Risk Management ch. 8-10

competent parties

the parties must have legal capacity to enter into a binding contract

definitions

typically contain a page or section of definitions. Key words or phrases have quotation marks around them.

concealment

(or nondisclosure) intentional failure of the applicant for insurance to reveal a material fact to the insurer. The legal effect is the same as misrepresentation- contract is voidable. In order to deny the claim, the insurer must prove that the concealed fact was known by the insured to be material and the insured intended to defraud the insurer.

principle of subrogation

(strongly supports the principle of indemnity) 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.

actual cash value methods the courts have used to determine it

(supports the principle of indemnity) In property insurance, the basic method for indemnifying the insured is based on the actual cash value of the damaged property at the time of the loss. 1. replacement cost less depreciation 2. fair market value 3. broad evidence rule

arguments for federal/national regulation

-Because of the recent collapse of the financial services industry, especially commercial banks during the severe 2007-2009 economic downswing, critics claim federal regulation would be superior to states serving as the primary supervisory body -uniform state laws and regulations -more effective negotiations of international insurance agreements -more effective treatment of systemic risk (the collapse of an entire system due to the failure of a single entity/entities that can result in the breakdown of the entire financial system) -Greater efficiency of insurers

When an insurable interest must exist in property insurance vs in life insurance

-In property insurance: at the time of the loss. Most property contracts are contracts of indemnity. If an insurable interest does not exist at the time of loss, the insured world not incur any financial loss. Hence the principle of indemnity would be violated if payment were made. Also, you may not have an insurable interest in the property when the contract is first written buy may expect to have an insurable interest in the future, a the time of possible loss. -in life insurance: the insurable interest requirement must be met only at the inception of the policy, not at the time of death. Life insurance is not a contract of indemnity but is a valued policy that pays a stated sum upon the insured's death. Because the beneficiary has only a legal claim to receive the policy proceeds, the beneficiary does not have to show that a financial loss has been incurred by the insured's death.

Agent principal

-Insurance contracts normally are sold by an agent who represents the principal (the insurer). -An agent is someone who has the authority to act on behalf of someone else -The principal (insurer) is the party for whom action is to be taken.

endorsements and riders

-The terms endorsements and riders are often used interchangeably and mean the same thing. In PNC insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contract. In life and health insurance, a rider is a provision that amends or changes the original policy. -Numerous riders can be added that increase or decrease benefits, waive a condition or coverage present in the original policy, or amend the basic policy. -An endorsement attached to a policy generally takes precedence over any conflicting terms in the policy. Many policies have endorsement that amend the policy to conform to a given state law.

Definition of "Insured"

-and insurance contract must identify the person or parties who are insured under the policy. The words "you" and "your" appear in the policies and refer to the named insured shown in the declarations.

coinsurance percentage clause the purpose of coinsurance in health insurance

-coinsurance percentage clause: a provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible. Most insurances require the insured pay 20-30 percent of covered medical expenses in excess of the deductible up to a maximum annual limit. -the purpose of coinsurance in health insurance 1. to reduce premiums 2. to prevent over utilization of policy benefits

exceptions to the principle of subrogation

-does not apply to life insurance contracts because life insurance is a valued policy and not a contract of indemnity. Subrogation only has relevance to contracts of indemnity. -the insurer cannot subrogate against its own insureds. If the insurer could recover a loss payment for a covered loss from an insured, the basic purpose of purchasing the insurance would be defeated.

differences between insurable interest in property and casualty insurance and in life insurance: -what are the three insurable interest in property and casualty insurance? -How much life insurance can you purchase on your own life? -What must you have to purchase a life insurance policy on another person? -what is pecuniary interest?

