in matters covered by the grant of agency

RISK

Possibility (uncertainty) that a loss might occur; the reason people buy insurance

MORALE HAZARD

Presented by a careless client (Not maintaining roof or loose banister on stairway)

PHYSICAL HAZARD

Presented by a client with a dangerous occupation or hobby (Ice on the road)

MORAL HAZARD

Presented by a dishonest client (Dishonest person fraudulant;burned down own house)

FOUR WAYS TO MANAGE RISK (RRAT)

RETAIN; ; REDUCE;AVOID TRANSFER

LOSS

Reduction in the value of an asset

AGENCY

Relationship in which one person is authorized to represent and act for another person or for a corporation

EXCLUSIVE (CAPTIVE) PRODUCERS

Represent only one company and may be paid a salary or earn commissions; exclusive producers do not own policy expirations

PRINCIPLE OF INDEMNITY

Restores the insured person, in whole or in part, to the condition he/she enjoyed prior to the loss

INDEPENDENT INSURANCE PRODUCERS

Sell the insurance products of several companies and work for themselves or other producers; paid a commission for each sale and owns the expirations of the policies sold

INSURANCE

Social device for spreading chance of financial loss among a large number of people

Named Peril

Specific list of Perils (causes of loss); if not listed in insuring agreement as a cause of loss it is not covered- Insuring agreement.

DOCTRINE OF ADHESION

States if the insurance contract language is vague or unclear, any ambiguity will be construed in favor of the insured (this is the reason insurance companies do not want to go to court, because they often lose)

REPRESENTATIONS

Truth to the best of his/her knowledge

REINSURANCE

a form of insurance between insurers; occurs when an insurer agrees to accept all or a portion of a risk covered by another insurer

COMPETENT PARTIES

all parties to contract must be competent to contract, meaning they have to be of age, of sound mind, and not under the influence (c.L.O.A.C)

(C.l.O.A.c) ELEMENTS OF INSURANCE CONTRACT

essential elements of insurance policies (contracts): Consideration, LEGAL PURPOSE, Offer, Acceptance of the Offer, COMPETENT PARTIES

ACCEPTANCE

happens when the underwriter approves the application and issues the policy for delivery (C.L.O.A.C)

PURE RISK

the type of risk that insurers accept; a loss is possible, but no gain is possible

RETAINED RISK

when a person decides to assume financial responsibility for certain events Deductible is an example.