Risk Ch. 9 - Fundamental Legal Principles

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

two (2) purposes of principle of indemnity

1. prevent insured from profiting from loss

2. reduce moral hazard

actual cash value

replacement cost less depreciation

fair market value

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

broad evidence rule

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

exceptions to principle of indemnity

valued policy

valued policy laws

replacement cost insurance

life insurance

valued policy

policy that pays the face amount of insurance if a total loss occurs

valued policy laws

law that exists in some states the 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

replacement cost insurance

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

purpose of insurable interest

prevent gambling

reduce moral hazard

measure the amount of insured’s loss in property insurance

pecuniary (financial) interest

financial interest that may result in financial loss if death occurs

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.

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

three (3) purposes of principle of subrogation

1. prevents insured from collecting twice for the same loss

2. hold negligent person responsible for loss

3. helps to hold down insurance rates

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 to induce the insurer to enter into an insurance contract

misrepresentations

representation that is false

material

if the insurer knew the true facts, the policy would not be issued, or it would be issued on different terms

reliance

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

innocent misrepresentation

misrepresentation that is unintentional and makes contract voidable

concealment

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

aka nondisclosure

warranty

statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects

offer and acceptance

the first requirement of a binding insurance contract

conditional premium receipt

receipt that binds coverage for life insurance without reference to actual delivery of the policy

exchange of consideration

the value that each party in a contract gives to the other

legally competent

parties must have legal capacity to enter into a binding contract

legal purpose

a contract that is legal and enforceable only if it complies with the law and public policy

legal characteristics of an insurance contract

aleatory contract

unilateral contract

conditional contract

personal contract

contract of adhesion

aleatory contract

contract where values exchanged may not be equal but depend on uncertain event

commutative contract

contract where values exchanged by both parties are theoretically equal

unilateral contract

contract where only one party makes a legally enforceable promise

conditional contract

contract where the insurer’s obligation to pay a claim depends on whether the insured or the 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

personal contract

contract is between the insured and the insurer

contract of adhesion

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

principle of reasonable expectations

insured is entitled to coverage under a policy that the reasonably expect to provide regardless of policy provisions

actual or express authority

specific powers given to the agent by the principal

agency agreement

agreement between agent and principal that specifies the rights and duties of each party

implied authority

authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement

apparent authority

an agent who has the authority to act on behalf of the principal when actions or expressions by the principal to a third party lead a reasonable third party to believe that the principal authorized the agent to act

nonwaiver clause

only certain representatives of the company can extend time to pau premiums or change terms of the policy

waiver

voluntary relinquishment of known legal right

estopppel

loss of legal defense because of previous actions that are now inconsistent with that defense