-in property and casualty Insurance: 1.) ownership of property can support an insurable interest because owners of property will lose financially it their property is damaged or destroyed. 2.) Potential legal liability can support an insurable interest. Secured creditors have an insurable interest as well (such as commercial banks or mortgage companies that property serves as collateral to). 3.) A contractual right can also support an insurable interest (such as a firm that contracts to purchase goods abroad on the condition that they arrive safely and loses profits if they don't arrive) -life insurance: The question of an insurable interest doesn't arise when you purchase life insurance on your own life, thus you can purchase as much life insurance as you can afford and the insurer's underwriting rules will maximally let someone do on any single life. You can also name anyone as beneficiary, and they are not required to have any insurable interest. You must have insurable interest if you purchase a life insurance policy on another person, such as close family ties or marriage. -pecuniary (financial) interest: if this exists the insurable interest requirement in life insurance to purchase life insurance on another person (that is not of close family ties or marriage) is met. Example: one business partner can insure the life of the other business partner and use the life insurance proceeds to purchase the deceased partner's interest if he/she dies.

disadvantages of existing state regulation

-inadequate protection of consumers -improvements needed in handling complaints -inadequate market conduct examinations -insurance availability -regulators overly responsive to the insurance industry

coinsurance problems

-inflation can result in a serious coinsurance penalty if the amount of insurance is not periodically increased for inflation. The coinsurance clause should be present to enforce the periodical evaluation of whether the coinsurance requirement is being met and to ensure that the insured won't be penalized by inflations increase in the replacement cost of their property -the insured may incur a coinsurance penalty if property values fluctuate widely during policy period. One solution to this is agreed value coverage, where the insurer agrees in advance that the amount of insurance carried meets the coinsurance requirements. Another solution is reporting form, where property values are periodically reported to the insurer.

Actual cash value rule is used in property insurance, other methods are used in other types of insurance such as: 1. liability 2. business income 3. life

-liability insurance: the insurer pays up to the policy limit the amount of damages that the insured is legally obligated to pay because of bodily injury or property damage to another -business income insurance: the amount paid is eerily based on the loss of profits + continuing expenses from business shutting down because of covered peril -life insurance: the amount paid when the insured dies is generally the face amount of the policy

advantages of existing state regulation

-quicker response to local insurance problems -increased costs from dual regulate -poor quality of federal regulation -promotion of uniform laws by NAIC -greater opportunity for innovation -unknown consequences of federal regulation

Law of Agency

Important rules of law govern the actions of agents and their relationship to insureds, including: 1. there is no presumption of an agency relationship 2. authority to represent the principal 3. The principal is responsible for the acts of agents 4. limitations on the power of agents

miscellaneous provisions

In PNC insurance, miscellaneous provisions include cancellation, subrogation, requirements if a loss occurs, assignment of the policy, and others. In life and heath- grace period, reinstatement of a lapsed policy, and misstatement of age.

deductibles commonly found in insurance contracts: -straight deductible -aggregate deductible -calendar year deductible -elimination (waiting) period

-straight deductible: the insured must pay a certain number of dollars of loss before the insurer is required to make a payment -aggregate deductible: all losses that occur during a specified time period, usually a policy year, are accumulated to satisfy the deductible amount. Once the deductible is satisfied, the insurer pays all future losses in full. Deductibles in health insurance can be stated in terms of dollars or times: -calendar year deductible: a type of aggregate deductible that is found in individual and group medical expense policies. Eligible medical expenses are accumulated during the calendar year, and once they exceed the deductible amount, the insurer must pay the benefits promised under the contract. Once they have paid it all they are not charged for any more. -elimination (waiting) period: a stated period of time at the beginning of a loss during which no insurance benefits are paid. It is appropriate for a single loss that occurs over some time period, such as the loss of work earnings. They are commonly used in liability-income contracts.

solvency regulation

In addition to minimum capital and surplus requirements, insurers are subject to other financial regulations designed to maintain solvency. 1. Balance Sheet 2. Risk-based capital (RBC) 3. Investments 4. Reports/Examinations 5. Liquidation proceedings

2 important points when applying the coinsurance formula

-the amount paid can never exceed the amount of the actual loss even though the coinsurance formula produces such a result. This could happen if the amount of insurance carried is greater than the minimum required amount of insurance -the maximum amount paid for any loss is limited to the face amount of insurance -the fundamental purpose of coinsurance is to achieve equity in rating. Most property insurance losses are partial rather than total losses. But if everyone insures only for the partial loss rather than the total loss, the premium rate for every 100$ of insurance would be higher -In property insurance, a coinsurance rate of 80% is typically used. However, the premium rate decreases as the coinsurance percentage increases.

