2 - 1Copyright 2008, The National Underwriter Company Legal Aspects of Insurance & Risk Management  Principal of indemnity  Indemnify means to make whole or to reimburse  Ideally, after a loss an insured should not be in a worse position or a better position prior to the loss  Insurable interest  A party must have an insurable interest in property in order to enter into an insurance contract or policy  An insured must have a legitimate financial interest in the property  Does not have rise to the level of ownership  Its loss must cause the insured money Chapter 2 Risk Management For Financial Planners

2 - 2Copyright 2008, The National Underwriter Company  Other insurance contract characteristics  Doctrine of Utmost Good Faith  it is in the interest to the general public good to hold insurers to higher standards of good faith and fair dealing than other types if private contracts  Aleatory Contract  Insurance contracts are aleatory because the dollar amount exchanged is unequal  Small premium for a large death benefit  Contract of Adhesion  Policy is written and drawn by the insurer  Offered to the applicant on a “take it or leave it” basis  Courts find ambiguity in the contracts in favor of the insured Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management

2 - 3Copyright 2008, The National Underwriter Company  Insurance regulations and contract requirements  1945 McCarran-Ferguson Act  Allowed individual states to regulate insurance and insurance companies within their borders  1887 Fire property policy  Created by New York legislature  The beginning of insurance policy regulation  Updated in 1918 and again in 1943  The 1943 New York Standard Fire Policy  adopted by nearly all states  1976 Simplified language homeowners policy and the simplified commercial policies of the 1980’s Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management

2 - 4Copyright 2008, The National Underwriter Company  Insurance policy characteristics  Property & Casualty Policies  Declarations page  Contains basic information about the insured, policy period, limits of liability, etc.  Insuring agreement  The coverage pledge  Exclusions page  What is not covered by the policy Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management

2 - 5Copyright 2008, The National Underwriter Company  Insurance policy characteristics (cont'd)  Property & Casualty Policies (cont'd)  Reasons for exclusions  Loss is not insurable  Flood or war  Loss is more appropriately covered in another type of policy  Automobile, aircraft  Loss is wholly or partially in control of the insured  Exclusion of marring and scratched damage  Loss is more appropriately covered by an endorsement  Jewelry  Small predictable losses Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management

2 - 6Copyright 2008, The National Underwriter Company  Insurance policy characteristics (cont'd)  Conditions Sections  How to file a claim  How and when each party may cancel the contract  What each party must do after a loss  How disagreements between parties are handled Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management

2 - 7Copyright 2008, The National Underwriter Company  Insurance policy analysis (property & casualty)  Questions to ask  Who is the insured?  What property or activity is insured?  What locations are insured?  What is the time period of the coverage?  What are the perils insured against?  What is not covered under the policy (exclusions)?  Are direct losses, indirect losses or both types insured?  What are the coverage limits?  Are there any miscellaneous clauses? Chapter 2 Risk Management For Financial Planners Legal Aspects of Insurance & Risk Management