Chapter 49

INSURANCE

WHAT THIS CHAPTER IS ABOUT

Insurance is a contract in which one party agrees to compensate the other for
any future loss on a specified subject by a specified peril. Essentially,
insurance is an arrangement for managing-transferring and allocating-risk. This chapter covers
the law relating to insurance.

CHAPTER OUTLINE

1. TERMINOLOGY AND CONCEPTS

A. RISK MANAGEMENT
Risk management consists of plans to protect personal and financial
inter­ests should an event undem-dne their security. The most common method
is to transfer risk from a business or individual to an insurance company.

B. INSURANCE TERMINOLOGY
An insurance company is an underwriter or an insurer; the party covered by
insurance is the insured; an insurance contract is a policy; consideration
paid to an insurer is a premium; policies are obtained through an agent or
broker.

C. RISK POOLING
Insurance companies spread the risk among a large of people-the pool-to make
the premiums small compared with the coverage offered.

D. CLASSIFICATIONS OF INSURANCE Insurance is classified according to the
nature of the risk involved.

E. INSURABLE INTEREST To obtain insurance, one must have a sufficient
interest in what is insured.

1. Life Insurance
One must have a reasonable expectation of benefit from the continued life of
another. The benefit may be related to money or may be founded on a
relationship (by blood or affinity).

a. Kerperson Insurance
An organization (partnership, corporation) can insure the life of a person
who is important to that organization (partner, officer).

b. When the Insurable Interest Must Eist
An interest in someone's life must exist when the policy is obtained.

2. Property Insurance
One has an insurable interest in property when one would sustain a pe­cuniary
loss from its destruction. An insurable interest in property must exist when
the loss occurs.

THE INSURANCE CONTRACT
Policies generally are standard; in some states, this is required.

A APPLICATION FOR INSURANCE
The application is part of the contract. Misstatements can void a policy,
especially if the insurer shows that it would not have issued the policy if
it had known the facts.

B. EFFECTIVE DATE OF COVERAGE
A policy is effective when (1) a binder is written, (2) the policy is issued,
or

(3) a certain time elapses.

1. When a Policy Is Obtained from a Broker
A broker is the agent of the applicant. Until the broker obtains a pol­icy,
the applicant is normally not insured.

2. When a Policy Is Obtained from an Agent
An agent is the agent of the insurer. One who obtains a policy from an Agent
can be protected from the moment the application is made (under a binder), or
the parties may agree to delay coverage until a policy is issued or some
condition is met (such as a physical exam).

C. PROVISIONS AND CLAUSES Some important clauses include

1. Provisions Mandated by Statute
A court will deem that a policy contains such a clause even if it'ts not
actually included in the language of the contract.

2. Incontestability Clause
After a life or health policy has been in force for a certain time (two or
three years), the insurer cannot cancel the policy or avoid a claim on the
basis of statements made in the application.

3. Coinsurance Clause
A standard provision in fire insurance policies; applies only in cases of
partial loss. If an owner insures property up to a specified percentage
(usually 80 percent) of its value, he or she will recover any loss up to the
face amount of the policy. If the insurance is for less than this
per­centage, the owner is responsible for a proportionate share.

4. Appraisal and Arbitration Clauses
If insurer and insured disagree about the value of a loss, they can de­mand
separate appraisals, to be resolved by a third party (umpire).

5. Multiple Insurance Coverage
If policies with several companies cover the same risk and the amount of
coverage exceeds the loss, the insured collects from each insurer its
proportionate share of the liability to the total amount of insurance.

6. Antilapse Clause
Provides grrace period for insured to pay an overdue premium.

D. INTERPRETING PROVISIONS
Words in an insurance contract have their ordinary meanings. If there is an
ambiguity or uncertainty, it is interpreted against the insurer.

E. CANCELLATION
A policy may be canceled for nonpayment of premiums, fraud or
misrepre­sentation, conviction for a crime that increases the hazard insured
against, or gross-negligence that increases the hazard insured against. An
insurer may be required to give advance written notice.

F. BASIC DUTIES AND RIGHTS
Parties must act in good faith and disclose all material facts. If there is
a claim, the insurer must investigate. Insurer and insured must fulfill the
terms of the policy.

G. DEFENSES AGAINST PAYMENT
Fraud, misrepresentation, violation of warranties, and actions that are
against public policy or that are otherwise illegal.

111. TYPES OF INSURANCE

A. LIFE INSURANCE A fixed amount is paid to a beneficiary on an insured's
death.

1. Types of Life Insurance
Basic types-whole life: has cash surrender value that grows at a
pre-determined rate and can be used as collateral for a loan; term: provides
protection for a specified period; has no cash surrender value.

2. Liability
Unless excluded, any cause of death is the insurer's risk. Typical
exclusions:death. by suicide, when the insured is a passenger in a commercial vehicle, in military action
in war, or execution by the government.

3. Misstatement of Age This does not void a policy, but premiums or benefits
are adjusted.

4. Assignment An insured can change beneficiaries, with notice to the
insurer.

S. Creditors' Rights
Generally, a judgment creditor can reach an insured's interest in life
insurance. The creditor cannot compel the insured to obtain cash surrender value or change the beneficiary to the
creditor.

6. Temtination
Usually occurs only on default in premium payments (policy lapses),payment of
benefits, expiration of term, or cancellation by insured.

B. FIRE INSURANCE
Protects the homeowner against fire, lightning, and damage from smoke and
water caused by the fire or the fire department.

1. Liability
Usually, recovery is limited to losses resulting from hostile fires. In some
cases, the insured must file proof of a loss as a condition for recov­ery. In most cases, premises must
be occupied at the time of loss, unless the parties agree otherwise.

2. Assigmnent
Not assignable without the consent of the insurer (because it would
ma­terially change the insurer's risk).

C. HOMEOWNERS'INSURANCE

1. Property Coverage
The garage; the house; other private buildings; personal possessions a home,
in travel, or at work. Includes expenses for living away from home because of a fire or some other
covered peril.

2. Liability Coverage
Injuries occurring on the insured's property; damage or injury by the in­sured to others or their property. Excludes professional malpractice.

D. AUTOMOBILE INSURANCE

1. Liability Insurance
Covers bodily injury and property damage.

2. Collision Insurance
Covers damage to the insured's car in any type of collision. Most people
agree to pay a deductible before the insurer becomes liable.

3 . Comprehensive Insurance
Covers loss, damage, and destruction by fire, hurricane, hail, vandalism, and
theft.

4. Uninsured Motorist Insurance
Covers the driver and passengers against injury caused by any driver without
insurance or by a hit-and-run driver. Some states require it all automobile policies sold to drivers.

5. Other-Driver Coverage
Protects vehicle owner and anyone who drives the vehicle with owner's
permission.

6. No-fault Insurance
Provides that claims arising from an accident are made against the
claimant's. own insurer, regardless of whose fault the accident was.

E. BUSINESS LIABILITY INSURANCE

1. Key-person Insurance
See above (1, E, 1, a).

2. General Liability Insurance
Covers as many risks as the insurer agrees to cover. Policies can be
drafted to meet special needs, such as specific risks of product liability (see Chapter 6).

3. Professional Malpractice Insurance
Protects professionals against malpractice claims.

4. Workers' Compensation Insurance
Covers payments to employees who are injured in accidents occurring an
the job or in the course of employment (see Chapter 35).

chapter notes provided courtesy West's Business Law - 8th edition