Chapter 37 Insurance. Twomey, Business Law and the Regulatory Environment (14th Ed.). The Insurance Contract. The Contract [37-1]. Duties of Parties. The Application. Statutory Provisions. Insured and insurer owe each other obligations imposed by the contract and by statute.
Twomey, Business Law and the Regulatory Environment (14thEd.)
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Bill Bonner owns and operates BB Equipment, Inc. He purchased BB’s factory for $67,000 in 1975. He remodeled the factory and added on in 1983, at a cost of $43,000. In 1999, a fire caused $30,000 in damage to the factory. The value of the factory was $120,000 at the time of the fire. Bonner carried an insurance policy for $60,000 with a co-insurance clause of 80%. How much of the fire loss can Bonner recover from the insurer?
Total amount of policy
.80 x Fair market value
$60,000 = $60,000
.80 x $120,000 $96,000
X loss = amount recoverable
= 5/8 x $30,000 = $17,755
Insurance is a contract, called a policy. Under an insurance policy, provision is made by the insurer, in consideration of premium payments, to pay the insured or beneficiary a sum of money if the insured sustains a specified loss or is subjected to a specified liability. These contracts are made through an insurance agent, who is an agent for the insurance company, or through an insurance broker. An insurance broker is the agent of the insured when obtaining a policy for the latter.
The person purchasing an insurance contract must have an insurable interest in the insured life or property. An insurable interest in property exists when the damage or destruction of the property will cause a direct monetary loss to the insured. In the case of property insurance, the insured must have an insurable interest at the time of loss. An insurable interest in the life of the insured exists if the purchaser would suffer a financial loss from the insured’s death. This interest must exist as of the time the policy is obtained.
Ocean marine policies insure ships and their cargoes against the perils of the sea. Inland marine policies insure goods being transported by land, by air, or on inland and coastal waterways.
In order for a fire loss to be covered by fire insurance, there must be an actual, hostile fire that is the immediate cause of the loss. The insurer is liable for the actual amount of the loss sustained up to the maximum amount stated in the policy. An exception exists when the policy contains a co-insurance clause requiring the insured to maintain insurance up to a certain percentage of the value of the property.
To the extent this is not done, the insured is deemed a co-insurer with the insurer, and the insurer is liable for only its proportional share of the amount of insurance required to be carried. A homeowners insurance policy provides fire, theft, and liability protection in a single contract.
Automobile insurance may provide protection for collision damage to the insured’s property and injury to persons. It may also cover liability to third persons for injury and property damage, and loss by fire or theft.
A life insurance policy requires the insurer to pay a stated sum of money to a named beneficiary upon the death of the insured. It may be a term insurance policy, a whole life policy, or an endowment policy. State law commonly requires the inclusion of an incontestability clause, whereby, at the conclusion of the contestability period, the insurer cannot contest the validity of the policy.