Insurance Final - Chapter 9 Fundamental Legal Principles

In property insurance, the insurable interest requirement must be met at the ____ __ _____.

time of loss.

• A warranty is a statement of

fact or a promise made by the insured, which is part of the insurance contract and must be true if the insurer is to be liable under the contract. Based on common law, any breach of the warranty, even if slight, allowed the insurer to deny payment of a claim. The harsh common law doctrine of a warranty, however, has been modified and softened by court decisions and statutes.

In life insurance, the insurable interest requirement must be met only at the ____ ___ ____ _____.

inception of the policy.

• In life insurance, the question of an insurable interest does not arise when a person purchases life insurance on his or her own life. If life insurance is purchased on the life of another person, there must be an...

insurable interest in that person's life. Close family ties, blood, marriage, or a pecuniary (financial) interest will satisfy the insurable interest requirement in life insurance.

• In property and casualty insurance, the ownership of property, potential legal liability, secured creditors, and contractual rights can support the _____ ______ _______.

insurable interest requirement

The principle of insurable interest means that

the insured must stand to lose financially if a loss occurs. All insurance contracts must be supported by an insurable interest to be legally enforceable

The principle of indemnity states that

the insurer should not pay more than the actual amount of the loss; in other words, the insured should not profit from a covered loss. This exists to reduce moral hazard.

Waiver is defined as

the voluntary relinquishment of a known legal right

• Four general rules of agency govern the actions of agents and their relationship to insureds:

1. There is no presumption of an agency relationship. 2. An agent must have the authority to represent the principal. 3. A principal is responsible for the actions of agents acting within the scope of their authority. 4. Limitations can be placed on the powers of agents.

• To have a valid insurance contract, four requirements must be met:

1. There must be an offer and acceptance. 2. Consideration must be exchanged. 3. The parties to the contract must be legally competent. 4. The contract must be for a legal purpose.

There are three purposes of the insurable interest requirement:

1. To prevent gambling 2. To reduce moral hazard 3. To measure the amount of loss in property insurance

There are several exceptions to the principle of indemnity

These exceptions include a valued policy, valued policy laws, replacement cost insurance, and life insurance.

Estoppel 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. Based on the legal doctrines of waiver and estoppel, an insurer may be required to pay a claim that it ordinarily would not have to pay.

If the insurer exercises its subrogation rights, the insured generally must

be fully restored before the insurer can retain any sums collected from the negligent third party. Also, the insured cannot do anything that might impair the insurer's subrogation rights However, the insurer can waive its subrogation rights in the contract either before or after the loss. Finally, subrogation does not apply to life insurance contracts and to most individual health insurance contracts.

A property insurance contract between the insured and insurer cannot be validly assigned to another party without the ___ _____.

insurer's consent. A life insurance policy is freely assignable without the insurer's consent. Finally, insurance is a contract of adhesion, which means the insured must accept the entire contract, with all of its terms and conditions; if there is an ambiguity in the contract, it will be construed against the insurer

• Insurance contracts have distinct _____ _________.

legal characteristics An insurance contract is an aleatory contract where the values exchanged may not be equal and depend on the occurrence of an uncertain event. An insurance contract is unilateral because only the insurer makes a legally enforceable promise. An insurance contract is conditional because the insurer's obligation to pay a claim depends on whether the insured or beneficiary has complied with all policy provisions.

The principle of utmost good faith means

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