Rejda_14e_accessible_PowerPoint_09

Chapter 9: Fundamental Legal Principles

Learning Objectives

• 9.1 Principle of Indemnitya. Describe the principle of indemnity.b. Explain how the actual cash value rule supports the principle of indemnity.

• 9.2 Insurable Interesta. Describe the nature and purposes of the principle of insurable interest.

• 9.3 Principle of Subrogationa. Explain the principle of subrogation.b. Explain the purposes of subrogation.c. List the major exceptions to subrogation.

• 9.4 Utmost Good Faitha. Explain the principle of utmost good faith.b. Discuss representations, concealment, and warranty supporting the principle.

• 9.5 Insurance Contract Requirementsa. Legal requirements for valid insurance contract formation.

• 9.6 Legal Characteristicsa. Identify legal characteristics of insurance contracts that differentiate them.

• 9.7 Law of Agencya. Explain how the law of agency influences insurance agents' actions and duties.

Principle of Indemnity

• Definition: The insurer agrees to pay no more than the actual amount of the loss incurred.

• Purpose:

  • Prevents the insured from profiting from a loss.

  • Reduces moral hazard.

Actual Cash Value (ACV)

• Indemnification in property insurance is based on ACV at the time of a loss.

• ACV Determination Methods:

  • Replacement Cost Less Depreciation: Value of property minus depreciation.

  • Fair Market Value: Price a willing buyer would pay a willing seller in a free market.

  • Broad Evidence Rule: Includes all relevant factors that an expert would use to determine property value.

Exceptions to Indemnity

• Valued Policy: Pays the face amount if a total loss occurs.

• Valued Policy Law: Some states require payment of the face value if specified perils cause total loss.

• Replacement Cost Insurance: No depreciation deduction in loss assessments.

• Life Insurance Contracts: Considered valued policies that pay a stated amount upon insured's death.

Principle of Insurable Interest

• Definition: The insured must be in a financial position to lose if a covered loss occurs.

• Purposes:

  • Prevents gambling on losses.

  • Mitigates moral hazard.

  • Assists in loss measurement.

Insurable Interest Forms

• Can arise from:

  • Ownership of property.

  • Potential legal liability.

  • Secured creditor relations.

  • Contractual rights.

Timing of Insurable Interest

• Property Insurance: Must exist at the time of loss.

• Life Insurance: Must exist at policy inception.

• No insurable interest issue arises when purchasing life insurance for oneself.

• For another person's life: Close family ties, marriage, or financial interest evidences insurable interest.

Principle of Subrogation

• Definition: Substitution of the insurer in place of the insured to claim indemnity from a third party for covered losses.

• Purpose:

  • Prevents the insured from double recovery for the same loss.

  • Holds the negligent party accountable.

  • Helps control insurance rates.

Key Points of Subrogation

• The insurer is entitled only to the amount it has paid under the policy.

• Insured must not impair the insurer's subrogation rights.

• Subrogation does not apply to life insurance contracts.

• Insurer cannot subrogate against its own insured parties.

Principle of Utmost Good Faith

• Requires a higher honesty degree from both parties in an insurance contract compared to other contracts.

• Key Legal Doctrines:

  • Representations

  • Concealment

  • Warranty

Representations

• Statements made by the insurance applicant.

• Contracts are voidable if representations are material, false, and relied upon by the insurer.

• Materiality: If insurers knew the true facts, the policy would not have been issued or issued differently.

• Reliance: Insurer must rely on misrepresentations to issue the policy at a specified premium.

• Innocent misrepresentations can void contracts if relied on by the insurer.

Concealment

• Intentional failure to disclose a material fact.

• To deny claims based on concealment, an insurer must prove that the insured understood the materiality of the concealed fact and intended to defraud.

Warranty

• A statement that is part of the insurance contract and guaranteed to be true.

• Statements made by applicants are classified as representations, not warranties.

• Breach of warranty is interpreted liberally, states allow loss recovery unless breach contributed to the loss.

Requirements of an Insurance Contract

• Legal Enforceability Requirements:

  • Offer and acceptance of contract terms.

  • Exchange of consideration (value).

  • Competent parties with legal capacity.

  • Contract must exist for a legal purpose.

Distinct Legal Characteristics of Insurance Contracts

• Key Traits:

  • Aleatory: Value exchange is not equal.

  • Unilateral: Only the insurer makes promises enforceable by law.

  • Conditional: Compliance with policy provisions is required for loss collection.

  • Personal: Property insurance policies cannot be assigned without insurer consent.

  • Contract of Adhesion: Insured must accept the entire contract and its terms.

• Court's ruling near ambiguities construed against insurers.

• Reasonable expectations principle entitles insured coverage based on reasonable expectations, regardless of policy provisions.

Law and the Insurance Agent

• Agent Definition: Authority to act on a principal's behalf (the insurer).

• Agency Regulations:

  • No presumption of agency relationship.

  • Agents must be authorized representatives.

  • Insurers are responsible for agents' actions within their authority scope.

  • Agents may have limited powers.

Sources of Agent Authority

• Express Authority: Clearly stated powers.

• Implied Authority: Powers reasonably inferred from duties.

• Apparent Authority: Authority perceived by third parties based on agent's actions.

• Agent's knowledge is presumed to be the principal's knowledge within the agency relationship scope.

• Insurers can limit agents' powers via nonwaiver clauses in applications or policies.

Waiver and Estoppel

• Waiver: Voluntary relinquishment of a known legal right.

• Estoppel: Loss of a legal defense due to prior actions inconsistent with the defense.