fundamental legal principles lecture no. 17. objectives principle of indemnity principle of...
TRANSCRIPT
Fundamental Legal Principles
Lecture No. 17
Objectives
• Principle of Indemnity• Principle of Insurable Interest• Principle of Subrogation• Principle of Utmost Good Faith• Requirements of an Insurance Contract• Distinct Legal Characteristics of Insurance
Contracts• Law and the Insurance Agent
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 Indemnity
• In property insurance, indemnification is based on the actual cash value 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 factors an expert would use to determine the value of the property
Principle of Indemnity
• 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 insured’s death
Principle of Insurable Interest
The insured must stand to lose financially if a loss occurs
• Purpose:– To prevent gambling– To reduce moral hazard– To measure the amount of loss
• When must insurable interest exist?– Property insurance: at the time of the loss– Life insurance: only at inception of the policy
Principle of Subrogation
Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person 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 Subrogation
• The insurer is entitled only to the amount it has paid under the policy
• The insured cannot impair the insurer’s subrogation rights
• Subrogation does not apply to life insurance and to most individual health insurance contracts
• The insurer cannot subrogate against its own insureds
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 are statements made by the
applicant for insurance• A contract is voidable if the representation is material,
false, and relied on by the insurer• An innocent misrepresentation of a material fact, if
relied on by the insurer, makes the contract voidable
Principle of Utmost Good Faith
– A concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer
– A warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects• Statements made by applicants are considered
representations, not warranties
Requirements of an Insurance Contract
• To be legally enforceable, an insurance contract must meet four requirements:– Offer and acceptance of the terms of the
contract– Consideration – the values that each party
exchange– Legally competent parties, with legal capacity
to enter into a binding contract– The contract must exist for a legal purpose
Distinct Legal Characteristics of Insurance Contracts
• Aleatory: values exchanged are not equal• Unilateral: only the insurer makes a legally enforceable promise• Conditional: policyowner 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 insurer's consent• Contract of adhesion: since the insured must accept the entire
contract as it is written, any ambiguities are construed against the insurer
Law and the Insurance Agent
• An agent is someone who has the authority to act on behalf of a principal (the insurer)
• Several laws govern the actions of agents and their relationship to insureds– There is no presumption of an agency relationship– An agent must be authorized to represent the principal
• Authority is either express, implied, or apparent– Knowledge of the agent is presumed to be knowledge of
the principal with respect to matters within the scope of the agency relationship
– Insurers can place limitations on the power of agents by adding a nonwaiver clause to the application or policy
Law and the Insurance Agent
• Waiver is defined as the voluntary relinquishment of a known legal right
• 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
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The Commercial Package Policy (CPP)
• In January 1986, a new, simplified approach to commercial insurance coverage was introduced by the insurance industry
• Under the Commercial Package Policy (CPP) – The insured can obtain almost all types of
insurance coverage • Broader contract provisions are included in
the CPP • The CPP has seven separate sets of
coverage – Commercial property, liability, crime, boiler and
machinery, commercial auto, inland marine, and farm
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The Commercial Package Policy (CPP)
• An insured can pick and choose coverages in the CPP
• The CPP allows many insureds to use one policy to meet most of their insurance needs – Workers’ compensation and ocean marine
insurance must be purchased separately • The CPP has many options available
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Building and Personal Property Coverage Form • Basic protection for buildings and personal
property in the CPP • Property coverage is divided into three major
categories – Buildings
• Includes the buildings described on the declarations page • Any additions, extensions, fixtures, machinery and
equipment constituting a permanent part of the described buildings
• Service equipment – Your business personal property
• Includes business personal property owned by the insured and usual to the occupancy of the insured
– Personal property of others • Improvements and betterments
– Alterations made to a leased building by the insured that the insured cannot legally remove when the lease is terminated
• Personal property of others in the insureds control – Develops in situations where the insured repairs the property of
others
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Extensions of Coverage
