Legal Aspects of Insurance

Contracts

ANNU
NITIN
NISHANT
VIBHA
TRIPTI
SAURABH

Overview
Distribution of Insurance Contracts
Insurance as contracts

legally enforceable agreements

Characteristics of Insurance Contracts

Fundamental Principles of Insurance Contracts

Principle
Principle
Principle
Principle

of indemnity
of insurable interest
of utmost good faith
of subrogation

Distribution of Insurance Contracts

Direct Marketing
No outside agent is involved
Mail marketing, internet based marketing
Exclusive Agent

represents one insurer

Independent Agent
represents more than one insurer

Distribution of Insurance Contracts

Agent versus Broker
Binding Authority by Agent
Property/Liability Insurance

Binder

Life/Health Insurance

Conditional premium receipt

Insurance as Contracts
Elements of contract
Agreement

Consideration

Parties must have legal capacity to enter into a binding contract

Legal Purpose

Insured premium payment and fulfillment of policy conditions

Insurer promise to do certain things as specified in the contract
(insurance policy)

Legally competent parties

Offer and Acceptance

Contract must be for a legal purpose

Legal Form

Contract may be oral or written

Some insurance policy provisions and attachments must be approved
by regulator before being marketed

Characteristics of
Insurance Contracts
1. Personal Contracts

Insurance protects insured, not the property or liability

subject to loss.
Assignment provision

In property insurance, if ownership of a property changes,

insurance contracts (policies) cannot be transferred to
another party (buyer) without the insurers written consent.
In life insurance, the beneficiary or ownership of policy may
be freely reassigned.

Characteristics of
Insurance Contracts
2. Aleatory Contracts

A contract whose value to either or both of the parties

depends on chance or future events, or where the
monetary values of the parties' performance are unequal.

The insurer's obligation to pay a loss depends on uncertain

events

Premium paid by Insured

< Claim paid by Insurer

cf: commutative contract

The values exchanged are theoretically equal.

Characteristics of
Insurance Contracts
3. Contracts of adhesion

Insurance contracts are drafted by an insurer and

an insured must accept or reject all the terms and
conditions.
Insured gets the benefit of the doubt.

Contracts may be altered by the addition of riders

or endorsements

Courts tend to construe an ambiguous term in an insurance

policy in favor of an insured.

Rider or endorsement a document that amends or changes

the original policy.

cf: Contracts of cohesion

Contracts are drafted by both parties.

Characteristics of
Insurance Contracts
4. Conditional contracts

An insurers obligation to pay a claim depends on whether

the insured or the beneficiary has complied with all
policy conditions.
The insurer may not pay a claim if one or more of policy
conditions are not complied.

Duties after loss Homeowners (p. 562)

Duties after an accident or loss Automobile (p. 585)
Duties after in the event of loss or damage CP

Characteristics of
Insurance Contracts
5. Unilateral contracts

Only one party makes a legally enforceable promise.

Insured are not legally forced to pay premium or renew the
policy.

Fundamental Legal Principles of

Insurance Contracts
1. Principle of indemnity
2. Principle of insurable interest
3. Principle of utmost good faith
4. Principle of subrogation

Principle of Indemnity
The insurer agrees to pay no more than the actual

amount of the loss suffered by the insured.

Why?

The purpose of the insurance contract is to restore the

insured to the same economic position as before the loss.
The insured should not profit from a loss.
It reduces the moral hazard by eliminating the profit
incentive.

Principle of Indemnity
To support the principal of indemnity an

insurance contact uses Actual Cash Value (ACV)

method

Replacement cost (RC) less depreciation

Fair market value

RC current cost of restoring the damaged property with new

materials of like kind and quality.
The price of a wiling buyer would pay a willing seller in a free
market.

Broad evidence rule

The determination of ACV should include all relevant factors

an expert would use to determine the value of the property.

Principle of Indemnity
Exceptions to the Principle of Indemnity
Valued policy (or agreed value)

Pays face value of insurance if a total loss occurs

Life insurance, disability insurance, fine arts, antiques

Valued policy law

Ex.) Value of a fine art is agreed at $250,000.

A law that requires payment of the face amount of insurance

to the insured if a total loss to real property occurs from a
covered peril, regardless of the propertys ACV.

Replacement cost

No deduction for depreciation in determining the amount paid

for a loss.

Principle of Insurable Interest

The insured must be in a position to financially

suffer if a loss occurs.

Why?

To prevent gambling

To reduce moral hazard

Insurance on a property and wait for a loss occur.

Life insurance on a person and pray for his/her death for
insurance proceeds.

In order not to indemnify more than an insureds

financial interest

It supports the principle of indemnity.

Principle of Insurable Interest

Property-Casualty insurance
At the time of a loss, an insured must have insurable
interest.
No insurable interest
no financial loss

no indemnity

support Prin. of
indemnity

Life Insurance
Insurable interest must exist at the time of a policy
inception, but not at the time of a loss (death)

Principle of Utmost Good Faith

A higher degree of honesty is imposed on an

insurance contract than is imposed on other

contracts

Honesty is mainly imposed on the insurance applicants.

It is supported by three legal doctrines

Representation
Concealment
Warranty

Principle of Utmost Good Faith

Representation

Statements made by an applicant

Insurance is voidable at the insurers option.

Material
False
Reliance

cf: Innocent misrepresentation

Concealment

Intentional failure to disclose a material fact

Warranty

A statement of fact or a promise made by the insured, which is

part of the insurance contract and must be true if the insurer
is to be liable under the contract.

In exchange for a reduced premium, a store owner warrants that a

burglar alarm will be always on.

Principle of Subrogation
Substitution of the insurer in place of the

insured for the purpose of claiming indemnity

from a third party wrongdoer for a loss paid by
the insurer.

Why?

To prevent collecting twice

To hold the negligent party responsible
To hold down insurance rates

Principle of Subrogation
The insurer is entitled only to the amount it

has paid under the policy.

What if the insurer collects more, from the

negligent party, than the amount the insurer paid to
its insured?
The insured cannot impair the insurers subrogation
rights.
Subrogation does not apply to life insurance

and to individual health insurance contracts.

The insurer cannot subrogate against its own
insured.