4 main reasons for regulation of insurance

1. Maintain insurer solvency: to ensure that the insured's covered debts will be paid as specified. The financial strength of the insurer must be carefully monitored because the risk of complete financial ruin due to a failed insurer creates greater economic uncertainty for an insured. Also, when insurers become insolvent, certain social and economic costs are incurred. 2.) lack of transparency: regulation is necessary because insurance contracts are complex and technical and customers should understand what they mean and are signing up for. Without good information, consumers cannot select the best insurance product out there. Protection is needed to protect consumers against unethical agents. 3.) ensure reasonable rates: rates should not be so high that consumers are being charged excessive prices. Nor should they be so low that the solvency of insurers is threatened. 4.)make insurance available

3 purposes principle of subrogation

1. Subrogation prevents the insured from collecting twice for the same loss. In the absence of subrogation, the insured could collect from his/her insurer and from the person who caused the loss. 2. Subrogation is used to hold the negligent person responsible for the loss. By exercising its subrogation rights, the insurer can collect from the negligent person who caused the loss. 3. Subrogation helps to hold down insurance rates. Subrogation recoveries are reflected in the rate making process, which tends to hold rates below where they would be in the absence of subrogation.

Insurance contracts must be supported by an insurable interest for the following 3 reasons:

1. To prevent gambling: If an insurable interest were not required, the contract would be a gambling contract and would be against the public interest 2. To reduce moral hazard: If it were not required, a dishonest person could purchase property insurance on someone else's property and then deliberately cause a loss to receive the proceeds. But if the insured stands to lose financially, nothing is gained by causing the loss. 3. To measure the amount of the insured's loss in property insurance: Most property insurance contracts are contracts of indemnity and measure of recovery is the insurable interest of the insured. If the loss payment cannot exceed the amount of one's insurable interest, the principle of indemnity is supported.

3rd financial Solvency regulation: Investments

Insurance company investments are regulated with respect to types of investments, quality, and percentage of total assets or surplus that can be invested in different investments. The purpose of these regulations is to prevent insurers from making unsound investments that could threaten the company's solvency and harm policyholders.

sales practices and consumer protection

1. licensing of intermediaries: all states require that agents and brokers be licensed. They must pass one or more written exams to ensure that agent have the knowledge of state insurance laws and the contracts they intend to sell. The state has the right to revoke their licenses. All states have legislation requiring the continuing education of agents to ensure that their knowledge and skills are up to date. 2. unfair claims practices statutes: Insurance laws prohibit a wide variety of unfair trade practices, including misrepresentation, twisting, rebating, deceptive or false advertising, inequitable claim settlement, and unfair discrimination. State insurance commissioner can legally stop ensurers form engaging in these practices by fining them or suspending/revoking their license. 3. complaints: State insurance departments typically have a complaint division or department for hanging consumer complaints. The department will investigate and try to obtain a response from the alleged offending agent or insurer. Most consumer complaints involve the failure to pay a claim or dispute the amount paid.

4 basic requirements of a legally enforceable insurance contract

1. offer and acceptance 2. exchange of consideration 3. competent parties 4. legal purpose

rate regulation

1. rationale: rate regulation is an important regulatory area. Property and casualty insurance rates must be adequate, not excessive or unfairly discriminatory. It is far from uniform and some states have more than one rating law. types of rating laws a. prior approval b. file-and-use c. flex rating d. state-made rates e. open competition

other important other-insurance provisions in property and liability insurance include:

1. the pro rata liability: a provision that applied when 2 or more policies of the same type cover the same insurable interest in the property. 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 2. contribution by equal shares: provision that may appear in some liability insurance contracts. Each insurer shared equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid. 3. primary and excess insurance: provision where the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted.

