RMI 3011 Chapter 6 Notes Principle of Indemnity The insurer agrees to pay no more than the actual amount of the loss Purpose o Prevents the insured from profiting from a loss o Reduce moral hazard fraud In property insurance indemnification is based on the Actual Cash Value ACV of the property at the time of loss o Three main methods to determine actual cash value ACTUAL CASH VALUE Replacement cost Depreciation Fair market value evidence Broad rule determine the value what would a willing buyer pay includes all relevant factors an expert would use to Replacement Cost Coverage RCC o Restores damaged property with new stuff of similar kind and quality o Replacement cost coverage for a home and for personal property are two different policy endorsements Exemptions to the Principles of Indemnity o Valued Policy Pays the face amount of insurance if a total loss occurs o Valued Policy Law Some states require certain policies to pay the face amount of insurance if a total loss to property occurs from a peril specified in the law o Replacement cost insurance Costs about 10 more but it pays off 30 40 better at claim time No deduction for depreciation o A life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured s death Aka NO depreciation Principle of Insurable Interest o The insured must be in a position to lose financially if a covered loss occurs o Purposes Prevents gambling Reduces moral hazard Measures the amount of the insured s loss o An insurable interest can be supported by Ownership of property Potential legal liability Serving as a secured creditor Contractual rights o When must insurable interest exist Condition that occurs to existing contract to make sure coverage will still be there after the condition takes place Property insurance at the time of the loss o If you sell your house one day and it burns down the next you can make no claims to the loss Life insurance only at inception of the policy o If divorce occurs an ex could still continue to have claim to life insurance if they keep paying premiums o People often forget about purchasing these policies and the ex wife who gets the money is not forced to share regardless if the other spouse gets remarried The question of insurable interest does not arise when you purchase life insurance on your own life Insurable interest in another person s life can be shown by close family ties marriage or a pecuniary financial business interest Principle of Subrogation 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 Purposes o Prevents the insured from collecting twice for the same loss o Holds the negligent person responsible for the loss Insurer can collect its losses o Excess amount goes to the insured o Sometimes less than 100 of the amount is collected If that happens insured gets the same percentage of the deductible back The insurer is entitled only to the amount it has paid under the policy The insurer cannot subrogate against its own insureds Subrogation does not apply to life insurance Principle of Utmost Good Faith A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts Supported by three legal doctrines o Representations you misrepresent the items you have o Concealment you hide something from insurance companies o Warranty statement that becomes part of the insurance contract and is guaranteed by the mker to be true in all respects Representations are statements made by the applicant for insurance o A contract is voidable if the representation is material false and relied on by the o Material means that if the insurer knew the true facts the policy would not have been issued or would have been issued on different terms o An innocent misrepresentation of a material fact if relied on by the insurer makes the insurer contract voidable Requirements of an Insurance Contract To be legally enforceable an insurance contract must meet 4 requirements of the terms of the contract o Offer and acceptance o Consideration o Competent parties o The contract must exist for a legal purpose the value that each party gives to the other with legal capacity to enter into a binding contract A binder is a temporary insurance contract can be written or oral Insurance is effective immediately upon approval Distinct Legal Characteristics of Insurance Contracts values exchanged are not equal only the insurer makes a legally enforceable promise policyowner must comply with all policy provisions to collect for a covered loss property insurance policy cannot be validly assigned to another party without the Aleatory Unilateral Conditional Personal insurer s consent A contract of adhesion the insured must accept the entire contract with all of its terms and conditions Principle of reasonable expectations she reasonably expects it to provide and that to be effective exclusions or qualifications must be conspicuous plain and clear Courts have rules that any ambiguities or uncertainties in the contract are construed against the insurer an insured is entitled to coverage under a policy that he or Law and the Insurance Agent An agent is someone who has the authority to act on behalf of a principal the insurer Several laws govern the actions of agents and their relationship to insureds o There is no presumption of an agency relationship o An agent must be authorized to represent the insurer o A principal is responsible for the acts of agents acting within the scope of their authority Insurance Sales o Limitations can be placed on the powers of agents o Producer someone who sells insurance o Agent represents the insurer Independent agents versus exclusive or captive agents o Broker represents the insured Are the intermediary between customer and insurer Usually sell commercial coverage An agent s authority comes from three sources o Express authority o Implied authority o Apparent authority Knowledge of the agent is presumed to be knowledge of the principle with respect to matters within the scope of the agency relationship Insurers can place limitations on the power of agents by adding a nonwaiver clause to the application or policy Waiver Estoppel reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation is defined as the voluntary relinquishment of a known legal
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