Risk management


Question 1.  (Liam)

  1.    

Indemnity is a way to prevent people with insurance from profiting from their insurance coverage. Indemnity is a way to restore the insurer’s financial position before they suffer a loss. When a loss is covered an insurance company will compensate the insurance policyholder for the actual value of their loss rather than a new replacement that costs and is more valuable than what was lost. This principle seeks to prevent situations where someone can benefit from insurance claims and may be motivated to cause a loss or exaggerate losses for financial gain. Overall, insurance is supposed to alleviate financial hardships not sure as a profit source. 

  1.  

Actual Cash Value is calculated by using the formula: ACV= Replacement Cost - Depreciation. Depreciation can be based on factors like age and wear and tear.

  1.   

The concept of actual cash supports the principle of indemnity because it guarantees that the insured only receive the value of what they lost rather than a higher value. The concept is designed to take into consideration that the insured item is depreciated and not the same value as a brand new replacement item and allows the insurer to only pay out the amount of money that was lost.


Question 2. (Chris P.)

  1. A valued policy is an insurance policy where the insurer agrees to pay a predetermined amount in the event of a loss regardless of the actual value of the insured item at the time of loss.

  2. A valued policy law requires insurers to pay the full face value of a policy in the event of a loss, even if the insured item's actual value at the time of the loss is lower. 

  3. A replacement cost policy provides coverage that pays out the full cost of replacing damaged or lost property without a deduction for depreciation. 

Question 3. (Julius)

a.

Insurable interest is the requirement that the insured person must show proof that in the event of a loss of property or life, they stand to suffer financial loss. This principle is in place in order to ensure that the person insured has a justifiable stake in the safety and preservation of what is insured. 

b.

An insurable interest is required in every insurance contract for three main but very crucial reasons. The first reason is to prevent gambling, forbidding the chance of an insurance contract becoming a gambling arrangement. The second reason is to reduce moral hazard, which is when there is a motive to cause a loss because it would financially benefit the person insured. This discourages damage that was done on purpose or fraudulent claims. The third reason is to measure the amount of the insured’s loss in property insurance. By defining the insurable interest, the insurance company can properly measure and limit the correct compensation to the value of the loss of the insured. 


Question 4. (Christopher M.)

a. The principle of subrogation says that the insurer is entitled to collect any payments of losses made to the insured by a negligent third party that caused the damage.


b. There are three main reasons why subrogation is used. The first is that it prevents the insured from collecting loss payments from both the insurer and the negligent party that caused the loss. The insured would profit from this and the principle of indemnity would be violated. The second reason is the negligent party is held accountable for causing the loss. If subrogation was not used, the negligent party would not suffer any financial consequences for causing the loss and the insurer would have to pay as a result. The final purpose of subrogation is that it keeps insurance rates down. When calculating insurance rates, subrogation recoveries are factored in which helps keep rates lower for the insured. 


Question 5. ( Mekhi M.  )

a. False means that the statement is not true or is misleading. Reliance means that the insurer relies on the misrepresentation in issuing the policy at a specified premium. For example, Joseph applies for life insurance and states in the application that he has not visited a doc- tor within the last 5 years. However, 6 months earlier, he had surgery for lung cancer. In this case, he has made a statement that is false, material, and relied on by the insurer. Therefore, the policy is voidable at the insurer’s option. An innocent misrepresentation of a material fact, if relied on by the insurer, also makes the contract voidable. An innocent misrepresentation is one that is unintentional. A majority of court opinions have ruled that an innocent misrepresentation of a material fact makes the contract voidable.

b. A concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer. Concealment is the same thing as nondisclosure; that is, the applicant for insurance deliberately withholds material information from the insurer.

c. A warranty is a statement that becomes part of the insurance contract and is guaran- teed by the maker to be true in all respects. For example, in exchange for a reduced premium, a liquor store owner may warrant that an approved burglar alarm system will be operational at all times.





Question 6. (Matt M)

To have a valid insurance contract, these four (4) requirements must be met:

  1. There must be an offer and acceptance

  2. There must be an exchange of consideration

  3. The parties to the contract must be legally competent

  4. The contract must be for a legal purpose


Question 7. (Andrew )

Insurance contracts have certain legal characteristics that distinguish them from other contracts. Explain the following legal characteristics of insurance contracts.


  1. Aleatory contract

  • An aleatory contract is a contract where the values exchanged may not be equal but depend on an uncertain event.

  1. Unilateral contract

  • A unilateral contract means that only one party makes a legally enforceable promise. In this case, only the insurer makes a legally enforceable promise to pay a claim or provide other services to the insured.

  1. Conditional contract

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

  1. Personal contract

  • Personal Contract means that the contract is only between the insured and the insurer

  1. Contract of adhesion

  • Contract of Adhesion simply means that the insured must agree to all the contracts rules and conditions. The insurer writes up the whole agreement and the insured has to accept the entire document without suggesting additions or revisions.

Question 8. ( Joseph L )

There is no presumption of an agency relationship; an agent must be authorized to represent the principal (authority is either expressed, implied, or apparent). Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship and insurers can place limitations on the power of agents by adding a non waiver clause to the application or policy



Question 9. (Tommy)

  1. Actual or expressed authority - specific powers given to the agent by the principal. 

  2. Implied authority - authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement.

  3. 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.


Question 10. (Christopher M.)

a. The meaning of the term waiver is that it is the voluntary relinquishment of a known legal right. This is very prevalent in insurance. If an insurer waives one of their rights, it cannot later claim that the same right was violated and deny a payment. For example, someone applies for health insurance and this application has missing information. If the insurer issues them a policy and does not try to retrieve the missing information, the insurer cannot deny a claim due to missing information on the application. They waived the necessity that the application be complete once they issued the policy. 

b. The term estoppel is the loss of a legal defense due to someone’s previous actions contradicting that current defense. This is an important principle because it ensures that someone cannot go back on their actions or change their mind in order to damage another party. An example of this would involve someone applying for health insurance and telling an agent about a health issue. If the agent tells the applicant that they do not have to state the problem in their application, then the insurer cannot later deny benefits by saying that the issue was not in the application.