CHAPTER 9 FUNDAMENTAL LEGAL PRINCIPLES

PRINCIPLE OF INDEMNITY

THE INSURER AGREES TO PAY NO MORE THAN THE ACTUAL AMOUNT OF THE LOSS

IN PROPERTY INSURANCE, INDEMNIFICATION IS BASED ON

ACTUAL CASH VALUE (AC) OF THE PROPERTY AT THE TIME OF LOSS

3 WAYS ACTUAL CASH VALUE IS DETERMINED

1. REPLACEMENT COST 

2. FAIR MARKET VALUE: THE PRICE A WILLING BUYER WOULD PAY A WILLING SELLER IN A FREE MARKET 

3. BROAD EVIDENCE RULE/EXPERT OPINION: MEANS THAT THE DETERMINATION OF ACV SHOULD INCLUDE ALL RELEVANT FACTORS AN EXPERT WOULD USE TO DETERMINE THE VALUE OF THE PROPERTY

EXCEPTIONS TO PRINCIPLE OF INDEMNITY (VALUED CONTRACT SUCH AS LIFE INSURANCE)

• A VALUED POLICY PAYS THE FACE/STATED AMOUNT OF INSURANCE IF A TOTAL LOSS OCCUR

• 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 OR POLICY OWNER MUST BE IN A POSITION TO SUFFER A FINANCIAL LOSS (OR LOSS OF A LOVED ONE FOR LIFE INS) IF THE COVERED EVENT OCCURS

• WHEN IT NEEDS TO BE DEMONSTRATED VARIES BY TYPE OF INSURANCE.

WHEN MUST INSURABLE INTEREST EXIST?

• PROPERTY INSURANCE: AT THE TIME OF THE LOSS

  • THATS MY HOUSE/CAR

  • TIME OF CLAIM

• LIFE INSURANCE: ONLY AT INCEPTION OF THE POLICY

  • POLICY OWNER CAN BUY THE INSURED LIFE INSURANCE ONLY ON IMMEDIATE FAMILY

  • ESTABLISH ONLY ON DAY 1 AND DON'T NEED TO KEEP ESTABLISHING

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

• INSURANCE COMPANY STEPS INTO YOUR SHOES TO COLLECT FROM THE OTHER INSURANCE COMPANY

• SUBROGATION DOES NOT APPLY TO LIFE INSURANCE CONTRACTS

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

• REPRESENTATIONS: STATEMENTS MADE BY THE APPLICANT FOR INSURANCE

WHEN IS A CONTRACT VOIDABLE DURING REPRESENTATION?

IF THE REPRESENTATION IS MATERIAL, FALSE, AND RELIED ON BY THE INSURER 

MATERIALS (REPRESENTATION)

MEANS THAT IF THE INSURER KNEW THE TRUE FACTS, THE POLICY WOULD NOT HAVE BEEN ISSUED, OR WOULD HAVE BEEN ISSUED ON DIFFERENT TERMS

IMMATERIAL (REPRESENTATION)

MEANS A FACT, LOSS, OR CONTRACT DETAIL THAT IS TOO MINOR OR INCONSEQUENTIAL TO INFLUENCE AN INSUER’S DECISION TO ISSUE A POLICY

REQUIREMENTS OF AN INSURANCE CONTRACT

1. OFFER AND ACCEPTANCE

   • SIGNED CONTRACT

   • PAID PREMIUM

2. EXCHANGE OF CONSIDERATION

   • THE VALUE THAT EACH PARTY GIVES TO THE OTHER

3. COMPETENT PARTIES

   • WITH LEGAL CAPACITY TO ENTER INTO A BINDING CONTRACT

4. LEGAL PURPOSE

LEGAL CHARACTERISTICS OF INSURANCE CONTRACTS

• ALEATORY

• UNILATERAL

• CONDITIONAL

• PERSONAL

• CONTRACT OF ADHESION

ALEATORY CONTACT

VALUES EXCHANGED ARE NOT EQUAL AND DEPENDS ON AN UNCERTAIN, UNPREDICTABLE EVENT

EX: YOU PAY REGULAR FEES FOR COVERAGE. THE COMPANY PROVIDES A LARGE CASH PAYOUT ONLY IF THE INSURED PERSON PASSES AWAY DURING THE POLICY TERM

UNILATERAL CONTRACT

ONLY THE INSURANCE COMPANY MAKES A LEGALLY ENFORCEABLE PROMISE

EX: INSURANCE COMPANY LEGALLY PROMISES TO PAY OUT CLAIM OR PROVIDE COVERAGE IF UNCERTAIN EVENT HAPPENS

CONDITIONAL CONTRACT

POLICY OWNER MUST COMPLY WITH ALL POLICY PROVISIONS TO COLLECT FOR A COVERED LOSS

ex: INSURANCE COMPANY DOES NOT HAVE TO PAY OUT BENEFITS NLESS A SPECIFIC, COVERED EVEN ACTUALLY HAPPENS

PERSONAL CONTRACT

PROPERTY INSURANCE POLICY CANNOT BE VALIDLY ASSIGNED TO ANOTHER PARTY WITHOUT THE INSURER'S CONSENT

EX: IF YOU SELL YOUR HOUSE, YOUR HOMEOWNERS INSURANCE DOES NOT AUTOMATICALLY GO TO NEW BUYER

CONTRACT OF ADHESION

THE INSURED MUST ACCEPT THE ENTIRE CONTRACT WITH ALL OF ITS TERMS AND CONDITIONS