legal principles
TRANSCRIPT
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Revised: 12/27/09
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Topic Objectives
Outline basic legal principlesunderlying insurance contracts.
Explain their purpose and how theywork.
Why do we care?
Legal provisions
enforce economicprinciples.
They also determine
our rights in contracts.
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Important Legal Principles
Indemnity
Actual Cash Value
Insurable Interest
Subrogation
Utmost Good Faith
Company/Agent Relationship
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Principle of Indemnity
Insured should be restored toapproximate financial position priorto loss, not better.
Purposes prevent insured from profiting from
insurance
reduce moral hazard
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Actual Cash Value
Basis of loss settlement thatsupports principle of indemnity
ACV = replacement cost -depreciation
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ACV Example
Couch cost $800 when new.
5 years later, couch isdestroyed by fire fromcigarette.
Couch is estimated to be60% depreciated.
Cost of replacing couch is$1,000.
ACV = $1,000 - .6 x $1,000= $400
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Variations of ACV
Fair Market Value price that would be paid in free mkt.
FMV may be less than ACV
market value policies common in homeinsurance
Broad Evidence Rule
ACV determination includes all relevant
factors considered by expert
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Why would insurers offer
replacement cost coverage?
May be viewed as accommodation toinsureds that they value.
In certain circumstances, insurers maybelieve that risk of moral hazard is low.
Insured may be required to actually
replace property damaged or destroyed toreceive replacement cost payment.
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Insurance to Value
Insurers have encouraged homeowners tochoose adequate policy limits; why?
If insured has inadequate coverage, they
could suffer uninsured losses in event oftotal loss.
This problem has arisen in the aftermath
of California wildfires. Property owners may fail to raise policy
limits when the value of their homes
increases.
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Insurable Interest
Any contingency that will cause lossor harm to person or firm.
Purposes
prevent gambling reduce moral hazard
measure loss
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Basis for Insurable Interest
Property-Liability Contracts ownership of property
potential legal liability
secured creditors
contractual rights
Life InsuranceContracts family
pecuniary interest
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When does insurable interest
exist?
Would insurer sell me a life insurance policytaken out on my wife?
Would insurer sell me a life insurance policyI took out on a student?
Would insurer sell me a home insurancepolicy I took out on a neighbors home?
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Subrogation
Allows insurer to collect loss
payments to insured from 3rd party. Purposes
prevent dual payments
discourage negligence Conditions
insured must be fully indemnified
only used for property-liability ins. How might subrogation be used in
insurance claims stemming fromFirestone tire problems?
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Utmost Good Faith
Higher degree of honesty imposedon parties to insurance contracts.
Representations: statements by
insurance applicant Insurance contracts voidable if
representation is:
material
false
relied upon by insurer
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Company-Agent Relationship
Participants
principal - insurance company
agent - acts on behalf ofcompany
Agent has authority to bindcompany under certainconditions.
Principal is responsible foracts of agents.
Potential conflicts?