Introduction to Insurance Objective 04.02 Insurance Law

Nature of Insurance The concept of insurance involves risk pooling or spreading losses over a greater number of people. An insurance company collects and pools premiums from many individuals or businesses for the payment of future claims.

Risk Management All people take risks every day. Risk Management is the process of managing one’s exposure to risk. Examples Using a seat belt Installing smoke detectors Driving a vehicle Playing sports Purchasing an insurance policy Other examples?

Risk Management Options for people to manage risk include Transfer part of risk of financial loss to an insurance company Auto, life, health, disability, property insurances Retain (keep) the risk of financial loss using high deductible Abstain or choose not to participate in risky activities Do not drive car, buy home, play sports, etc. People make decisions about insurance based on their individual situation and risk tolerance.

ADHESION CONTRACT An adhesion contract is a standard form contract that is written primarily by one party Insurance policies are adhesion contracts Policyholder (buyer) cannot usually change: Policy language Perils covered Policyholder can change: The dollar limit of coverage Example- $200,000 coverage on homeowner’s structure Specific items to be covered Example- 1 carat diamond ring, valued at $3000 Some adhesions contracts are found by courts to be unconscionable if they take advantage of one party

Insurance Planned protection provided by sharing economic losses Insurance does NOT stop the loss from happening Insurance companies provide a risk management service to consumers Insurance does indemnify or financially repay the insured a portion of the loss All insurance policies have a specified limit of coverage

NC Department of Insurance Insurance is a highly regulated business activity governed by the laws of each state NC Department of Insurance (NCDOI) handles: Consumer complaints (http://www.ncdoi.com) Fraud investigations and prosecution Approval of requested rate increases/decreases Regulation of agent licensing requirements Censuring unethical/illegal actions of agents Head of NCDOI is the insurance commissioner NC Dept. of Insurance Web Research

Insurance – Basic Terms Insurance policy- A contract issued by the insurance company (insurer) for coverage of the policyholder An insurance policy should be kept in a safe place with other important documents. Policyholder- The person who buys or owns the policy Insured – The person whose life or property is insured, may or may not also be the policyholder Insurer - An individual or company who undertakes, underwrites or agrees to compensate the insured for losses, liability, or damages incurred.

Insurable Interest A financial interest in property or a person’s life that permits someone to buy insurance to protect against the financial loss of that property or person’s life Examples: You can insure cars owned or leased by you, but not a car belonging to another person You can purchase life insurance on someone whose death would be a financial loss to you, ie spouse, business partner, parent, child

Premium The amount of money the policyholder must pay for insurance coverage An insurance underwriter determines the cost of the policy using risk factors and statistical data An agent represents the company to the consumer Equals consideration in the insurance contract

Non-Payment of Premium If the premium is not paid, the policy may lapse or cancel, voiding the contract If claims are made after a lapse, the claim is denied Some policies have a grace period Late premiums are received and Policies are reinstated

Claims The request for payment from an insurance company to cover the financial losses Examples: Automobile-car accident Medical-doctor’s appointment Life-covered person dies Disability-out of work for health reasons Unemployment-laid off from job

Deductibles Most policies have a self-insured portion of the cost of the claim that is paid by the insured. The insured chooses the amount of risk retained by choosing the deductible amount Deductible On auto coverage, the amount the insured pays before the insurer pays collision or comprehensive damage claims On health coverage, the amount the patient pays before the insurance company pays any covered medical expenses The higher the deductible chosen by the insured, the lower the premium for the coverage. 100% self insurance = 100% risk retention means no insurance is purchased

Exclusions Limitations to policy coverage – Why? Examples: No coverage for flood on homeowners policy No coverage for CD player in car unless permanently attached to vehicle No coverage for self inflicted injury filed as worker’s compensation claim

Insurance Fraud False claims made to an insurance company Federal prosecution is frequent under mail and wire fraud schemes because the USPS is involved What are some of the most common types of fraud that are reported in North Carolina?

Insurance Fraud Automobile Repair Billing of Medical Services What are some examples of auto repair fraud? Who should you contact if you believe that an auto repair business has been fraudulent in dealing with you. Billing of Medical Services What type medical service incidents may be considered fraud? Who should you contact if you believe that medical services organizations has been fraudulent in dealing with you. Automobile Accidents What are some examples of automobile accident fraud? What should you do if you suspect you are a victim of this type of fraud?

Insurance Fraud Adjusting Property Claims Adjusting What is “adjusting” in the insurance property insurance industry? How does adjusting work, when the adjuster is doing a professional job and not trying to defraud a consumer? What are some of the most common methods that fraudulent adjusters utilize to defraud a consumer Who would you contact if you believed you were a victim of adjusting fraud. Property Claims Adjusting What is this type of fraud? Why has this type of fraud been so common in North Carolina in the past several years?

Insurance Fraud Examples: Inflated cost of damage repairs Staging car accidents (felony) Arson for profit (felony) Faked deaths for life insurance (felony) Overstated health care billings or service not provided Phony workers compensation filed when hurt at home not work False statements made on an application may also create a voidable contract for the insurance company WORKSHEET: Insurance Matching