The main purposes of Deductibles

1. to eliminate small claims that are expensive to handle and process. 2. Deductibles are also used to reduce premiums paid by the insured: depending on the insured's income level and ability to pay, higher deductibles are generally preferred rather than smaller ones. This concept of using insurance premiums to pay for large losses rather than small ones is often called the large-loss principle. Its objective is to cover large losses that can financially ruin and individual and exclude small losses that can be budgeted out of the person's personal income. 3. Deductibles are used to reduce attitudinal (morale) hazard. They encourage people to be more careful with respect to the protection of their property and prevention of a loss because the insured must bear a part of the loss.

2 fundamental purposes of the principle of indemnity

1.) to prevent to insured from profiting from a loss 2.) to reduce moral hazard. If dishonest policyholders could profit from a loss, they might deliberately cause losses with the intention of collecting the insurance. If the loss payment does not exceed the actual amount of the loss, the temptation to be dishonest is reduced.

state-made-rates

A few states prescribed these that apply to a small number of specialized lines. They determine the rates, forms, and classifications that insurers must follow. Insurers can deviate from these with state regulator approval.

the coinsurance formula

Amount of insurance carried x loss = recovery Amount of insurance required

forms regulation

1. Need: Because insurance contracts are technical and complex. The state insurance commissioner has the authority to approve or disapprove new policy forms before the contracts are sold to the public in order to prevent misleading and deceptive provisions. 2. Role of Rating Organizations (ISO) Insurance Services Office: the provide forms that can save insurers time and help them avoid risk with policy writing language. Many ISO policy forms serve as the industry standard.

Insurance contracts can be generally divided into the following parts

1. declarations 2. definitions 3. insuring agreement 4. exclusions 5. conditions 6. miscellaneous provisions

1st financial solvency regulation: Balance Sheet admitted vs non-admitted assets assets liabilities surplus

Insurers are required by law to file certain financial statements in an annual report to regulators based on the accounting principles (SAP) statutory acct. principles. Based on SAP, only admitted assets can be shown on the insurer's balance sheet, which are assets that determine its financial condition. all other asset are non- admitted assets. -admitted assets: cash bonds, common and preferred stocks, mortgages, real estate, other legal investments -non-admitted assets: premiums overdue by 90 or more days, office furniture and equipment, and certain investments or amounts that exceed statutory limits for certain types of securities. These assets are excluded because their liquidity is uncertain. a. assets: an insurer must have sufficient assets to offset its liabilities b. liabilities (resources): reserves are liability items on an insurer's balance sheet and reflect obligations that must be met in the future c. surplus: policyholders' surplus is the difference between an insurer's assets and liabilities. On the balance sheet it represents the insurer's net worth.

Rule 4 of the law of agency: limitations on the power of agents

Insurers can place limitations on the power of agents. They are effective when they are properly communicated to the policyholder and do not conflict with the law. This is done by a non waiver clause in the application or policy, which typically states that only certain representatives of the company, such as executive officers, can extend the time to pay premiums or to change the terms of the policy.

taxation of insurers

Insurers pay numerous local, state, and federal taxes. Such as federal income tax and state premium tax (on gross premiums received by policy holders). Most states also have retaliatory tax laws that affect premium taxes and other taxes to protect domestic insurers in the state from excessive taxation by other stated where they do business.

The meaning of "insured" can be grouped into what categories:

Named insured: the person or party names on the declarations page of the policy. "you" or "your" First name insured: When more than one person or party is named on the declarations page the order of names is important. The first name insured is the first name that appears on the declarations page of the policy as an insured. The first name insured has additional rights and responsibilities that do not apply to the others such as the right to a premium refund, but they are also responsible for the payment of premiums in the first place other insureds: persons or parties who are insured under the name insured's policy. Example: their children additional insureds : a person or party who is added to the named insured's policy by an endorsement. The additional insured acquires coverage under the named insured's policy.

