RI&INSUR Ch. 9 Legal Principles Test 1

When must insurable interest exist in property insurance?

Property insurance is contract of indemnity Insurable interest myst exist in property insurance at inception of policy and at the time of loss: ex: Silverstein Properties, LLC signed a long term lease with Port Authority for lease of World Trade Center property on 9-5-2001. Lease required that Silverstein provide insurance on the property

Utmost good faith: breach of warranty

Protective safeguards warranty -Ex: alarm system, security guard, sprinkler system -Breach of warranty myst increase the hazard -Breach or warranty must contribute to the loss -Ex: Acme Chemical warrants by a Protective Safeguards Endorsement that their building has a functioning and maintained sprinkler system. A major fire loss occurs while the sprinkler system is out of service.

Replacement cost: The roof of Taylor's home is damaged in a hail storm. The current cost to replace the roof is $10,000. At the time of the damage, the roof is 5 years old with an expected life of 20 years. What total amount would Taylor collect for the roof damage under homeowners policy after replacement is completed?

$10,000

Actual cash value: Nicholas owns a laptop that was stolen Original purchase price of the laptop was $2,000 Current replacement cost of the laptop is $1,800 The laptop is 2.5 years old with a five year life expectancy.

$900

When is property and liability policy effective?

*Binder* in property and liability insurance -Binder based on offer and acceptance -Temporary contract of insurance -Binder can be oral or written

When is life insurance policy effective?

*Conditional receipt* in life insurance -conditional receipt based on offer and acceptance -Application must be completed and written receipt provided -Premium deposit must be paid -life insurance becomes effective if applicant is deemed to be insurable after completing all underwriting requirements Ex: Dale Earnhardt Jr.

Principle of Indemnity

-A fundamental characteristic of insurance -Insured is restored to the same financial position -Insurance company pays only amount of the loss, so insured can not profit from the loss -Purpose is to reduce moral hazard -Example of pure indemnity (security or protection against a loss or other financial burden.) is Actual Cash value

When must insurable interest exist in life insurance?

-Life insurance is a valued policy -Insurable interest must exist in life insurance only at inception of policy, not at the time of death

Purposes of subrogation

-Prevents insured from collecting twice. Reinforces the principle of indemnity -Holds negligent person responsible -Holds down insurance rates Ex: Automobile accident, Fire loss to Rite Aid Drugs (electrical origin)

Indemnity: actual cash value

ACV=current replacement cost minus depreciation Example: theft of a TV -Current replacement cost is $800 (RC as of the date of the loss) -Assume four years old and 50% depreciation, based on current age and life expectancy -ACV is $800-400=$400

Exception to Indemnity: stated value

Agreed value (antiques, fine arts, jewelry, silver) Pays stated value in event of total loss Important to schedule valuable items using Personal Articles Floater under HO-stated value, open perils -appraisal will be required for scheduling

Exception to indemnity: replacement cost

Dwelling-Replacement cost under HO -No deduction for deprecation -Must insure home at 80-100% of RC value and must actually replace to qualify for RC coverage Personal Property-ACV under HO policy -Add personal property RC to convert to RC coverage

Utmost good faith: misrepresentation

False statement of material fact -Material means that policy would not have been issued or issued on different terms if accurate information provided -Material also means that the misrepresentation was relied on by the insurance company in making an underwriting decision

More subrogation rules

Insurance company cannot subrogate against its own insured Subrogation is not applicable in life and health insurance policies

What is subrogation?

Insurance company pays insured for damages to insured's property and then pursues collection against negligent third party

Utmost good faith

Insurance contract requires honesty -historical basis in ocean marine insurance Contract voidable at insurance company's option if: -Misrepresentation -Concealment -Breach of warranty

Subrogation rules

Insured can not impair subrogation rights of insurance company after loss. For example, if insured driver admits fault or attempts to settle at the scene, insurance company could deny recovery. However, permission is granted in the homeowners policy for insured to waive subrogation rights before loss. Why is this important?

Utmost Good faith: misrepresentation example

Jeff operates a book store. He added a Cafe in a portion of the building. In the application for insurance, he described the occupancy as book store only with no special hazards. A fire loss occurs as a result of a fire in the hood and duct system in the Cafe area.

Exceptions to Indemnity: Life insurance

Life insurance -Valued policy -Pays stated value to beneficiary in event of death

what creates insurable interest in P&C incurance

Ownership of property -owner has title to home, automobile -owns personal property Bailment -Bailee hold personal property of others for service or repair Secured creditor -Mortgage (home) -Loss payee (automobile)

Insurable interest: Jeff purchased a building from Richard in December 2012. Jeff obtained a loan from Gateway Bank to purchase the building, and Gateway Bank has a mortgage on the building. Which of these parties has no insurable interest in the building in 2013

Richard

waiver and estoppel

Waiver: occurs when insurance company fails to enforce a policy exclusion Estoppel: prohibits insurance company from denying a claim based on a policy exclusion if the exclusion has been previously waived by the insurance company

Insurable Interest

What is insurable interest? -Insured must suffer financially from a covered loss -Supports the concept of indemnity Purposes: -Precent gambling with hope for profit -Reduce moral hazard -Measures property loss

Utmost good faith: concealment

Withholding a material fact Intent to defraud Brenda applies for life insurance. She is HIV positive but she fails to disclose this condition in the application

What Creates Insurable Interest in Life Insurance?

Your own life Family relationship or marriage Business relationship -Ownership-partner, stockholder -Key employee

Reservation of rights (under waiver and estoppel)

letter is issued to policy holder by insurance company to reinforce policy conditions and exclusions and protect against waiver and estoppel. Insurance company reserves the right to investigate and deny claim in the future Ex: claim with potential exclusion or inadequate policy limits