Ch. 9-10: Legal Principles of Insurance Contracts

coinsurance clause in property insurance

in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value. If the coinsurance requirement is not met at the time of loss, the insured must share in the loss as a coinsurer

property-liability contracts

ownership of property can support an insurable interest because owners of property will lose financially if their property is damaged or destroyed

name insured

person or party named on the declarations page of the policy

definitions

to defined clearly the meaning of key words or phrases so that coverage under the policy can be determined more easily (we, us, you, your)

excluded perils, losses, property

3 types of exclusions

miscellaneous provisions

In property and casualty insurance, miscellaneous provisions include cancellation, subrogation, requirements if a loss occurs, assignment of the policy, and other-insurance provisions. In life and health insurance, typical miscellaneous provisions include the grace period, reinstatement of a lapsed policy, and misstatement of age.

replacement cost minus depreciation (RCMD)

This rule has been used traditionally to determine the actual cash value of property in property insurance

additional insureds

a person or party who is added to the named insured's policy by an endorsement

valued policy

a policy that pays the face amount of insurance if a total loss occurs (used to insure antiques, fine arts, rare paintings)

deductible

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

rider

a provision that amends or changes the original policy

aleatory contract

contract where the values exchanged may not be equal but depend on a uncertain event (Jessica pays a premium for $200,000 homeowners policy, if the home were destroyed by fire then she would collect an amount that great exceeds the premium paid. On the other hand, a homeowner may faithfully pay premiums for many years and never have a loss)

first name insured

first name that appears on the declarations page of the policy as an insured

pro rata liability

generic term for a provision that applies when two or more policies of the same type cover the same insurable interest in the property (basic purpose if to preserve the principle of indemnity and to prevent profiling from insurance)

conditions

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

warranty

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

representations

statements made by the applicant for insurance (if you apply for life insurance, you may be asked questions concerning your age, weight, height, occupation...)

declarations

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

insurable interests

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

indemnity

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

conditional contract

the insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions

life insurance law

the law considers the insurable interest requirement to be met whenever a person voluntarily purchases life insurance on his or her life

fair market value

the price a willing buyer would pay a willing seller in a free market; the fair market value of a building may be below its actual cash value based on replacement less depreciation

others insureds

• persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy

excluded losses

certain types of losses may be excluded

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

3 purposed of insurable interest

offer and acceptance, consideration, competent parties, legal purpose

4 requirements of insurance contracts

coinsurance clause in health insurance

a provision that required the insured to pay a specified percentage of covered medical expenses in excess of the deductible

endorsement

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

legal purpose

an insurance contract that encourages or promotes something illegal or immoral is contrary to the public interest and cannot be enforced

primary and excess insurance

another type of other-insurance provision; the primary insure pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted

contribution by equal shares

any type of other-insurance provision that may appear in some liability insurance contracts. Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy

values policy laws

law that exists in some states the 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

subrogation

means 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

unilateral contract

means that only one party makes a legally enforceable promise (after the first premium is paid, and the insurance is in force, the insured cannot be legally forced to pay the premium or to comply with the policy provisions; although the insured must continue to pay the premiums to receive payment for a loss, he or she cannot be legally forced to do so)

broad evidence rule (BER)

means the the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property

replacement cost insurance

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

life insurance

not a contract of indemnity but is a valued policy that pays a stated amount of the beneficiary at the time of the insured's death

insuring agreement

summarizes the major promises of the insurer

actual cash value

supports the principal of indemnity; in property insurance, the basic method for indemnifying the insured is based on the actual cash value of the damaged proprety at the time of loss

concealment

supports the principle of utmost good faith, intentional failure of the applicant for insurance to reveal a material fact to the insurer

utmost good faith

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

offer and acceptance

the applicant for insurance makes the offer, and the company accepts or rejects the offer

excluded perils

the contract may exclude certain perils, or causes of loss (earth movement, nuclear radiation)

excluded property

the contract may exclude or place limitations on the coverage of certain property

consideration

the value that each party gives to the other (payment of the premium or promise to pay the premium)

competent parties

this means that parties must have legal capacity to enter into a binding contract