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Chapter 4 Principles of Insurance Contract

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40 views18 pages

Chapter 4 Principles of Insurance Contract

Uploaded by

hailegebreselassie24
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 18

CHAPTER 4: LEGAL PRINCIPLES OF INSURANCE

CONTRACT

The main points of this chapter are:


4.1.Principle of Indemnity
4.2.Principle of Insurable Interest
4.3.Principle of Subrogation
4.4.Principle of Utmost Good Faith
4.5.Principle of contribution
4.6.Doctrine of proximate cause

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-1


4.1.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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-2


Principle of Indemnity

• 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:

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-3


Continues

– 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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-4


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
Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-5
Continues

– 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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-6


4.2.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 insured’s loss
•An insurable interest can be supported by:
– Ownership of property
– Potential legal liability
– Serving as a secured creditor
– Contractual rights

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-7


Principle of Insurable Interest

• 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 person’s life
can be shown by close family ties,
marriage, or a pecuniary (financial) interest

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-8


4.3.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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-9


4.3.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
contracts
• The insurer cannot subrogate against its
own insureds

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-10


4.4.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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-11


4.4.Principle of Utmost Good Faith
• 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
– An innocent misrepresentation of a material fact,
if relied on by the insurer, makes the contract
voidable
Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-12
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

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-13


Continues

You must tell all relevant information when


filling out an application for insurance.

Eg. If you have an illness you must tell the


ins. co. as they may want to charge a higher
premium or not insure you at all.

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-14


4.5. Principle of contribution

If a risk is insured with two insurance


companies each will pay half of the
compensation.

Eg: A ring insured with two ins. co.’s. for


€1,000

Both will give €500 each.

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-15


Continues

Contribution is the right of an insurer to call

upon the other insurers to share the costs of

such a claim payment. The fundamental point

is that, if an insurer has paid a claim in full, it

can recoup a proportion of the costs from the

other insurers of the risk.

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-16


4.6. Doctrine of proximate cause

Causation inquiries focus on identifying the peril


which causes loss. Generally, a two step process is
applied to identify the loss-producing peril. The
first step requires a court to identify the actual
cause in fact of a loss. Next, the court must
determine whether a suspected peril was
sufficiently strong by itself to cause loss. A cause in
fact of loss is the product of the

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-17


Continues

The proximate cause is the dominant cause


that sets in play a chain of events. For
example, if lightning damaged a building
and weakened a wall, following which the
weakened wall was blown down by high
winds, lightning would be considered the

proximate cause.

Copyright ©2014 Pearson Education, Inc. All rights reserved. 9-18

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