The doctrines of waiver and estoppel relevance

The doctrines of waiver and estoppel have direct relevance to the law of agency and to the powers of insurance agents. The insurer may be required to pay a claim that it ordinarily wouldn't have to

exclusions

Three major types: Excluded perils Excluded losses Excluded property -Reasons exclusions are necessary: 1. certain perils are considered uninsurable by commercial insurers 2. presence of extraordinary hazards (a condition that increases the chance or severity of loss) 3. coverage can be better provided by other contracts: used to avoid duplicating coverage and to limit coverage the policy best designed to provide for it 4. moral hazard or difficulty in determining and measuring the amount of loss 5. attitudinal hazard problems: (morale hazard) Attitudinal hazard is carelessness or indifference to a loss because of the presence of insurance, which increases the frequency or severity of loss. This forces individuals to bear certain losses that result from their own carelessness. 6. coverage is not needed by the typical insured. (example: private planes in homeowners policies)

exceptions to the principle of indemnity: valued policy

Valued policy: a policy that pays the face amount of insurance if a total loss occurs (ex: rare paintings, family heirlooms). Because of difficulty in determining the actual value of the property at the time of loss, the insured and insurer both agree on the value of the property when the policy is first issued.

aleatory contract

a contract where the values exchanged may not be equal but depend on an uncertain event. Depending on chance, one party may receive a value out of proportion to the value that is paid. (ex: someone paying 800$ for a homeowners policy for there 200k house and soon after it burns down vs someone who pays for years and have no home damage ever)

coinsurance

a contractual provision that often appears in property insurance contracts, especially commercial.

formation and licensing of insurers: how is a new insurer formed? What are the 3 requirements

a new insurer is typically formed by incorporation. The insurer receives a certificate of formation from the state, and then they must be licensed to do business. 1. capital requirements: The licensing requirements require that if the insurer is a capital stock insurer, it must meet certain minimum capital and surplus requirements, which vary state by state. A new mutual insurer must meet a minimum surplus requirement (rather than capital and surplus, as there are no stockholders). 2. personnel 3. licensing status a. admitted -domestic: an insurer domiciled in the state; it must be licensed in the state as well as in other states where is does business -foreign: out-of-state insurer that is chartered by another state; must be licensed to do business in the state -alien: insurer chartered by a foreign country that must meet certain licensing requirements to operate in the state b. non-admitted

deductible

a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable. It is used in all insurance contracts, except for life insurance because the insured's death is always a total loss, and personal liability insurance because the insurer must provide a legal defense. They want to be involved from the first dollar of the loss so as to minimize its ultimate liability for a claim.

warranty

a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects. Based on common law, in its strictest form, warranty is a harsh legal doctrine. Any breech of the warranty, even if minor or not material, allowed the insurer to deny payment of a claim. Because strict applications of the warranty doctrine harmed many insureds, the courts has softened and modified the harsh common law doctrine warranty over time such as: -statements made by applicants for insurance are considered to be representations and not warranties. Insurers cannot deny liability for a claim if misrepresentation is not material -most courts will interpret a breach of warranty liberally in those cases where a minor breach affects the risk only temporarily or insignificantly -statutes have been passed that allow the insured to recover for a loss unless the breach of warranty actually contributed to the loss.

replacement cost less depreciation

actual cash value= replacement cost - depreciation. Replacement cost is the current cost of restoring the damaged property with new materials of like kind and quality. Depreciation is a deduction for physical wear and tear, age, and economic obsolescence.

