Risk Ch 9, 10, 11, & 19

Principle of Indemnity

the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss (usually property/casualty insurance)

Purposes of the Principle of Indemnity

1- prevent the insured from profiting from a loss

2- to reduce moral hazard

Actual Cash Value

replacement cost less depreciation, how much it costs to replace entirely minus the amount that is actually damaged

Fair Market Value

the price a willing buyer would pay a willing seller in a free market

Broad Evidence Rule

the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property.

Valued Policy

an exception to the principle of indemnity, pays the face amount of insurance if a total loss occurs

Valued Policy Laws

another exception to the principle of indemnity, a law 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. (ex: fire)

Replacement Cost Insurance

an exception to the principle of indemnity, there is no deduction for physical depreciation in determining the amount paid for a loss.

Principle of Insurable Interest

the insured must be in a position to lose financially if a covered loss occurs (ex: if your car gets wrecked, its a financial loss)

Purpose of the Principle of Insurable Interest

1- to prevent gambling

2- reduces moral hazard

3- measures the amount of the insured’s loss

Subrogation

the insurance company is entitled to recover from a negligent third party any loss payments made to the insured. (ex: if a negligent motorcycle crashes into your car and the insurance pays for the car, they can try and get money from the motorcycle)

Purposes of Subrogation

1- prevents the insured from collecting twice from the same loss

2- used to hold the negligent person responsible for the loss

3- helps hold down insurance rates

Exceptions to Subrogation

Life insurance contracts and the insurer cannot subrogate against their own insured

Principle of Utmost Good Faith

higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts. (trusting to be honest)

Representations

statements made by the applicant for insurance to induce the insurer to enter into an insurance contract (ex: your age, health, height)

Material

a misrepresentation (lies) that if the insurer knew the true facts, the policy would not be issued, or it would be issued on different terms.

False

the statement is not true or is misleading

Reliance

that the insurer relies on the misrepresentation in issuing the policy at a specified premium

Concealment

intentional failure of the applicant for insurance to reveal a material fact to the insurer

Warranty

a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects (ex: a bank warrants to have a security guard)