Transcript Chapter 49 Insurance

Chapter 49
Insurance
Insurance
Insurance is a contractual arrangement for
transferring and allocating risk.
Risk.
Prediction concerning potential loss based on known
and unknown factors.
Risk Management.
Involves the transfer of certain risks from the individual
to the insurance company by a contractual agreement.
§ 1: Insurance Terminology
and Concepts
Insurance Terminology.
The Concept of Risk Pooling.
Classification of Insurance.
Insurable Interest.
Insurance Terminology
Policy (Insurance contract).
Premium is the consideration to be paid to
the insurer.
Underwriter (usually an insurance
company).
Broker v. Agent.
The Concept of Risk Pooling
All insurance companies spread the risk among
a large number of people - the pool - to make
premiums small in comparison with the
coverage offered.
Insurance companies correlate data over a
period of time to estimate fairly accurately the
total amount they will have to pay if they insure
a particular group, as well as the rates they will
have to charge each member of the group so
they can make the necessary payment and still
show a profit.
Insurance is Classified According
to the Risk Involved
Insurance is classified according to the
nature of the risk involved.
See Exhibit 49-1 in textbook for
Insurance Classifications.
Insurable Interest
A person can insure anything in which he
or she has an insurable interest.
Types of insurable interest:
Life.
Property.
Life Insurance
Anyone who has an insurable interest.
Must have a reasonable expectation of benefit
from the continued life of another.
Insurable interest must exist at the time the
policy is obtained.
• Policy remains valid, even after interest no longer
exists (divorce).
• Key-person insurance -- insurance obtained by an
organization on the life of a person important to that
organization.
Property Insurance
Anyone who has an insurable interest.
A person who derives a pecuniary benefit from
the preservation and continued existence of the
property.
Insurable interest must exist when the loss
occurs.
§ 2: The Insurance Contract
Governed by the general principles of
contract law, and regulated by the state.
Application is an offer, which insurance
company can either reject or accept.
• Acceptance sometimes conditional.
Need consideration.
Parties need capacity.
The Insurance Contract [2]
Application For Insurance.
Effective Date.
Provisions and Clauses.
Interpreting Provisions of an Insurance.
Contract.
Cancellation.
Basic Duties and Rights.
Defenses Against Payment.
Application For Insurance
Filled in application attached to the
policy and made a part of the contract.
Misstatements or misrepresentation can
void a policy, specially if company can
show it would not have issued policy if it
had known the facts.
Effective Date
Broker is agent for the applicant.
Agent is agent for the insurance company. He
can issue a binder, if some consideration is paid,
which will immediately bind the insurance
company, depending on certain conditions being
met.
Parties may agree contract will not be effective
until policy is issued and delivered or sent to
applicant.
Parties may agree policy will be binding, not be
effective, until first premium paid, or physical
exam passed.
Provisions and Clauses
Provisions Mandated by Statute.
Incontestability Clauses.
Coinsurance Clauses.
Appraisal and Arbitration Clauses.
Multiple Insurance Coverage.
Antilapse Clauses.
Provisions Mandated by Statute
Provisions which are mandated by statute
to be included in the insurance policy will
be deemed to be in the insurance policy -whether they are in the policy or not.
Incontestability Clauses
State statutes sometimes provide that
once a life or health insurance policy has
been in force for a specified length of
time, the insurer cannot contest
statements made in the application.
Coinsurance Clauses
If owner insures her property for at least 80%
of its value, owner will be able to recover up to
the face value of the policy.
If owner insures for less than 80%, owner will
be responsible for a proportionate share of the
loss.
Amount of insurance recovery
Coinsurance percentage = percentage
(80%) x Property value
Appraisal and Arbitration Clauses
If insurer and insured cannot agree on
value of property, an appraisal can be
demanded.
Contract may also provide for
arbitration.
Multiple Insurance Coverage
If insured has multiple insurance policies
and the amount of coverage exceeds the
loss, the insured can collect from each
insurer only the company’s proportionate
share of the liability, relative to the total
amount of insurance.
Anti-lapse Clauses
Policy does not lapse automatically upon
nonpayment of premium.
Insured has a grace period of thirty or thirtyone days within which to pay the overdue
premium.
The insurer may be required to extend the insurance for
a period of time.
Insurer may issue a policy with less coverage to reflect
the amount of the payments made.
The insurer may pay the insured the cash surrender
value of the policy.
Interpreting Provisions
of an Insurance Contract
Courts interpret ambiguity against the
insurance company.
Uncertainty as to whether policy actually
exists is resolved against the insurance
company.
Insurer must adequately notify insured of
any change in policy under an existing
policy.
