CHAPTER 50 INSURANCE © 2010 Pearson Education, Inc., publishing as Prentice-Hall

Insurance A means for persons and businesses to protect themselves against risk of loss.

Insurance One undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. Means of transferring and distributing risk of loss. Risk of loss is pooled. Governed by state law.

Terms Insured – party who pays a premium to insurance company for insurance coverage. Insurer – insurance company that underwrites the insurance coverage. Policy – the insurance contract. Sold by agents or brokers. Premium – the money paid to the insurance company.

Insurable Interest Anyone who would suffer a monetary loss from the destruction of real or personal property has insurable interest. E.g., owner of property, mortgagee, lienholder, tenant. Person who has close family relationship or economic benefit from the continued life of another has insurable interest. Can insure own life. Interest must exist when policy issued.

Insurance Policy Governed by contract law. Most prepared on standardized forms. Some state statues mandate specific language. Coverage in place when policy issued. Modifications can be made by adding endorsement or rider. Insured may cancel policy at any time. Insurer may cancel for nonpayment.

Performance of Insurance Contracts Insured’s Duties Duty to pay premiums. Duty to notify insurer of insured event. Duty to cooperate in investigation. Insurer’s Duties Duty to defend against suit. Duty to pay legitimate claims.

Duties of Insurer An insurance company owes a duty to defend an insured against a lawsuit. This includes: Providing for and paying for a lawyer Court costs Deposition fees Insurer owes duty to pay legitimate claims up to policy limit. If insurer wrongfully refuses, it is liable for damages.

Deductible Clause Contract may provide that insurance proceeds are payable only after the insured has paid a specified amount of the damage or losses.

Coinsurance Clause Contract may provide that insured must pay a percentage of an insured loss. Also called a co-pay clause.

Exclusions from Coverage Contract may provide that certain events not covered. E.g., preexisting medical conditions excluded from health insurance coverage. E.g., flood damage excluded from homeowners’ insurance coverage.

Misrepresentations and Concealment Insurer may avoid liability on policy if it was issued based upon: Material misrepresentations by insured, or Applicant concealed material information. Incontestability clauses prevent insurers from contesting statements after the passage of a certain number of years (usually 2-5).

Life Insurance A form of insurance where the insurer is obligated to pay a specific sum of money upon the death of the insured.

Types of Life Insurance Description Whole life Provides coverage during the entire life of the insured. Premiums paid during the life of the insured or until a certain age. Element of savings. Limited-Payment Premiums paid for a fixed number of years. Coverage is provided during the entire life of the insured. Term Insurance is issued for a limited period of time. Premiums are payable and coverage effective during this term. Universal life Combines features of both term and whole life insurance. Endorsement and Annuity Contracts Forms of retirement and life insurance contracts.

Double Indemnity Clause Contract may provide that insurer will pay double the amount of the policy if death is caused by accident.

Parties to Life Insurance Contract Insurance company issues the policy. Owner of policy is the person who contracts with insurance company and pays premiums. Insured is the person whose life is insured. Beneficiary is the person to receive insurance proceeds when the insured dies.

Suicide Clause Contract may provide that if the insured commits suicide before a stipulated date, insurance company does not have to pay the life insurance proceeds. Usually two years.

Health and Disability Insurance Health Insurance Covers costs of medical treatment, surgery, or hospital care. Disability Insurance Provides a monthly income to an insured who is disabled and cannot work.

Fire and Homeowners’ Insurance Standard Fire Insurance Policy Homeowners’ Policy Renters Insurance

Standard Fire Insurance Policy Protects real and personal property against loss resulting from fire, lightning, smoke, water damage, and related perils. Most policies exclude coverage for losses caused by enemy attack, civil war, revolution, landslides, and floods. Most policies provide replacement cost insurance.

Homeowners’ Policy Comprehensive insurance policy that includes coverage for the risks covered by a standard fire insurance policy as well as personal liability insurance. Includes coverage for: The dwelling Any appurtenant structures Personal property Protection for losses caused by theft

Personal Liability Coverage Insurer must pay property damage, personal injuries, and medical expenses to persons injured on the insured’s property and to persons injured by the insured or members of the insured’s immediate family away from the insured’s property. E.g., guest slips on sidewalk of home. E.g., family member injures person while golfing at golf club.

Personal Articles Floater Insurance in addition to the homeowners policy that covers specific valuable items. Art Jewelry Furs Must submit list of items along with appraisals. Charged an increased premium based on value of items listed.

Renters’ Insurance Covers loss and damage to renter’s possessions and provides personal liability coverage. Insures against the same perils as a homeowners’ policy.

Title Insurance Insures that owners of real property have clear title to the property. Protects against defects in title and liens and encumbrances that are undisclosed on title insurance policy. May be required to obtain mortgage.

Automobile Insurance Collision Comprehensive Liability Medical Payment Uninsured Motorist No-Fault

Auto Insurance Collision insurance covers auto against risk of loss. Pays damages if car is hit by another vehicle. Comprehensive insurance covers auto from loss or damages other than from collision. E.g., theft or hail.

Auto Insurance (continued) Liability insurance covers damage to third parties. Limits are usually given as three figures – e.g., 200/500/100. Basic policy covers insured driving own vehicle. Omnibus clause. D.O.C. clause. States often require minimum coverage.

Auto Insurance (continued) Uninsured motorists coverage provides coverage for driver and passengers injured by hit-and-run or uninsured motorist.

No-Fault Automobile Insurance Driver’s insurance company pays for injuries to driver and passengers, no matter who caused the accident. Medical expenses Lost wages Sometimes pain and suffering Assures that coverage is available.

Marine Insurance Insures against loss or damage of vessel or cargo. Shippers purchase to cover risk of loss of goods.

Umbrella Policy Pays if policy limits of homeowners or auto coverage exceeded. May purchase this additional insurance if stipulated amount of minimum homeowners or auto coverage has been purchased. Higher limits. E.g., $5 million.

Business Insurance Business Interruption Insurance Workers’ Compensation Insurance Key Person Life Insurance Directors’ and Officers’ Liability Insurance Product Malpractice Insurance Product Liability Insurance

Key-Person Life Insurance Small businesses often purchase key-person life insurance on the owners of the business. The company pays the premiums for the life insurance policies. Usually used to fund buy-sell agreements among the owners of the business.