1. 1 Legal Principles of Insurance Contracts

2. Requirements of a Valid Insurance Contract 2 Legality Capacity Offer and Acceptance Consideration contracts in most states can be oral or written

3. Valid Insurance Contract - Legality 3 needs to be for legal purpose must not encourage or protect illegal activities

4. Valid Insurance Contract - Capacity 4 the legal ability to enter into a contract capacity is assumed except: minors insane intoxicated corporations acting outside the scope of its charter

5. Valid Insurance Contract - Offer and Acceptance 5 a meeting of the minds between the parties contracting Who makes the offer? Applicant always makes the offer Property insurance: agent solicits offer applicant offers agent accepts (binds) if company does not want the contract, it may cancel the contract according to the contracts cancellation clause

6. Valid Insurance Contract - Offer and Acceptance (cont.) 6 Life insurance: agent solicits offer applicant offers insurance company accepts, rejects or counter offers counter offer may be accepted or rejected by the applicant legal offer in life insurance must be supported by a consideration

7. Valid Insurance Contract - Consideration 7 property: monetary payment and an agreement to abide by conditions and stipulations in the contract life: monetary payment and making truthful statements in the application

8. Insurance by Type of Contract 8 aleatory - dollar outcome is unequal conditional - performance is conditional upon the occurrence of an uncertain event adhesion - ambiguities are construed against the contracts writer personal - requires privity of contract unilateral - only one party has to perform - the insurer

9. Legal Principles Underlying Insurance Contracts - Overview 9 Principle of Insurable Interest Principle of Indemnity Principle of Subrogation Principle of Utmost Good Faith

10. Legal Principles - Principle of Insurable Interest 10 must demonstrate a loss to collect would be gambling or intentional loss if could collect with no personal loss insurance is a personal contract follows the person - not the property What constitutes insurable interest? ownership leases can cause secured creditors - can have; general creditors do not legal liability care, custody, and control life insurance - exists for person voluntarily insuring ones own life - others must have insurable interest

11. Legal Principles - Principle of Insurable Interest (cont.) 11 When must the insurable interest exist? Property insurance - must exist at the time of the loss Life insurance - must exist at the inception of the policy; continuing insurable interest is not necessary

12. Legal Principles - Principle of Indemnity 12 Principle of insurable interest determines if a loss is suffered; the principle of indemnity measures the loss. a person may not collect more than the actual loss - cannot make a profit

13. Principle of Indemnity (cont.) - Actual Cash Value 13 Actual Cash Value = Replacement Cost Less Depreciation ACV loss = [RC loss - DEP loss ] RC = the cost to repair or replace with like kind and quality of material DEP = A measure of betterment

14. Principle of Indemnity (cont.) - Exceptions to the Actual Cash Value Rule 14 Valued policies Valued policy laws Replacement cost coverage Life insurance - not an indemnity contract

15. Legal Principles - Principle of Subrogation 15 No Insurance contract or If insurance does not exist Negligent party Injured injury suit

16. Legal Principles - Principle of Subrogation 16 One who indemnifies anothers loss is entitled to recovery from any liable third parties Insurer pays Injured Insured Negligent Party causes injury Subrogates against negligent party

17. Principle of Subrogation - (cont.) 17 reinforces the principle of indemnity - can only collect once holds rates below what they would otherwise be - salvage places burden of the loss on those responsible i.e. negligence

18. Principle of Subrogation - (cont.) - Important Facts 18 subrogation does not exist where the principle of indemnity does not apply - life insurance subrogation is ALWAYS waived for AN INSURED if an insured violates or destroys insurers subrogation rights, insured may forfeit collection rights under the contract the insurer is entitled to subrogation dollars only after insured has collected fully for the loss

19. Principle of Subrogation - (cont.) - Example 19 Insured has $10,000 loss and recovers $7,000 from insurer Insurer pays $8,000 less $1,000 Deductible Negligent Party pays $5,000 subrogates injury $3,000 to insured $2,000 to insurer

20. Principle of Utmost Good Faith 20 higher standard of honesty is imposed on insurance contracts as compared to other contracts as a result, abuses are categorized as: a material misrepresentation a concealment a breach of a warranty a breach of utmost good faith

21. Principle of Utmost Good Faith - Representations 21 statements made BEFORE a contract starts to induce a party to enter the contract oral or written statements contract can be avoided if the representation is FALSE and MATERIAL False - not true at the time of the statement material - would the insurer declined the contract, changed the wording or priced it differently if the truth were known statement of opinions are not sufficient to avoid the contract

22. Principle of Utmost Good Faith - Concealments 22 silence when there is an obligation to speak utmost good faith imposes duty to voluntarily divulge material information when a material fact concealed - allows insurer to avoid contract generally there must be an element of deception tests for concealment did the insured know of a certain fact was the fact material was the insurer ignorant of the fact

23. Principle of Utmost Good Faith - Warranties 23 a warranty creates a condition in a contract any breach of warranty even if not material will allow insurer to avoid contract (strict interpretation) types of warranties express - written implied - not written promissory - condition to continue throughout contract period affirmative - exists at contracts inception; promises nothing about the future

24. Warranties - Examples 24 implied affirmative implied promissory express affirmative express promissory

25. 25 Commonly referred to as a bad faith claim Used when the insured feels the insurer is not acting in good faith Used to force insurance companies to perform according to the contract Principle of Utmost Good Faith - Breach of Utmost Good Faith