3. state insurance departments

all states have a separate insurance department or bureau. An insurance commissioner who is elected or appointed by the governor, is responsible for administering state insurance laws. They also have the power to hold hearings, issue cease-and-desist orders, and revoke or suspend and insurer's license to do business

1. legislation

all states have insurance laws that regulate the operations of insurers. these laws regulate: 1. formations and licensing of insurers 2. licensing of agents and brokers 3. financial requirements for maintaining solvency 4. rates and forms 5. sales and claim practices 6. Rehabilitation/liquidation of insurers

open competition

allows each property/liability insurer to choose between using rates set by a bureau or its own rates. Experts believe that competition would result in either unfairly high rates or unreasonably low rates that would lead to mass insolvencies.

Rule 2 of the law of agency: Authority to represent the principal types of authority: express implied apparent

an agent must be authorized to represent the principal. Its authoring comes from three sources. express authority: refers to powers specifically conferred on the agent as stated in the agency agreement, which can also withhold certain powers. implied authority: the authority of the agent to to perform all incidental acts necessary to fulfill the purpose of the agency agreement apparent authority: If an agent acts with apparent authority to do certain things, and a third party is led to believe that the agent is acting within the scope of reasonable and appropriate authority, the principal can be bound by the agent's actions. Third parties have to show only that they have exercised due diligence in determining the agent's authority based on the agent's actual authority or conduct of the principal.

principle of utmost good faith what 3 things is it supported by?

an insurance contract is based upon this. A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts. It is supported by 3 important legal doctrines: representations, concealment, and warranty

legal purpose

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

4th financial Solvency regulation: Reports/Examinations

each insurer must file an annual report (detailed financial information with respect to assets, liabilities, reserves, investments, claim payments, risk-based capital, etc.) with the state insurance department in states where it does business. Insurers are also periodically examined by the states. Domestic insurers are typically examined 1 or more times every 3-5 years by state insurance department, but can be examined at any time when considered necessary. Out-of-state insurers are also periodically examined.

areas of regulation

formation and licensing of insurers solvency regulation rate regulation forms regulation sales practices and consumer protection taxation of insurers

5th financial Solvency regulation: liquidation proceedings

if an insurer is financially impaired, the state insurance department assumes control of the company. With proper management the insurer may be rehabilitated or merged with another insurer. If not, it is liquidated according to the state's insurance code. The Insurers Supervision, Rehabilitation, and Liquidation Model Act is used by most states. If an insurer becomes insolvent, some claims may still be unpaid and so all states have guaranty funds that cover these claims. The assessment method is the major method used to raise the necessary funds to pay unpaid claims. The result is that taxpayers and the general public indirectly pay the claims of insolvent insurers.

coinsurance clause

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 co-insurer. -the insurable value of the property is the actual cash value, replacement cost, or some other value described in the valuation clause of the policy. -if the insured wants to collect in full for the partial loss, the coinsurance requirement must be satisfied. otherwise, the insured will be penalized if a partial loss occurs.

coordination-of-benefits provision

in group health insurance is another example of primary and excess coverage. It is designed to prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan. Most stated have adopted this by the NAIC (national association of insurance commissioners). 2 important rules are: (1) coverage as an employee is usually primary to coverage as a dependent (2) the plan of the parent whose birthday occurs fist during the year is primary for dependents in a family in which the parents are married.

offer and acceptance difference between property/casualty and life insurance

in order for a legal contract to binding there must be an offer and acceptance of its terms. -In PNC insurance, the offer and acceptance can be oral or written. The applicant fills out the application and pays the first premium, which constitutes the offer. The agent then accepts the offer on behalf of the insurance company. PNC agent typically have the power to bing their companies through a binder (a temporary contract for insurance and can be written or oral) that obligates the company immediately prior to receipt of the application and issuance of the policy. Thus, the insurance contract can be effective immediately because the agent accepts the offer on behalf of the company, or if this is not authorized it is sent to the company for approval and then becomes effective. -In life insurance, the agent doesn't have the power to bind the insurer. Therefore the application for life insurance is always in writing and the application must be approved by the insurer before the life insurance is in force. The usual procedure is for the applicant to fill out the application and pay the first premium. I conditional premium receipt is then given to the applicant, the most common type is called the insurability premium receipt, and if they are found to be insurable the life insurance becomes effective as of the date of the application. However if the applicant doesn't pay the first premium when the application is filled out, his life insurance would have not gone into affect because he didn't do all of the steps.

