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
