THE BASICS Important Concepts—SAM PIE o Spreading or diversification of risk o Adverse Selection o Moral hazard o Principle of Indemnity o Insurable Interest o Equity v Efficiency Premium FormulaGP = PP + Exp + PM o Gross premium = Pure Premium + expenses + profit margin REINSURANCE Purchase of ins by ins co to cover all or part of loss from Ks—helps to further diversify risks--Types o Surplus share—RE assumes portion of each risk o Excess loss—RE pays over certain max o Quota—RE pays agreed portion Risk Rating o Class rating Uses base rate w/ a consideration of all insureds and then makes adj for risks associated w/ specific insured subjective Risk classification is ok b/c ins co doesn’t have to accept any risk and can apply subjective factors 6 MO waiting period after pd premium is per se impermissible o Individ Risk Develops premiums w/out use of class rating—typically used in large commercial risks w/ size and experience to depelop such indiv plans Agency (SIG) o Special—limited authority, no authority to bind when SA commits fraud, principal is liable through respondent superior principles o Independent—not agent at all, cant impose liability on ins co unless cloaks person w/ apparent authority o General agent—has full authority to bind ins co—stands in shoes of ins co o GR—agent is agent of insured not insurer but Agent may convert to agent of insurer through course of dealings—factors (PICS) Who PAYS agent INTEREST agent is protecting Who CONTROLS agent’s actions Who first SET agent in motion Underwriting o Objectiverisk = policy + premium st 1 Party v. 3rd Party Coverage 1st (insured)—loss by insured 3rd Party—coverage injuries to person using prop who are not insured (liability) K INTERPRETATION—PAID FEW BRIDES PROTECT weaker party—GW CAR o GR—assume equal negotiation power o Wayfaring fool—ER must use language plain enough where a fool wouldn’t be deceived
Contra Preferentia—ambiguities in K construed against drafter Adhesion—no equal bargaining power, so ambiguities construed against ER Reasonable expectation—ER no allowed to interpret terms inconsistent w/ reas expectation ABSENCE ambiguity, interpreted like reg K—if ambiguity, DOCTRINE of probability or reasonableness governs INCONSCIONABLE—denial of claim despite reasonable expectation SPECIAL provisions govern over general ones FORFEITURE not favored unless agreed to in clear language EQUITABLE estoppel—judicial construction based on ER’s conduct that misled ED to determent—were payment accepted WAIVER—express/implied, voluntary or intentional relinquishment of known, existing rt—if K is modified, this might be waiver of certain terms BUSINESS RELATIONSHIP and other circumstances has bearing on construction INTENT—reas of parties always govern over rules of grammer DATE—issued determines nature and period of coverage EXCLUSIONS are ok but must be specific—not genera, prominently placed, and in clear language
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GOOD FAITH/FAIR DEALING 2 Duties owed by liability ins o Indemnity—held liable in excess of policy limits if ER fails to consider offers of compromise for amts w/in policy limits o Duty to defend—if facts give rise to potential liability, ER has duty to defend, even if remote possibility—but no duty if there is coverage under the terms of policy Duties in gen of ins co ID IF MAN o Indemnity o Defend o Insured’s interest should = their interest o Fault of insured should be looked into o Mitigate settlement w/in policy limits o Act in good faith throughout investigation o Notify throughout investigation Duties owed by ED o Notice of ClaimFailure to comply, unless deemed excusable might preclude coverage Claims made—coverage determined as of date claim is made Occurrence—coverage as of date of incident See also K interpretation Fraud by ED—Elements (FIRMM) False stmt or concealment Intent to deceive Reliance by ER Materiality o If facts were divulged, ins co would Deny coverage Increase premium o Was misrep material—Test:
Falsity is germane to Ins Co risk Statement is untrue, fraudulent, and willful
Misrep o GR—misrep isn’t fatal unless material o KS—did misrep contribute to contingency where policy first becomes due o Look at knowledge and timing
WARRANTIES, REPRESENTATION AND COND PRECEDENT Warranty o GR—warranty is integral part of K and must be literally true at time of K—risk still attaches but violation trigger K remedies which can void policy Cond Precedent o Risk doesn’t attach unless met Representation— o Not part of K formation—will only avoid liability when false/wrong statement are material to cost of risk OTHER INS CLAUSES—attempts to eliminate coverage if there’s another potential ins co Pro Rata clause—ins co will only pick up their share of loss Excess—Policy will only pick up loss in excess of other policy Escape—indemnity ONLY when no other ins is available RISKS, EXCLUSIONS AND EXCEPTIONS All risks—broad coverage language o Exception CL—all risk EXCEPT event stemming from excepted language o Exclusion—Certain event not covered that would otherwise be covered o GR—exceptions, exclusions, are constued narrowly—ins co has duty to define such by explicit terms SEVERABILITY Rts of one insured when co-insured forfeited policy by breaching cond or causing loss—3 judicial approaches o Traditional K—determine whether both insured’s interest can be severed o Ignores property interest and focuses on K o Focuses on culpability of insured to make sure innocent 3P isn’t punished for other persons bad deed CONTRIBUTION AND SUBBROGATION Contribution—2 insurers obligated to pay—if one pays more than pro rata share they can get other co to pay them their ratable share Subrogation—rt against 3P following payment that should have been made by 3P o Ins co is entitled to collect any $ received by insured by 3P or step into shoes of 3P and assert right of subrogation—but ins co can’t do this if insurer hasn’t collected entire amt owed LIFE INS Whole life o Death benefit + saving feature Term life o Temporary policy for specified time Provisions++ PIG MERN P
Premium Intial—consideration for ins co promise Renewal—consideration for continuation of promise o Incontestable Feature ER can’t void policy on things like mistake of age if policy in effect for usually 2 + yrs—must have insurable interest at formation and K actually went into effect o Grace period of 31 days—after missed payment o Misstatment of age—not fatal but risk re-calculation can occur o Entire K—prohibits incorp by reference o Reinstatment Clause—requires reinstatement upon insured’s request made w/in 3-5 yrs after lapse o Non-forfeiture clause Policy yields cash surrender value—meaning if policy is in force for a specific amt of time, $ belongs to insured o Policy loan provision If policy lapses b/c of no payment, policy automatically extracts $ from cash surrender value for premium Insurable interest o GR—must have lawful and substantial econ. Interest at time of app and claim o GR for Ins—just need ins interest at time of app in the life, support of another person Beneficiary problems o Primary and contingent—if neither avail, them past under intestacy laws o Changing Beneficiary—2 ways Endorsement—submit policy and get endorced OR Filing—written request to ER to change (most common) o If ER has Q as to who is beneficiary, then they should do an interpleader and deposit $ w/ ct and let them decide o Assignment—ins policies are freely assignable Preclusion of policy o Suicide GR—ER wont pay it ED commits suicide-but provision is usually only in effect for 2 yrs o Actual accidental death GR—accidental death as to cause and result Auto Ins GR—Ins follows the car and will extend to all drivers as long as granted permission If issue on permission, look for forseeability of use Subrogation-- did other car cause accident, thus their ins should be liable Look for causation— Multiple policies—which one, contribution CAUSATION 2 or more causes—one excluded in policy—2 rules o Immediate cause—what was the common sense cause o Most Dominant factor and efficient cause of loss Modern trend—maximize scope of protection by o Resolving ambiguity against ins co o Disallowing unconscionable advantage o Honoring reas expectation of policyholder
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