personal contract in property vs life insurance

in property insurance, the contract is between the insured and the insurer. A property insurance contract insures the owner of a property, not the property itself. The applicant must be acceptable to the insurer and met underwriting standards. This kinds of contract can not be transferred without insurer consent. -life insurance can be assigned to anyone because it does not usually alter the risk or increase the probability of death. conversely, transfer of a loss payment does not need the insurers consent, but may require to be notified.

file-and-use

insurers are required only to file the rates with the sate insurance department, and the rates can be used immediately. Regulators have the authority to disapprove the filing if it violates state law. This law eliminates the problems that arise from prior approval laws

3 methods used for regulating insurers

legislation courts state insurance departments

exceptions to the principle of indemnity: life insurance

life insurance: a life insurance contract is not a contract of indemnity but is a valued policy that pays a stated amount to the beneficiary at the time of the insured's death. The indemnity principle is difficult to apply to life insurance because the actual cash value rule is meaningless in determining the value of a human life. A certain amount of life insurance must be purchased before death occurs to plan for personal and business purposes.e

2nd financial Solvency Regulation: Risk-Based Capital (RBC) what are the 4 types of RBC risks?

means that insurers must have a certain amount of capital, depending on the riskiness of their investments and insurance operations. Insurers are monitored by regulators based on how much capital they have relative to their risk-based capital requirements. The risk based capital requirements of life insurance are based on a formula that considers 4 types of risk: a. asset risk: the risk of default of assets for affiliated investments; the parent company must hold an equivalent amount of risk based capital that provides protection against the financial downturn of affiliates. b. Interest rate risk: reflects possible losses due to changing interest rates. Policyholders are likely to withdraw funds from the insurer when changing interest rates affects products where contractual guarantees favor them. c. underwriting risk: reflects the amount of surplus needed to pay excess claims because of random fluctuations and inaccurate pricing for future claims levels. d. Business risk: represents the wide range or general business risks that life insurers face, such as guaranty fund assessments and insolvency because of bad management

broad evidence rule

means that the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property. Relevant factors include replacement cost less depreciation, fair market value, present value of similar property, opinions of appraisers, and other factors.

Rule 1 of the law of agency: There is no presumption of an agency relationship:

no automatic presumption that one person legally can act as an agent for another. Some visible evidence of an agency relationship must exist.

commutative contract

one in which the values exchanged by both parties are theoretically equal.

unilateral contract bilateral contract

only the insurer makes a legally enforceable promise to pay a claim or provide other services to the insured. Once the insured pays the first premium and the insurance takes effect they cant be legally enforced to pay the premiums or comply with the policy provisions, but as long as they pay on time the insurer IS legally enforced to provide protection promised under contract each party makes a legally enforceable promise to the other party

other-insurance provisions

present in property and casualty insurance and health insurance contracts. These provisions apply when more than one contract covers the same loss. This prevents profiting from insurance.

flex rating

prior approval of rates is required only if the rate increase or decrease exceeds a specified range. rate changes of 5-10% typically don't need prior approval and this enables rapid rate changes in respond to changing market conditions.

conditions

provisions in the policy that qualify or place limitations on the insurer's promise to perform. This provision imposes certain duties on the insured. If the policy conditions are not met, the insurer can refuse to pay the claim. Common policy conditions include: notifying the insurer if a loss occurs, protecting the property after a loss, preparing an inventory of damaged personal property, and cooperating with the insurer in the event of a liability suit.

prior approval

rates must be filed and approved by the state insurance department before they can be used. In some states if they don't receive an answer in 30-60 days they are deemed to be approved. Criticized for the delay in obtaining a needed rate increase, and the decisions of state insurance departments being affected by political affiliations

exceptions to the principle of indemnity: replacement cost of insurance

replacement cost of insurance: means that there is no deduction for physical depreciation in determining the amount paid for a loss.

