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Business Law and the Legal Environment for a New Century
Alternate Edition
Quote of the Day
“If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss....”
Rudyard Kipling,
English novelist and poet,
In the poem “If” (ends “you’ll be a man, my son.”)
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Business Law and the Legal Environment for a New Century
Alternate Edition
Insurance Contract
 An insurance policy must meet all the
common law requirements for a
contract.
 Offer and Acceptance
• The purchase of a policy makes an offer by
delivering an application and a premium to
the insurer.
• It can be accepted by oral notice, by written
notice, or by delivery of the policy.
• It also has a fourth option-a written binder,
which is a temporary acceptance.
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Business Law and the Legal Environment for a New Century
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Insurable Interest
 An insurance contract is not valid
unless the owner has an insurable
interest in the subject matter of the
policy.
• This means you must have some financial
stake in the subject of the insurance policy.
• The insurable interest must exist at the time
of loss, and cannot be for more than the
amount of loss.
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Business Law and the Legal Environment for a New Century
Alternate Edition
Insurers’ Rights
 Insurers have the right to void a policy
if, during the application process, the
insured makes a material misstatement
or conceals a material fact.
 Insurers have the right to void a policy if
the insured violates a warranty.
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Business Law and the Legal Environment for a New Century
Alternate Edition
Co-Payments
 Deductibles
• Deductible provision that requires the
insured to pay a certain amount of the claim
herself.
 Co-insurance
• Co-insurance means that the insured must
pay some percentage of the entire loss.
 Pro Rata Provisions
• A pro rata clause prevents an insured from
collecting more than the actual damage
suffered.
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Business Law and the Legal Environment for a New Century
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Taking on Rights and Duties
 Subrogation
• If an insurance company pays a claim, it is
subrogated to the rights of the insured,
meaning that the company acquires
whatever rights the insured has against any
third parties.
 Suretyship
• In suretyship, the insurance company
succeeds to the obligations of the insured.
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Business Law and the Legal Environment for a New Century
Alternate Edition
Bad Faith by the Insurer
 Insurance policies often contain a
covenant of good faith and fair dealing,
which may be violated by:
• Fraud
• Refusing to Pay a Valid Claim
• Wrongfully Refusing to Accept a Settlement
Offer
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Business Law and the Legal Environment for a New Century
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Property Insurance
 Property insurance (also known as
casualty insurance) typically does not
cover:
• Earthquakes and floods (unless a special
rider is added)
• Friendly fire (fire that stays where it is
supposed to be)
• Employee theft or embezzlement
• Merchandise lost or damaged in
transportation
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Business Law and the Legal Environment for a New Century
Alternate Edition
Life Insurance
 Term Insurance – simple, cheap; covers
a particular time period
 Whole Life Insurance (straight life) –
more expensive, but forces policyholder
to save; part of premium goes into a
savings, giving the policy cash value.
 Universal Life – a hybrid of term and
whole life; premiums may be adjusted
some.
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Business Law and the Legal Environment for a New Century
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Life Insurance (cont’d)
 Annuities are the reverse of life
insurance-they make payments until
death whereas life insurance pays after
death.
 Accidental Death – policy may have a
double indemnity clause, doubling the
value of the policy if the death is
accidental.
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Business Law and the Legal Environment for a New Century
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Health Insurance
 In a pay for service plan, the insurer
pays for almost any treatment ordered
by almost any doctor.
 In managed care plans, patient and
doctor choice is limited, in order to limit
costs.
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Business Law and the Legal Environment for a New Century
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Disability Insurance
 Disability insurance replaces the
insured’s income if he becomes unable
to work because of illness or injury.
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Business Law and the Legal Environment for a New Century
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Liability Insurance
 The purpose of liability insurance is to
reimburse the insured for any liability
she incurs by (accidentally) harming
someone else.
 Liability insurance covers:
• Injuries sustained on the insured’s property
• Injuries to another’s property caused by the
insured
• Professional malpractice
• Product liability
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Business Law and the Legal Environment for a New Century
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Automobile Insurance
 Collision – pays to repair or replace a
car damaged in an accident.
 Comprehensive – covers fire, theft and
vandalism.
 Liability – covers harm to other people
or other property (usually required).
 Uninsured Motorist – covers the insured
and all passengers who are injured by
another driver who does not have
insurance.
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Business Law and the Legal Environment for a New Century
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“Life is risky. Insurance provides
a financial buffer against risk.
But purchasing insurance
without understanding its law
creates its own risk.”
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Business Law and the Legal Environment for a New Century
Alternate Edition