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Legal Principles of Insurance Contracts
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Requirements of a Valid Insurance Contract
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LegalityCapacityOffer and AcceptanceConsideration
contracts in most states can be oral or written
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Valid Insurance Contract - Legality3
needs to be for legal purposemust not encourage or protect illegal
activities
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Valid Insurance Contract - Capacity4
the legal ability to enter into a contractcapacity is assumed except:
minors insane intoxicated corporations acting outside the scope of its charter
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Valid Insurance Contract - Offer and Acceptance
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a meeting of the minds between the parties contracting
Who makes the offer? Applicant always makes the offer
Property insurance: agent solicits offer applicant offers agent accepts (binds) if company does not want the contract, it may cancel
the contract according to the contract’s cancellation clause
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Valid Insurance Contract - Offer and Acceptance (cont.)
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Life insurance: agent solicits offer applicant offers insurance company accepts, rejects or counter offers counter offer may be accepted or rejected by the
applicant legal offer in life insurance must be supported by a
consideration
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Valid Insurance Contract - Consideration
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property: monetary payment and an agreement to abide by conditions and stipulations in the contract
life: monetary payment and making truthful statements in the application
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Insurance by Type of Contract8
aleatory - dollar outcome is unequalconditional - performance is conditional upon
the occurrence of an uncertain eventadhesion - ambiguities are construed against
the contract’s writer personal - requires privity of contractunilateral - only one party has to perform -
the insurer
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Legal Principles Underlying Insurance Contracts - Overview
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Principle of Insurable InterestPrinciple of IndemnityPrinciple of SubrogationPrinciple of Utmost Good Faith
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Legal Principles - Principle of Insurable Interest
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must demonstrate a ‘loss’ to collect would be gambling or intentional loss if could collect with
no personal loss insurance is a ‘personal’ contract
follows the person - not the property What constitutes insurable interest?
ownership leases can cause secured creditors - can have; general creditors do not legal liability care, custody, and control life insurance - exists for person voluntarily insuring ones
own life - others must have insurable interest
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Legal Principles - Principle of Insurable Interest (cont.)
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When must the insurable interest exist? Property insurance - must exist at the time of the loss Life insurance - must exist at the inception of the
policy; continuing insurable interest is not necessary
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Legal Principles - Principle of Indemnity
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Principle of insurable interest determines if a loss is suffered; the principle of indemnity measures the loss.
a person may not collect more than the actual loss - cannot make a profit
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Principle of Indemnity (cont.) - Actual Cash Value
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Actual Cash Value = Replacement Cost Less Depreciation
ACVloss = [RCloss - DEPloss]
RC = the cost to repair or replace with like kind and quality of material
DEP = A measure of ‘betterment’
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Principle of Indemnity (cont.) - Exceptions to the Actual Cash Value Rule
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Valued policiesValued policy lawsReplacement cost coverageLife insurance - not an indemnity contract
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Legal Principles - Principle of Subrogation
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No Insurance contract or If insurance does not exist
Negligentparty
Injured
injury
suit
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Legal Principles - Principle of Subrogation
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One who indemnifies another’s loss is entitled to recovery from any liable third parties
Insurerpays
InjuredInsured
NegligentParty causes
injury
Subrogates againstnegligent party
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Principle of Subrogation - (cont.)17
reinforces the principle of indemnity - can only collect once
holds rates below what they would otherwise be - salvage
places burden of the loss on those responsible i.e. negligence
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Principle of Subrogation - (cont.) - Important Facts
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subrogation does not exist where the principle of indemnity does not apply - life insurance
subrogation is ALWAYS waived for AN INSURED
if an insured violates or destroys insurer’s subrogation rights, insured may forfeit collection rights under the contract
the insurer is entitled to subrogation dollars only after insured has collected fully for the loss
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Principle of Subrogation - (cont.) - Example
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Insured has $10,000 loss andrecovers $7,000
from insurer
Insurer pays$8,000 less $1,000
Deductible
Negligent Partypays $5,000
subrogates
injury
$3,000 to insured$2,000 to insurer
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Principle of Utmost Good Faith20
higher standard of honesty is imposed on insurance contracts as compared to other contracts
as a result, abuses are categorized as: a material misrepresentation a concealment a breach of a warranty a breach of utmost good faith
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Principle of Utmost Good Faith - Representations
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statements made BEFORE a contract starts to induce a party to enter the contract
oral or written statementscontract can be avoided if the representation
is FALSE and MATERIAL False - not true at the time of the statement material - would the insurer declined the contract,
changed the wording or priced it differently if the truth were known
statement of opinions are not sufficient to avoid the contract
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Principle of Utmost Good Faith - Concealments
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silence when there is an obligation to speakutmost good faith imposes duty to voluntarily
divulge material informationwhen a material fact concealed - allows
insurer to avoid contractgenerally there must be an element of
deceptiontests for concealment
did the insured know of a certain fact was the fact material was the insurer ignorant of the fact
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Principle of Utmost Good Faith - Warranties
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a warranty creates a condition in a contractany breach of warranty even if not material
will allow insurer to avoid contract (strict interpretation)
types of warranties express - written implied - not written promissory - condition to continue throughout
contract period affirmative - exists at contract’s inception; promises
nothing about the future
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Warranties - Examples24
implied affirmativeimplied promissoryexpress affirmativeexpress promissory
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Commonly referred to as a ‘bad faith claim’Used when the insured feels the insurer is
not acting in ‘good faith’Used to force insurance companies to
perform according to the contract
Principle of Utmost Good Faith - Breach of Utmost Good Faith