Legal Principles Chapter 9

purposes of subrogation

1. prevents the insured from collecting twice for the same loss 2. is used to hold the negligent person responsible for the loss 3. subrogation helps to hold down insurance rates.

Principle of utmost good faith concealment

a concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer to deny a claim based on concealment, a nonmarine insurer must prove: the concealed fact was known by the insured to be material the insured intended to defraud the insurer

Principle of utmost good faith

a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts supported by three legal doctrines: representations concealment warranty

Understand the various characteristics associated with insurance contracts:

aleatory contract unilateral contract conditional contract personal contract contract of adhesion

Distinct legal charactersics of insurance contracts

an insurance contract is: aleatory: values exchanged are not equal unilateral: only the insurer makes a legally enforceable promise conditional: policy owner must comply with all policy provisions to collect for a covered loss personal: property insurance policy cannot be validly assigned to another party without the insurers consent a contract of adhesion: the insured must accept the entire contract with all of its terms and conditions

Distinct legal characteristics of insurance contracts principle of reasonable expectations

courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer the principle of reasonable expectations states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions

Principle of indemnity continued methods and property

in property insurance, indemnification is based on the actual cash value ACV of the property at the time of loss there are three main methods to determine actual cash value replacement cost less depreciation fair market value is the price a willing buyer would pay a willing seller in a free market broad evidence rule means that the determination of ACV should include all relevant factorsan expert would use to determine the value of the property

aleatory contract

is a contract where the values exchanged may not be equal but depend on an uncertain event

concealment

is intentional failure of the applicant for insurance to reveal a material fact to the insurer. Concealment is the same thing as nondisclosure; that is the applicant for insurance deliberately whitholds material information from the insurer.

unilateral contract

means that only one party makes a legally enforceable promise

contract of adhesion

means the insured must accpt the entire contract with all of its terms and conditions

innocent misrepresentation

of a meterial fact, if relied on by the insurer, also makes the contract voidable. An innocent misrepresentation is one that is unintentional. A majority court opinions ahve ruled that an innocent misr of a material fact makes the contract voidable.

Agenda

principle of indemnity principle of insurable interest principle of subrogation principle of utmost good faith requirements of an insurance contract dinstinct legal characteristics of insurance contracts law and the insurance agent

actual cash value

replacement cost minus depreciation replacement cost is the current cost of restoring the damaged property with new materials of like kind and quality. Replacement cost-depreciation = actual cash value

Principle of utmost good faith representations

representations are statements made by the applicant for insurance a contract is voidable if the representation is material, false, and relied on by the insurer material means that if the insurer knew the true facts, the policy would not have been issued, or would have been issued on different terms reliance means that the insurer relies on the misrepresentation in issuing the policy at specified premium an innocent misrepresentation of a material fact, if relied on by the insurer makes the contract voidable

what is the principle of reasonable expectations

states than an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions. Insurers cannot enforce exclusions and limitations in the policy that are inconsistent with the insureds reasonable expecations

principle of insurable interest

states that the insured must be in a position to lose financially if a covered loss occurs. for ex: youhave an insurable interest in your car because you may lose financially if the car is damaged or stolen insruance contracts must be supported by an insurable interest for the following reasons 1. to prevent gambling 2.to reduce moral hazard 3. to measure the maount of the insureds loss in property insurance

principle of indemnity

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. Purpose 1. prevent the insured from profiting from loss purpose 2. reduce moral hazard

Principle of subrogation

strongly supports the principle of indemnity 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. subrogation does not apply unless the insurer makes a loss payment the insured gives to the insurer any legal rights to collect damages from the negligent third party.

Principle of subrogation

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 purpose: -to prevent the insured from collecting twice for the same loss -to hold the negligent person responsible for the loss -to hold down insurance rates

principle of 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. Supported by three legal doctrines: representations, concealment, and warranty

Principle of insurable interest

the insured must be in a position to lose financially if a covered loss occurs purposes: -to prevent gambling -to reduce moral hazard -to measure the amount of the insureds loss an insurable interest can be supported by: -ownership of property -potential legal liability -serving as a secured creditior -contractual rights

Principle of indemnity

the insurer agrees to pay no more than the actual amount of the loss purpose: to prevent the insured from profiting from a loss to reduce moral hazard

Principle of subrogation entitled

the insurer is entitled only to the amount it has paid under the policy the insured cannot impair the insurers subrogation rights subrogation does not apply to life insurance contracts the insurer cannot subrogate against its own insureds

conditional contract

the insurers obligation is to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions. conditions are provisions inserted in the policy that qualify or place limitations on the insurers promise to perform.

Principle of indemnity exceptions

there are some exceptions to the principle of indemnity a valued policy pays the face amount of insurance if a total loss occurs some states have a valued policy law that 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 replacement cost insurance means there is no deduction for depreciation in determining the amount paid for a loss a life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insureds death

Requirements of an insurance contract

to be legally enforceable, an insurance contract must meet four requirements 1.offer and acceptance of the terms of the contract 2. exchange of consideration- the value that each party gives to the other 3. competent parties, with legal capacity to enter into a binding contract 4. the contract must exist for a legal purpose

4 requirements that must be met to form a valid insurance contract

1. offer and acceptance: in most cases, the applicant for insurance makes the offer, and the company accepts or rejects the offer. 2. exchange and consideration: the value that each party gives to the other. The insureds consideration specified in the policy. The insurers consideration is the promise to do certain things as specified in the contract 3. competent parties:must be legally competent, this means the parties must have legal capacity to enter into a binding contract. Most adults are capable. 4. legal purpose: an insurance contract that encourages or promotes something illegal or immoral is contrary to the public interest and cannot be enforced. For example drug dealing.

ACV VS REPLACEMENT COST

In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost - depreciation).

Exceptions to the principle of indemnity

valued policy:policy that pays the face amount of insurance if a total loss occurs -generally to protect antiques valued policy laws: law that exists in some states that 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. Laws in some states only cover fire; other cover lighting , fire , windstorm and tornatode. and some states include all perils replacement cost insurance: means there is no deduction for physical depreciation in determining the amount paid for a loss life insurance: a valued policy that pays a stated amount to the beneficiary at the time of the insureds death

Principle of insurable interest questions

when must insurable interest exist? -property insurance: at the time of the loss -life insurance: only at inception of the policy The question of insurable interest does not arise when you purchase life insurance on your own life insurable interest in another persons life can be shown by close family ties, marriage, or a pecuniary (financial) interest

personal contract

which means the contract is between the insured and the insurer