• BPP has extensions of coverage that expand protection to other categories of property – Newly acquired or constructed property – Your business personal property at newly acquired
premises – Personal effects and property of others – Valuable papers and records–cost of research – Property off-premises – Outdoor property
• All of these extensions are an additional amount of insurance – Apply only if the policy has an 80 percent or higher
coinsurance clause
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Specific versus Blanket Coverage
• Under specific coverage, property at one or more locations is listed and specifically insured
• Under blanket coverage, property at several locations may be insured under a single item
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Common Clauses in the BPP
• Common clauses include – Coinsurance– Subrogation– Electrical apparatus
• No loss to electrical items will be covered if caused by artificially generated electrical currents
– Unless fire ensues, and then loss is covered only for the fire damage
– Power failure• Spoilage due to power failure from an insured peril is not
covered unless the loss of power is from an on-premises insured peril
– Operation of building laws• No loss will be paid that results from the operation of
building codes – Alterations and repairs
• Allows the insured to make this type of modification without its being considered an increase in hazard
– Which would cause the coverage to be suspended
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Common Clauses in the BPP
• Two important exclusions were added to property clauses in 2002 – Mold claims
• Have skyrocketed in a few states in the early 2000s• Prior to 2002, mold was listed in the so-called “wear
and tear” exclusion – After the terrorist attacks of September 11,
insurers begin excluding terrorism from their policies • The Terrorism Risk Insurance Act (TRIA) was enacted in
November 2002– By the federal government to provide a backup for
insurers that could not get reinsurance coverage for terrorism
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Insured Perils
• The basic form of the BPP covers – Fire, lightning, explosions, windstorm and hail, smoke, riot
or civil commotion, vandalism, sprinkler linkage, sinkhole collapse, and volcanic action
• The broad form includes the basic perils plus – Falling objects, the weight of ice, sleet, and snow; and
accidental discharge of water or steam from a system or appliance containing steam or water other than an automatic sprinkler system
• The special cause of loss form covers all direct physical losses except those that are excluded – Examples of excluded perils
• Earth movement, flood, war, enforcement of building ordinance, smog, insect damage, and wear and tear
– The old name for this type of coverage was “all risk” • The new name is “open perils”
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Debris Removal
• The BPP form includes coverage for debris removal – However if the loss is > or equal to the policy
• There is additional debris coverage up to $10,000
• BPP provides coverage for costs of pollution cleanup and removal from land or water at the described premises
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Subrogation • Practically all contracts of property
insurance are subject to the right of subrogation – By the insurer against any liable third party
• It may turn out, for example, that while the insured’s property insurance provides coverage for loss – Someone else has agreed to assume this
liability by contract or is held liable because of its negligence in causing the damages • If the insurer pays the claim, it has a right to any such
claims that the insured may have had against others • Such recoveries assign responsibility to the party that
is responsible for the damages – Holding that party accountable for its actions
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Endorsements used with the BPP
• An insured can add earthquake and radioactive contamination to the list of insured perils
• The limits of recovery on such property as outdoor signs, trees, shrubs, plants, and radio and television antennas may be increased
• Special market value endorsements are available for distilled spirits and wines
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Endorsements used with the BPP
• Two endorsements that modify the BPP include – Replacement cost
• Like that found in the homeowner’s policy and changes the basis of recovery from actual cash value to replacement cost
– Ordinance and law endorsement • Used when older buildings must be repaired according
to a more stringent building code
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Boiler and Machinery Insurance (Equipment Breakdown Coverage)• Explosions caused by steam boilers, compressors,
engines, electrical equipment, flywheels, air tanks, and furnaces constitute a serious source of loss that the layperson often does not recognize
• Has developed along somewhat different lines from the usual insurance contract – Recognizing that prevention of losses is even more
important than indemnification of loss• Insurers have taken on the service of inspection and
servicing of boiler operations and technical machinery – Failure of the vessel to pass an inspection may mean imminent
danger to continued operations – The insurer reserves the right to suspend coverage immediately
if recommended repairs or replacements are not made
End of Lecture 17