Ch 9 ACSC

Principle of indemnity

the insurer agrees to pay no more than the actual amount of the loss—the insured should not profit from a loss 

purposes: prevent insured from profiting from a loss and reduce moral hazard

actual cash value

in pnc: basic method for indemnifying the insured—based on actual cash value

how to determine actual cash value (3 methods)

1. replacement cost less depreciation

• replacement cost: current cost of restoring damaged property

• depreciation: deduction for physical wear and tear, age. economic obsolescence

2. fair market value—the price a willing buyer would pay a willing seller in a free market (may be below actual cash value)

3. broad evidence rule—the determination of ACV should include all relevant factors an expert would use to determine the value of the property

4 exceptions to the principle of indemnity

1. valued policy—a policy that pays the face amount of insurance if a total loss occurs

• typically used to insure critiques, fine arts, family heirlooms, jewelry since it is hard to determine ACV, so they agree upon value when policy is first issued

2. valued policy laws—a 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 (loss must be TOTAL)

• ex) house insured for 600k but has an actual cash value of 400k. In event of a total loss, they receive 600k. This is to protect the insured if agent deliberately over insured property for a higher commission. Can decrease moral hazard

3. replacement cost insurance—there is no deduction for physical depreciation in determining the amount paid for a loss (replacement cost is how much insured receives). This is to protect insured from a substantial loss.

4. loss insurance—actual cash value would be meaningless in determining the value of a human life.

principle of insurable interest

the insured must be in a position to lose financially (suffer a financial loss) if a covered loss occurs

3 purposes of the principle of insurable interest

1. prevent gambling—if insurable interest not required, the contract would be a gambling one and against public interest

2. reduce moral hazard

3. measure the amount of the insured’s loss in property insurance—if the loss payment cannot exceed the amount of one’s insurable interest, the principle of indemnity is supported

examples of insurable interest in pnc and life

pnc:

• ownership of property can support an insurable interest because owners will lose financially if their property is damages or destroyed

• legal liability

• secured creditors

• contractual right

life

• question of insurable interest—does not arise if you buy yourself life insurance but beneficiaries are not required to have an insurable interest. if buying for another person, then you must have insurable interest in their life (spouse)

when must an insurable interest exist?

pnc: at time of loss

life: only at inception of the policy, not at time of death

principle of subrogation

the insurance company is entitled to recover from a negligent 3rd party any loss payments made to the insured

3 purposes of subrogation

1. prevents the insured from collecting twice for the same loss (also violates principle of indemnity)

2. subrogation is used to hold negligent person responsible for the loss

3. subrogation helps hold down insurance rates (recoveries reduce loss payments) 

2 exceptions to subrogation

1. subrogation does not apply to life insurance contracts because life insurance is a valued policy, not a contract of indemnity.

2. the insurers cannot subrogate against its ow insureds (like why would insurance exist, then?).

principle of utmost good faith

a higher degree of honesty is imposed on both parties to an insurable contract than is imposed on parties to other contracts — historical roots in marine insurance

3 legal doctrines that support the principle of utmost good faith

1. representations—statements made by the applicant for insurance to induce the insurer to enter into an insurance contract

• not part of contract (ex: healthcare questionnaire)

misrepresentations—insurance contract is voidable at the insurer’s option if the misrepresentation is:

material (had the insurer knew the true facts, the policy would not have been issued), false/misleading, or relied on by the insurer (reliance) (insurer relies on misrepresentation in issuing the policy at a specified premium.

2. concealment—intentional failure of the applicant for insurance to reveal a material fact to the insurer (same as nondisclosure)

to deny a claim on concealment, nonmarine insurer must provide: 1) concealed fact was known by insured to be material, 2) insured intended to defraud the insurer 

3. warranty—a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects (ex: reduced premium for home insurance warrant there are sprinklers)

aleatory contract vs commutative contract

values exchanged by both parties may not be equal

other one: values are equal

unilateral contract

only one party makes a legally enforceable promise—insurer makes promise to pay a claim, but insured not legally forced to pay premiums

conditional contract

the insurer’s obligation to pay a claim depends on whether the insured or beneficiary has complied with all policy conditions

• conditions: provisions inserted in the policy that qualify or place limitations on the insurer’s promise to perform

contract of adhesion

the insured must accept the entire contract, with all of its terms and conditions

• since the contract is drafted by the insurer, the insured gets benefit of the doubt if the contract is ambiguous.