Bảo hiểm - Chapter 9: Fundamental legal principles

Chapter 9Fundamental Legal PrinciplesAgendaPrinciple of IndemnityPrinciple of Insurable InterestPrinciple of SubrogationPrinciple of Utmost Good FaithRequirements of an Insurance ContractDistinct Legal Characteristics of Insurance ContractsLaw and the Insurance AgentPrinciple of IndemnityThe insurer agrees to pay no more than the actual amount of the lossPurpose:To prevent the insured from profiting from a lossTo reduce moral hazardPrinciple of IndemnityIn property insurance, indemnification is based on the actual cash value of the property at the time of lossThere are three main methods to determine actual cash value:Replacement cost less depreciationFair market value is the price a willing buyer would pay a willing seller in a free marketBroad evidence rule means that the determination of ACV should include all relevant factors an expert would use to determine the value of the propertyPrinciple of IndemnityThere are some exceptions to the principle of indemnity:A valued policy pays the face amount of insurance if a total loss occursSome states have a valued policy law 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 lawReplacement cost insurance means there is no deduction for depreciation in determining the amount paid for a lossA life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured’s deathPrinciple of Insurable InterestThe insured must stand to lose financially if a loss occursPurpose:To prevent gamblingTo reduce moral hazardTo measure the amount of lossWhen must insurable interest exist?Property insurance: at the time of the lossLife insurance: only at inception of the policyPrinciple of SubrogationSubstitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss covered by insurance.Purpose:To prevent the insured from collecting twice for the same lossTo hold the negligent person responsible for the lossTo hold down insurance ratesPrinciple of SubrogationThe insurer is entitled only to the amount it has paid under the policyThe insured cannot impair the insurer’s subrogation rightsSubrogation does not apply to life insurance and to most individual health insurance contractsThe insurer cannot subrogate against its own insuredsPrinciple of Utmost Good FaithA higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contractsSupported by three legal doctrines:Representations are statements made by the applicant for insuranceA contract is voidable if the representation is material, false, and relied on by the insurerAn innocent misrepresentation of a material fact, if relied on by the insurer, makes the contract voidablePrinciple of Utmost Good FaithA concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurerA warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respectsStatements made by applicants are considered representations, not warranties Requirements of an Insurance ContractTo be legally enforceable, an insurance contract must meet four requirements:Offer and acceptance of the terms of the contractConsideration – the values that each party exchangeLegally competent parties, with legal capacity to enter into a binding contract The contract must exist for a legal purposeDistinct Legal Characteristics of Insurance ContractsAleatory: values exchanged are not equalUnilateral: only the insurer makes a legally enforceable promiseConditional: policyowner must comply with all policy provisions to collect for a covered lossPersonal: property insurance policy cannot be validly assigned to another party without the insurer's consentContract of adhesion: since the insured must accept the entire contract as it is written, any ambiguities are construed against the insurerLaw and the Insurance AgentAn 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 insuredsThere is no presumption of an agency relationshipAn agent must be authorized to represent the principalAuthority is either express, implied, or apparentKnowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationshipInsurers can place limitations on the power of agents by adding a nonwaiver clause to the application or policyLaw and the Insurance AgentWaiver is defined as the voluntary relinquishment of a known legal rightEstoppel occurs when a representation of fact made by one person to another person is 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