Insurance Law (Outline 17)

Concept of Insurance?

Many people are exposed to certain risks, so they create a pool of money from which payment is made to compensate them for their losses

What do insurance companies need to do what to be sustainable?

Make a profit

Why buy insurance?

Sometimes you have to buy insurance → Home insurance

Also if you can’t afford the loss without insurance

Dont insure against losses that you can?

afford to pay

Whats one way to control insurance premiums?

Through selecting a higher deductible amount

Suppose a $700k house is insured for $800k with a $200k deductible. If the house is destroyed, how much will the owner recover?

$500k

The nature of insurance is indemnity not gambling therefore?

recovery cannot exceed the lesser of the amount of the loss or the face amount of the policy → don’t over insure

Does an insurance policy with a lower deductible carry a higher premium?

Yes, since the insurer is taking on more risk, they charge a higher premium to compensate for how little you have to pay out of pocket

Suppose Melania takes out a $10 million life insurance policy on Donald. How much will Melania recover if Donald dies?

10 million

With life insurance, one collects what?

Only the face amount, not some measure of the value.

Can you insure the life of former President Biden for $10 million

No, as you have no insurable interest in his life

What is Insurable Interest?

You must have a financial or personal stake in the insured item or person, meaning you would suffer a loss if it were damaged or lost

In the case of life insurance, an insurable interest exists in what?

A close relative, debtor, or a business associate/partner.

Does a beneficiary need to have an insurable interest?

No, but the owner of the policy must

What is a beneficiary

The person or entity who receives the money or benefit from an insurance policy, will, or trust.

In the case of property insurance who has an insurable interest?

Anyone who could suffer economic loss from damage to the property. title holder; both landlord & tenant; a contract purchaser

H and W bought a $200,000 insurance policy on their house. H also bought a $500,000 insurance policy on the life of W. Later when H and W divorced, H moved out and transferred his interest in the house to W. H and W did not change the insurance policies. A few months later, a tragic fire killed W and caused $100,000 damage to the house.

A. How much does H receive under the property insurance policy?

They get zero because at the time of the loss he had no insurable interest. In case of property insurance interest must exist at the time of the loss.

B. How much does H receive under the life insurance policy?

500,000 (B)

What is a Key person Insurance?

A life or disability insurance policy taken out by a business on the life of an essential employee.

Suppose H buy another house. At closing the seller signs a document purporting to assign her property insurance to H. When a fire destroys the house, who recovers the insurance proceeds?

Nobody → Property insurance is non assigned.

Ichabod’s Crane

Ichabod owns a crane recently appraised for $200K and insured for $100K with AB Insurance Co. Later Ichabod purchased an additional $300K policy from CD Insurance Co. After the crane is destroyed, Ichabod claims $100K from AB and $200K from CD. Is that what Ichabod gets?

No, Ichabod only gets 200k as he gets 50k from AB and 150k from CD. You can’t collect more than what the crane is worth.

Pro-Rata Clause?

If the owner has more than one insurer, the insurers share the loss based on the agreed formula in their policies.

Suppose you have a $100K asset and can afford to bear a $20K loss. Assuming the premiums were the same, which policy would be better for you?

A 80k policy with zero deductible → you would be able to get coverage for the majority of the asset value and receive a full payout up to 80k

What is a con-insurance clause?

Unless the owner insures for a certain minimum percentage of the property’s value at the time of loss (usually 80%), the owner will bear a portion of any partial loss.

Recovery for partial loss formula?

Amount of partial law X (Total insurance you have/ co insurance % X Full Market Value)

Long Co. owns a warehouse worth $150K and insured for $60,000 against loss by fire. The policy contains an 80% co-insurance clause. A fire did $70,000 damage to the warehouse.

A. Ignoring any deductible amount, how much does Long receive?

35k → 70k X (60k/ 80% X 150k) → 70k X (60k/120k) = 35K

B. How much would Long Co. receive if its loss were 140,000

60,000 because even though you lost 70,000 you are only able to recover 60,000 because that the max amount your insurance covers

Suppose a thief steals your car. If the car is not recovered, what will the insurance company pay you?

The insurance company will pay you the actual cash value of the car at the time of the theft, minus any deductible.

Can you also recover from the thief? What is the thief’s liability to you?

You may file a civil lawsuit against the thief to recover damages. The thief can be held liable for the value of the stolen property.

The thief is guilty of a crime, but does the thief have no other liability?

They are still liable to your insurance company for the loss on the car.

Subrogation

When it is the legal right of the insurance company to step into the shoes of an insured person and recover cost from third party → the thief

Liability insurance

Insuring against tort liability and worker’s compensation claims

What are the two common types of liability insurance coverage

Claims Made Coverage and Occurrence Coverage.

What is Claims Made Coverage

it covers liability for claims made against the insured during the period of the policy. The time when the tort occurred may or may not be important to coverage.

Prior Acts Endorsement

extends coverage to claims arising from acts that occurred before the policy’s effective date

Exclusion

a provision in a policy that specifically removes coverage for certain risks, events, people, property, or situations → always read a policy’s eclusions

Occurence Coerage

Covers liability for any torts that occur during the period of the policy, regardless of when the claim is made against the insured.

What type of coverage do insurers prefer?

Claims made coverage

Does Pam Professional need to continue buying liability insurance if she is no longer out there committing malpractice?

Yes, she should maintain coverage to protect against any potential claims arising from past services.

Tail coverage

An insurance option that allows you to report claims after your main policy has ended, for incidents that happened while the policy was active.

Suppose Pam heard occurrence coverage was better, so, in the middle of her career, she switched from claims made to occurrence coverage. At all times she had insurance. Are there any potential problems with her making the switch?

When Pam switches from claims-made to occurrence, she loses protection for acts that happened earlier in her career but haven't yet resulted in a claim → unless she buys tail coverage

Plaintiff sues Pam and demands punitive damages. Pam looks at her liability policy to see whether it covers punitive damages. The policy states that it covers “all damages, up to the limit of the policy.” Pam is relieved to read this. Should she be?

No, she should not be relieved, as liability policies usually exclude punitive damages, which are intended to punish the defendant rather than compensate the plaintiff.