Law 2
Chapter 52 - Insurance Law Notes

he key points in this chapter include:

1. The concept of insurable interest.

2. Coinsurance clauses.

3. What makes up an insurance contract.

4. The effective date of insurance coverage.

5. Grounds on which an insurer can void a policy
or avoid paying a claim.

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.s

I. TERMINOLOGY AND CONCEPTS

A. RISK MANAGEMENT
Risk management consists of plans to protect
personal and financial interests should an event
undermine 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 number of people—the pool—to make
the premiums small compared with the
coverage offered.

D. CLASSIFICATIOINS 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. Key-person 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 Exist
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.

II. 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 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 is 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 grace 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.

III. 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 predetermined 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.

5. 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. Termination
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. Assignment
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 at 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 of 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. MARINE INSURANCE
Protects from the damage to or loss of a
seaworthy vessel or its cargo due to perils at
sea. (If the vessel is not seaworthy, the policy
is usually void.)

F. BUSINESS LIABILITY INSURANCE

1. Key-person Insurance
See above.

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 8).

3. Professional Malpractice Insurance
Protects professionals against malpractice
claims.

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