2. courts

state and federal court periodically hand down decisions concerning the constitutionality of state insurance laws, the interpretation of policy clauses and provisions, and the legality of administrative actions by state insurance departments

representations when does this make the contract voidable?

statements made by the applicant for insurance. The insurance contract is voidable if the representation is (1)material (if the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms) (2)false (3)relied on by the insurer (the insurer relies on the misrepresentation in issuing the policy at a specified premium)

declarations

statements that provide information about the particular property or activity to be insured. -in property insurance: the declarations page typically contains information concerning the identification of the insurer, name of the insured, location of the property, period of protection, amount of insurance, amount of the premium, size of the deductible (if any), and other relevant information. This information is used for underwriting and rating purposes and for identifying the property or activity to be insured. Can be found on the first page of policy. -in life insurance, the first page is not called a declarations page, it contains the insured's name, age, premium, the face amount of the life insurance, beneficiary, issue date, and policy number

the principle of insurable interest

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

principle of indemnity These are mostly what type of insurance contracts? what does this type of contract not imply?

states that the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss. -most property and casualty insurance contracts are contracts of indemnity. -a contract of indemnity doesn't mean that all covered losses are always paid in full. Because of deductibles, dollar limits on the amount paid, and other contractual provisions, the amount paid is often less than the actual loss.

insuring agreement

summarizes the major promises of the insurer. The insurer agrees to do certain things, such as paying losses from covered perils, providing certain services (such as loss-prevention services), or agreeing to defend the insured in a liability lawsuit. 2 basic forms of an insuring agreement in property insurance named perils coverage: only those perils specifically names in the policy are covered open-perils policy: all losses are covered except those losses specifically excluded. also called special coverage policy (if the loss is not excluded, then it is covered).

contract adhesion the principle of reasonable expectations

the insured must accept the entire contract, with all of its terms and conditions. The courts have ruled that any ambiguities are construed against the insurer, therefore if the policy is ambiguous the insured gets the benefit of the doubt. states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions.

conditional contract

the insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions (provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform). They aren't legally obligated to abide by them, but they have to if they want to collect for a loss.

estoppel

the loss of a legal defense because of previous actions that are now inconsistent with that defense. If one person makes a statement of fact to another person who then reasonably relies on the statement to his/her detriment, the first person cannot later deny the statement was made. The law of estoppel is designed to prevent persons from changing their minds to the detriment of another party.

fair market value

the price a willing buyer would pay a willing seller in a free market. The fair market value of building may be below its actual cash value based on replacement cost less depreciation. The difference is due to several factors including a poor location, deteriorating neighborhood, or economic obsolescence of the building.

Rule 3 of the law of agency: The principal is responsible for acts of its agents

the principal is responsible for all acts of agents when they are acting within the scope of their authority. This includes fraudulent acts, omissions, and misrepresentations. Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency.

exchange of consideration what is the insured's consideration? what is the insurer's consideration?

the value that each party gives to the other. The insured's consideration is payment of the premium plus an agreement to abide by the policy's conditions. The insurer's consideration is the promise to do certain things as specified in the contract (pay for a loss, defending the insured in liability lawsuit)

waiver

the voluntary relinquishment of a known legal right. If the insurer voluntarily waives a legal right under the contract, it cannot later deny payment of a claim by the insured on the grounds that a legal right was violated.

what else does the doctrine of material misrepresentation apply to

to statements made by the insured after a loss occurs. If the insured submits a fraudulent proof of loss or misrepresents the value of damaged items, the insurer has the right to void the coverage

innocent misrepresentation

unintentional misrepresentation of a material fact if relied on by the insurer also makes the contract voidable

exceptions to the principle of indemnity: valued policy laws

valued policy laws: a law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to a real property occurs from a peril specified in the law. (some states cover only fire, other states cover fire, lightening, windstorm and tornado). Laws generally apply only to real property, and the loss must be total.