Download - Insurance Act Final
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Amity Business School
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Definition of InsuranceInsurance is the pooling of fortuitous lossesby transfer of such risks to insurers, who
agree to indemnify insured for such losses,to provide other pecuniary benefits on theiroccurrence or to render services connectedwith the risk
Commission on Insurance Terminologyof the American Risk and Insurance
Association
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Amity Business SchoolRequirements of an
Insurance ContractTo be legally enforceable, an insurancecontract must meet four requirements:
Offer and acceptance of the terms of thecontract
Consideration the values that each partyexchange
Legally competent parties, with legal capacityto enter into a binding contract
The contract must exist for a legal purpose
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Amity Business SchoolDistinct Legal
Characteristics of Insurance Contracts
Aleatory: values exchanged are not equal
Unilateral: only the insurer makes a legally enforceable
promise
Conditional: policy owner must comply with all policyprovisions to collect for a covered loss
Personal: property insurance policy cannot be validly
assigned to another party without the insurer's consent Contract of adhesion: since the insured must accept the
entire contract as it is written, any ambiguities are construedagainst the insurer
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Insurance vs. GamblingInsurance
Insurance is a techniquefor handing an already
existing pure risk
Insurance is sociallyproductive: both parties have a
common interest in theprevention of a loss
Gambling
Gambling creates anew speculative risk
Gambling is not sociallyproductive The winners gain comes
at the expense of theloser
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Insurance vs. HedgingInsurance
Risk is transferred by a
contract Insurance involves thetransfer of insurable risks
Insurance can reduce theobjective risk of an
insurer through the Lawof Large Numbers
Hedging
Risk is transferred by a
contract Hedging involves risksthat are typicallyuninsurable
Hedging does not result
in reduced risk
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Types of Insurance Private Insurance
Life and Health
Property and Liability
Government Insurance
Social Insurance
Other Government Insurance
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Fundamental Legal
Principles
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Legal Principles Principle of Indemnity
Principle of Insurable Interest
Principle of Subrogation Principle of Utmost Good Faith
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Principle of IndemnityThe insured agrees to pay no more than the
actual amount of the loss
Purpose:
To prevent the insured from profiting from a
loss To reduce moral hazard
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Principle of Indemnity In property insurance, indemnification is based on
the actual cash value of the property at the time ofloss
There are three main methods to determine actualcash value: Replacement cost less depreciation
Fair market value is the price a willing buyer would pay awilling seller in a free market
Broad evidence rule means that the determination ofactual cash value should include all relevant factors anexpert would use to determine the value of the property
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Principle of Indemnity There are some exceptions to the principle of indemnity:
A valued policy pays the face amount of insurance if atotal loss occurs
Valued policy law that requires payment of the faceamount of insurance to the insured if a total loss to realproperty occurs from a peril specified in the law
Replacement cost insurance means there is nodeduction for depreciation in determining the amountpaid for a loss
A life insurance contract is a valued policy that pays astated sum to the beneficiary upon the insureds death
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Principle of Insurable InterestThe insured must stand to lose financially if a loss occurs. A
contract entered into without insurable interest is wageringagreement.
Purpose:
To prevent gambling
To reduce moral hazard
To measure the amount of loss
When must insurable interest exist?
Property insurance: at the time of the loss
Life insurance: only at inception of the policy
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Principle of SubrogationSubstitution of the insurer in place of the insured
for the purpose of claiming indemnity from athird person for a loss covered by insurance.
Only in case of Marine and Fire Insurance
Purpose: To prevent the insured from collecting twice for the
same loss To hold the negligent person responsible for the loss
To hold down insurance rates
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Principle of Subrogation The insurer is entitled only to the amount it has
paid under the policy
The insured cannot impair the insurerssubrogation rights
Subrogation does not apply to life insurance and
to most individual health insurance contracts
The insurer cannot subrogate against its owninsurer.
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Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties toan insurance contract than is imposed on parties to othercontracts
Supported by three legal doctrines:
Representations are statements made by theapplicant for insurance
A contract is voidable if the representation ismaterial, false, and relied on by the insurer
An innocent misrepresentation of a material fact, ifrelied on by the insurer, makes the contractvoidable
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Principle of Utmost Good Faith
A concealment is intentional failure of the applicant
for insurance to reveal a material fact to the insurer
A warranty is a statement that becomes part of theinsurance contract and is guaranteed by the maker to
be true in all respects
Statements made by applicants are considered
representations, not warranties
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Amity Business SchoolDOUBLE INSURANCE
Insurance of same person or an asset with two different
companies.
Full amount in case of life insurance.
Loss amount in any other insurance.
Loss is paid in proportion of the loss by different
companies.
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Amity Business SchoolRe-Insurance
Done by the insurer
To reduce risk
Delegation of risk
Insured doesnt have to deal with the new insurer
Re-insurance can be in full or a part of policy.
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Made by:-
Akhil Suneja (D-23)
Aneesh Bajaj(D-52)
Chaitanya Gandhi(D-28)
Shrikant Yadav(D-38)
Viresh Arora(D-27)