Cancellation
Insured can cancel policy at any time,
and the insurer can cancel according to
terms of policy.
Insurer must give written notice of
cancellation.
Basic Duties and Rights
Insured must act in good faith.
Insurer has duty to investigate to
determine the facts.
Third party claims: Insurer is obligated
to make reasonable efforts to settle the
claim, and policy provides that in this
situation insured must cooperate.
Defenses Against Payment
Insurance company can raise any of the
defenses that would be valid in any
ordinary action or contract:
Fraud, misrepresentation.
• Not if information given was optional.
• Not incorrect statement of age.
Concurrent causation doctrine.
§ 3: Types of Insurance
Life Insurance.
Fire and Homeowner’s Insurance.
Automobile Insurance.
Business Liability Insurance.
Life Insurance
Types of Life Insurance:
Whole life.
Limited-Payment Life.
Term Insurance.
Endowment Insurance.
Universal Life.
Life Insurance [2]
Features of rights and liabilities:
Liability.
Adjustment Due to Misstatement of Age.
Assignment.
Creditors’ Rights.
Termination.
Fire and Homeowner’s
Insurance
Standard Fire Insurance Policies:
Liability.
Proof of Loss.
Occupancy Clause.
Homeowner’s Insurance:
Assignment Property Coverage.
Liability Coverage.
Automobile Insurance
Liability Insurance.
Collision and Comprehensive Insurance.
Other Automobile Insurance.
Uninsured Motorist.
Accidental Death Benefits.
Medical Payment Coverage.
Other-Driver Coverage.
No-Fault Insurance.
Business Liability Insurance
General Liability.
Product Liability.
Professional Malpractice.
Worker’s Compensation.
Case 49.1: Sotelo v.
Washington Mutual
(Insurable Interest)
FACTS:
Delhurst Country Inn was owned by Randco,
mortgaged to Sotelo for $389,000, and insured by
Washington Mutual under a policy with a $432,000
limit.
When a fire destroyed the Inn, Randco owed
Sotelo $395,545.37, including $12,763.62 in late
payment penalties, on two validly recorded
mortgages.
Washington Mutual sent Sotelo a check for
$220,576.17.
Sotelo sued claiming the amount was not enough.
Case 49.1: Sotelo v.
Washington Mutual
(Insurable Interest)
HOLDING:
Sotelo’s recovery was to be based on the
outstanding mortgage debt and late payment
penalties totaling $395,545.37, minus what she
had already been paid, plus interest.
The amount owed by the mortgagors for back
taxes was not to be deducted.
Generally, the mortgagee’s insurable interest is
the amount of the mortgage debt since the debt
represents its personal interest in the property.
Case 49.2: American Guarantee v.
Liability Insurance Co.
(Insurance Interpretations)
FACTS:
Ingram Micro’s entire operation depends on the proper
functioning of Impulse, a computer network program.
American Guarantee insured Ingram’s “property,
business income and operations.” The policy insured
against “[a]ll [r]isks of direct physical loss or damage
from any cause.” Ingram’s computers, including Impulse,
were insured under the policy.
Ingram experienced a power outage that caused the
computer network to be totally disrupted for 8 hours.
Ingram filed a claim.
Case 49.2: American Guarantee v.
Liability Insurance Co.
(Insurance Interpretations)
HELD: FOR INGRAM.
The court concluded that “physical damage” to a
computer, under a policy insuring against that risk,
is not restricted to the physical destruction or harm
of the circuitry but includes loss of access, loss of
use, and loss of functionality.
In this case, there was property damage. Impulse
was ‘physically damaged’ for eight hours. Ingram
employees ‘repaired’ Impulse by physically
bypassing a malfunctioning matrix switch. Until
this restorative work was conducted, Ingram’s
mainframes and Impulse were inoperable.”
Case 49.3: Paul Revere Life
Insurance Co. v. Fima
(Defenses Against Payment)
FACTS:
Fima applied to Paul Revere for a disability policy.
Fima stated that his income was $105,000 in the
previous year and $85,000 in the current year. His
actual income was $21,603 and $6,320. The
policy had a two-year incontestability clause.
Three years later, Revere discovered the truth,
and filed a suit in a federal district court against
Fima to have the policy declared void ab initio on
the ground of lack of an insurable interest.
Case 49.3: Paul Revere Life
Insurance Co. v. Fima
(Defenses Against Payment)
HELD: FOR FIMA.
The U.S. Court of Appeals for the Ninth Circuit
held that “Every person has an insurable interest
in his or her own life and health.” Thus, the policy
was not void ab initio.
Also, “because the period for contesting the policy
has passed under the incontestability clause,
Revere may not now challenge the terms of the
policy or the extent of Fima’s insurable interest.
HELD: