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Chapter 9 Fundamental Legal principals Principal of Indemnity insured should not profit from a loss The insurer agrees to pay no more than the actual amount of the loss The Purposes Of Indemnity 1 Prevents the insured from profiting from a loss 2 Reduces moral hazard fraud cheating the system trying to force a loss on oneself to profit Side Note Majority of property and causality insurance contracts are contracts of indemnity Actual Cash Value ACV Replacement cost depreciation Takes into account inflation replacement cost and depreciation of values Replacement cost is the current cost of the damaged property TODAY 4 ways ACV can be measured 1 Replacement cost Depreciation 2 Fair Market Value a price a buyer would be willing to pay the seller in the free market 3 Broad evidence rule all relevant factors an expert would take into consideration before purchasing the property EX Goes deep within many factors to determine projected income what MR C would evaluate before purchasing 4 Replacement Cost Current cost of restoring the damaged property with new materials of like kind and quality Exceptions to the rules of IDEMNITY 1 Valued Policy a policy that pays the face amount of insurance if a total EX Used to insure rare antiques fine arts and family heirlooms life 2 Valued Policy Law A state law that requires certain insurance policies to EX Law that requires insures to pay the full face value if a particular catastrophe occurs fire insurance hurricane insurance 3 Replacement Cost Insurance There is no deduction for physical depreciation in determining the amount paid for a loss just a type a policy a insured would purchase loss occurs insurance be valued policies Insurable Interest The insured must be in a position to lose financially if a covered loss occurs Purposes 1 Prevents gambling insure the property of another and hope for a loss 2 Reduces moral hazard some one kills someone to gain a profit assuming you bought life insurance on someone else Side note In property insurance insurable interest measures the amount of the insured s loss Profit off someone s loss maybe hazardous owner or prevents you from destroying their property and gain Insurable Interest relating to Property and Casualty P C 1 Ownership of property You have insurable interest if you own property 2 Potential legal liability from loss of property if your dog bites someone you will be legally liable for that dog or if a kid falls into a pool 3 Claim of secured creditors ex you mortgage your house you and the creditor have Insurable interest creditor not so much because it has collateral 4 Contractual right lost profits if items do not arrive EX You purchased inventory and it has to be shipped you and the seller have insurable interest based on the contract of you receiving those items For insurer to cover Insurable Interest must exist at the time of loss If you don t have a stake in the loss you are technically profiting from the loss and that would defy the principal of INDEMNITY Insurable Interest Life 1 Yourself 2 Immediate family member 3 Pecuniary financial interest e g business partners Most common husband buys policy on wife and vice versa Life insurance doesn t make sense for children because they drain the family of money so you would actually be gaining from loss Can buy life insurance on top sales person who make 3 mill for the company SUBROGATION The insurer is entitled to recover from a negligent third party after loss payments are made to the insured In simpler terms Insurance company covers your loss and then the other insurance company would subrogate another insurance company sew or individual responsible Side notes Insurance company cannot subrogate itself You have no control over who they subrogate unless you specify in the policy who the insurer cannot subrogate Purposes 1 Prevents the insured from collecting twice from his and other persons insurer 2 Holds the negligent party responsible for a loss 3 Helps reduce insurance premiums how If the insures had to pay for EVERY accident then there would be more risk involved for them which would ultimately raise premiums To cover their ass Also the money earned from subrogation lowers premiums Lower stake Some rules of Subrogation self explanatory 1 Insurer can collect its losses excess to insured 2 The insured cannot stop insurer from subrogating 3 Subrogation does not apply to life insurance 4 The insurer cannot subrogate against its own insured s Ex If I have state farm and negligent party has state farm than state farm cant subrogate against the negligent party important Principle of Utmost Good Faith A higher degree of honesty is imposed on both parties to an insurance contract than to most other contracts Tracks history to ocean marine coverage underwriter had to have a lot of faith in the insured its stupid just memorize that this is were the concept originated The principle of Utmost Good Faith is supported by three legal doctrines 1 Representations Statements made by the applicant for insurance Life insurance may be asked to provide info like age height weight The insurer must prove the insured supplied false information and intended to deceive in order to void a policy 3 things that insurance can void a policy the company would not have issued the policy 1 Material if the insurer had all the info that insured had than 2 False statement is not true or misleading 3 Reliance relies on the misrepresentation in issuing policy at a specified premium The book doesn t go into detail and neither did the professor so just know it Innocent misrepresentation can also be classified as voidable 2 Concealment Intentional failure of the applicant for insurance to reveal a material fact to the insurer To prove concealment occurred insurer must prove The concealed fact was known by the insured to be material The insured intended to defraud the insurer Basically they have to have material evidence that was withheld and then prove that this was intentional only for concealment Ex if you have a criminal record and you fail to tell the insurer that as you purchase life insurance and then you die five months later then insurer can void payment 3 Warranty A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects Breach of a warranty may allow the insurer to deny part or all of a claim Ex Warranting that a guard will be on duty or an alarm will be on or a sprinkler in case of a fire will be present


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FSU RMI 3011 - Chapter 9 Fundamental Legal principals

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