RMIN 4000 1st EditionExam # 2 Study Guide Lectures: 11 - 18Lecture 11 (February 7)What are the four principles of Insurance? Principle of Indemnity, Principle of Insurable Interest, Principle of Subrogation, and Principle of Upmost Good Faith. What is the Principle of Indemnity and what are its purposes? It states that he insurer agrees to pay no more than the actual amount of the loss. Its purposes are insured should not profit from a loss and reduction of moral hazard. What are the different ways Actual Cash values is calculated? There are three ways Actual cash values are calculated: Replacement Cost less DepreciationFair Market Value, which is the price a willing buyer, would pay a willing seller in a free market Broad Evidence Rule means that the determination of actual cash value should include all relevant factors an expert would use to determine the value of property.What are the exceptions to the principle of indemnity? Valued Policy is a policy that pays the face amount of insurance if a total loss occurs and therefore does not indemnify. Valued Policy Law is a law that exists in some states that requires payment of face amount of insurance to insured if a total loss to real property occurs from a peril specified in the law and therefore does not indemnify the insured. Replacement Cost Insurance means there is no deduction for physical depreciation in determining the amount paid for a loss and therefore there is not reduction. Life Insurance is also an exception to indemnity because there is no replacement cost of human life. What is the principle of Insurable Interest and what are its purposes? It states that the insured needs to be in a position to loose financially in order to obtain insurance. Its purposes are to prevent gambling, to help measure amount of loss in property insurance and reduce moral hazard. When is Insurable Interest required? In property insurance it is required at the time of loss and in Life insurance it is required at the inception of the policy. What is the Principle of Subrogation and what are its purposes?Principle of Subrogation allows for the substitution of insurer in place of insured for the purposeof claiming indemnity from a third party for a loss covered by insurance. It serves three major purposes: Helps to reduce insurance premiums Those who cause losses are held accountableInsureds are prevented from double collectingWhat are some important aspects of Subrogation? General rule is that by exercising its subrogation rights, insurer is entitled only to the amount it has paid under the policy After a loss insured cannot impair or interfere with insurer’s subrogation rights Subrogation does not apply to life insurance and health insurance contracts The insurer can’t subrogate against its own insureds. What is a waiver of subrogation? It sates that if something was to happen, the insured does not want the insurer to ever subrogate a certain individual or company. May require hold-harmless agreements with the other party.What is the principle of utmost good faith? A higher degree of honesty is expected from both parties to the contract and it is due to a high degree of Information asymmetry. Elements of Utmost Good Faith 1. Representations Statements made by applicant for insurance “Material Misrepresentation” - One that would have caused insurer to deny application or issue on different terms Material misrepresentations may cause contract to be voided by insurer Innocent misrepresentation: if relied on by the insurer also makes contract voidable It is unintentional. 2. Concealment is an intentional failure of the applicant for insurance to reveal a material fact tothe insurer. Silence when there is an obligation to speak 3. Warranties is a statement that becomes part of the insurance contract an is guaranteed by the maker to be true in all respects A warranty creates a condition in a contract Any breach of warranty, even if not material, will allow the insurer to void the contract Promissory: condition to continue throughout contract period Affirmative: exists at contract’s inception, promises nothing about futureWhat are the requirements of an insurance contract? 1. Offers and Acceptance An offer that someone accepts 2. Consideration the value that each party gives to the otherInsured vs. Insurer In consideration for the premium paid by insured the insurer will pay for your damages 3. Competent Parties means that parties must have legal capacity to enter into a binding contract 4. Legal PurposeLecture 12 (February 10)Distinct Legal Characteristics of Insurance Aleatory Contract is a contract here the values exchanged may not be equal but depended on an uncertain event Unequal (monetary) values, You can pay for insurance for years and never claim a loss, the 2 amounts will not be equal Unilateral Contract means that only 1 party makes a legally enforceable promise One Party’s promise is enforceable Only the insurance is enforceable Conditional Contract: the insurer’s obligation to pay a claim depends on whether the insured or beneficiary has complied with all policy conditions. Conditions: Required Provisions inserted in the policy that qualify or place limitations on insurer’s promise to perform Personal Contract means that the contract is between insured and insurer Insures owner of property against loss Contract of Adhesion means that the insured must accept the entire contract will all of its termsand conditions Principle of reasonable expectations states that an insured is entitled to cover under a policy that he or she reasonably expects it to provideWhat are the basic parts of an Insurance Contract? DeclarationsDefinitions Insuring Agreement Exclusions Conditions Miscellaneous ProvisionsWhat is Kidnap and Ransom Insurance? It is used in countries where kidnap is very popular and will pay the ransom amount. These Insurance companies have people who are trained with crisis management What is the declaration page? It has the statements that provide information about the particular property or activity to be insured and is the first part of the insurance policy. What is the definitions page?Definitions serve the purpose to clearly define the meaning of key words and phrases so that coverage under policy can be determined more easily. What is the Insuring Agreement? Insuring Agreement summarizes the major