RMIN 4000 Chapter 91. Principle of indemnitya. The principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from the loss.b. The first purpose is to prevent the insured from profiting from a loss.c. The second purpose is to reduce moral hazard.2. Actual Cash valuea. The concept of actual cash value supports the principle of indemnity.b. The courts have used a number of methods to determine actual cash value, including:i. Replacement cost less depreciation-under this rule actual cash value is defined as replacement cost less depreciationii. Fair market value-is the price a willing buyer would pay a willing seller in a free marketiii. 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 the property. 3. Exceptions to the principle of indemnitya. Valued policy is a policy that pays the face amount of insurance if a total loss occurs.i. Because of difficulty in determining the actual value of the property at the time of loss, the insured and insurer both agree on the value of the proerpty when the policy is first issued.b. A valued policy law is a law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law.c. Replacement cost insurance- means there is no deduction for physical depreciation in determining the amount paid for a loss.d. Life insurance is another exception to the principle of indemnity. A life insurance contract is not a contract of indemnity but is a valued policy that pays a stated sum to the beneficiary upon the insured’s death. The indemnity principle is difficult to apply to life insurance because the actual cash value rule is meaningless in determining the valueof human life.4. Principle of Insurable Interesta. The principle of insurable interest states that the insured must be in a position to lose financially if a covered loss occurs.b. Purposes of an insurable interest:i. To prevent gamblingii. To reduce moral hazardiii. To measure the amount of the insured’s loss in property insurance5. Examples of Insurable interesta. Ownership of property can support an insurable interest because owners of property will lose financially if their property is damaged or destroyedb. The law considers the insurable interest requirement to be met whenever a person voluntarily purchases life insurance on his or her life.c. If you wish to purchase a life insurance policy on the life of another person, however, you must have an insurable interest in that person’s life.d. If there is a pecuniary (financial) interest, the insurable interest requirement in life insurance can be met.e. In property insurance, the insurable interest must exist at the time of the loss.f. In contrast, in life insurance, the insurable interest requirement must be met only at theinception of the policy, not at the time of death.6. Principles of subrogationa. Subrogation means substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance. Stated differently, the insurer is entitled to recover from a negligent third party any loss payments made tothe insured. b. Subrogation does not apply unless the insurer makes a loss payment. c. Purposes of subrogationi. First, subrogation prevents the insured from collecting twice for the same loss.ii. Second, subrogation is used to hold the negligent person responsible for the loss.iii. Finally, subrogation helps to hold down insurance ratesd. Importance of subrogationi. The general rule is that by exercising its subrogation rights, the insurer is entitled only to the amount it has paid under the policy.1. One view is that the insured must be reimbursed in full for the loss; the insurer is then entitled to any remaining balance up to the insurer’s interest, with any remainder, going to the insured. ii. After a loss, the insured cannot impair or interfere with the insurer’s subrogation rights.iii. Subrogation does not apply to life insurance and to most individual health insurance contracts.iv. The insurer cannot subrogate against its own insureds.7. Principle of Utmost good faitha. An insurance contract is based on the principle of utmost good faith- that is, a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.b. The principle of utmost good faith is supported by three important legal doctrines: representations, concealment, and warranty.c. Representations are statements made by the applicant for insurancei. The legal significance of a representation is that the insurance contract is voidable at the insurer’s option if the representation is material, false, and relied on by the insurer.ii. Material means that if the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms.d. An innocent misrepresentation of a material fact if relied on by the insurer also makes the contract voidable.e. Finally, the doctrine of material misrepresentation also applies to statements made by the insured after a loss occurs.f. Concealment is intentional failure of the applicant for insurance to reveal a material factto the insureri. To deny a claim based on concealment, a nonmarine insurer must prove two things:1. The concealed fact was known by the insured to be material2. The insured intended to defraud the insurerg. A warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects.h. Modifications of the warranty doctrine are summarized as follows:i. Statements made by applicants for insurance are considered to be representations and not warranties. Thus, the insurer cannot deny liability for a claim if a misrepresentation is not material.ii. Most courts will interpret a breach of warranty liberally in those cases where a minor breach affects the risk only temporarily or insignificantlyiii. Statutes have been passed that allow the insured to recover for a loss unless thebreach of warranty actually contributed to the loss8. Requirements of an insurance contracta. To be legally enforceable, an insurance contact must meet four basic requirements:i. Offer and acceptanceii. Considerationiii. Competent