Basic Terms and Concepts (BTC): Insurance
The transfer of risk through a legal contract - From insured (customer) - 1st party.
-to insurer (insurance
... [Show More] company) 2nd party
Based upon principle of indemnity - to restore to pre-loss condition, no better, no worse
(BTC) Property Insurance
Covers insured's real property (structures) and personal property ( moveable stuff) against damage or loss resulting from covered causes of loss called perils
(BTC) Casualty insurance
covers insured's non-property losses.
Legal liability to others- 3rd party.
covers injury to other people and damage to other peoples property.
(BTC) Personal Lines
Insurance for families and individuals:
auto, homeowners, boats, recreational vehicles
(BTC) Commercial Lines
Insurance for businesses:
commercial auto, commercial property, commercial liability, workers compensation
(BTC) Risk
Uncertainty of financial loss, pure risk and speculative risk
(BTC) Pure risk
chance of loss only
(BTC) Speculative risk
Chance of loss or gain
INSURANCE COVERS PURE RISK ONLY
"Buying insurance does not eliminate the risk, but it reduces the financial loss exposure to the insured"
(BTC) Law of Large Numbers
insurers employ people called actuaries to estimate claims using a mathematical concept known as the law of large numbers
as the law of homogeneous (similar) loss exposures increases, the more accurate the claims can be predicted from the group.
Perils
A peril causes a loss
-commonn causes of a loss include fire, wind, lightning, and so on.
Perils- coverage in one of two ways
Named peril(specified perils) list the perils that are covered in the policy
Open peril (all risk) cover all perils except those specifically excluded by the policy
"a deer breaking into a house is covered by open perils but not named peril"
Hazard
hazards are not causes of loss but are things that increase the chance of a peril happening.
"increases the chance of a loss, we do not insure against hazards, we insure against perils"
Types of Hazards
Physical: visible characteristic ex:dead tree
Moral: dishonest tendencies ex: convicted arsonist
Morale: Attitude of carelessness ex: keys in an unlocked car
Types of Loss:
Direct and Indirect
Direct Loss
Immediate physical damage to property
-damage to a house caused by a tornado
-damage to a car due to collision with a tree
-damage to a retail store caused by a fire
Indirect loss
Loss that happens after the direct loss but due to the loss of use of the property. Also called "consequential"
-additional living expenses
-rental car expense
-loss of income
"you cannot be paid for a indirect loss without 1st suffering a direct loss. Indirect losses are also called "time element" losses.
Insurable Interest
for an insurance policy to pay there must be an insurable interest-financial risk of loss
-exist at the time of loss for property and casualty losses
"owner, lien holder at the time of loss"
"insurable interest may not exist at the time of application but must exist at the time of loss"
Proximate Cause
The 1st cause in an unbroken chain of events
-"had it not been for this occurring, this would not have occurred"
Proximate cause is important when determining an insurance claim.
Typically if the proximate cause is covered, all resulting damage is covered.
Elements of a Legal Contract (CALC)
Competent Parties: 18+sane+sober
Agreement: composed of the offer(insured completes the application) and acceptance (insurers issues policy)
Legal Purpose: transfer of risk is legal
Consideration: exchange of values (insured gives premium and information, the insurer gives a promise to pay in the future)
Legal Issues Affecting Insurance Contracts
Representations:
Misrepresentation:
Material misrepresentation:
Fraud:
Warranty:
Binder:
Representations:
-information believed to be true
-answers to questions by the insured are representations
Misrepresentation:
-information that is not true. has no effect on the insurer's decision to issue the policy.
Material misrepresentation:
-Information that is not true but would have caused the insurer not to issue the policy
-usually is concealed (intentionally hidden) by the insured. May void the policy [Show Less]