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  2. Fundamental Legal Principles

  3. Principle of Indemnity Principle of Insurable Interest Principle of Subrogation Principle of Utmost Good Faith

  4. Principle of Indemnity

  5. Requirement that the insured should not profit if a loss occurs

  6. People are indemnified when they are restored to approximately the same financial position they were in before the loss occurred.

  7. Actual cash value, which is defined as replacement cost less depreciation, supports the principle of indemnity since it is designed to prevent profiting from insurance.

  8. Actual cash value rule • -Replacement cost less depreciation • -Fair market value • -Broad evidence rule

  9. Exceptions to the principle of indemnity - Valued policy - Valued policy laws - Replacement cost insurance - Life insurance

  10. Valued policy

  11. A valued policy pays the face amount in the event of a total loss. Thus, it is an exception to the principle of indemnity since the amount paid could be more than what the property is actually worth.

  12. Valued policy laws

  13. A valued policy law requires payment of the face amount of insurance if a total loss to real property occurs from a peril specified in the law. Because the insured may be paid more than the actual cash value of the loss, the principle of indemnity would be violated.

  14. Replacement cost insurance

  15. Replacement cost insurance means there is no deduction for depreciation, which allows the insured to be made better off by receiving new property for old.

  16. Life insurance

  17. A life insurance policy is also an exception to the principle of indemnity because it is a valued policy that pays a stated sum to the beneficiary upon the insured’s death.

  18. It is difficult to determine accurately the value of a human life, and the amount paid may substantially exceed the economic value of the insured’s life. The human life value approach gives a crude estimate of how much a person's life is worth, but few people insure their lives fully, and all losses are total.

  19. Principle of Insurable Interest

  20. The principle of insurable interest means that the insured must stand to lose financially if a loss occurs.

  21. An insurable interest is required in every insurance contract in order to prevent gambling, to reduce moral hazard, and to measure the amount of the insured’s loss in property insurance.

  22. Purposes of an insurable interest • To prevent gambling • To reduce moral hazard • To measure the amount of the • insured’s loss in property • insurance

  23. Examples of an insurable interest

  24. - full value of a business - unpaid balance of a loan

  25. Time that an insurable interest must be met

  26. Principle of Subrogation

  27. Subrogation applies when the insurer makes a loss payment to the insured because of a loss caused by the negligence of a third party.

  28. Insurer is entitled to recover from a negligent third party any loss payments made to the insured

  29. Subrogation is taking over another person's right to recover in a legal action against a negligent third party. It is used to support the principle of indemnity by preventing an insured from collecting twice, once from the insured and a second time from the negligent party.

  30. Purposes of subrogation • To avoid collecting twice • To hold the negligent person responsible • To hold down rates

  31. Principle of Utmost Good Faith

  32. Higher degree of honesty is imposed on both parties to an insurance contract

  33. The principal of utmost good faith pertains to the disclosure of information in negotiations leading up to the forming of an insurance contract. In ordinary good faith contracts, there is no strong pressure to disclose information that would influence the other party's willingness to contract; in an utmost good faith contract, there is.

  34. The doctrines of representations, concealment, and warranties support the principle of utmost good faith by allowing the contract to be broken at the option of the injured party (the insurer). The insurer has a legal basis for denying payment of a loss if there is a material misrepresentation, concealment, or breach of warranty.

  35. Representations are statements made by the applicant for insurance. An example would be answers to health questions when the applicant for insurance wants to purchase life insurance or health insurance. The insurer could deny payment of claim if the representation is both material and false.

  36. A warranty is a clause in an insurance contract that prescribes, as a condition of the insurer's liability, the existence of a fact affecting the risk. For example, a bank may warrant that a guard will be on the premises 24 hours a day.

  37. In the past, under common law, any breach of the warranty, even if slight, permitted the insurer to deny liability for the claim. This harsh doctrine, however, has been substantially modified by court decisions and legislation. Warranties are presumed to be material.

  38. Areas of application-legal doctrines of misrepresentation, concealment, and breach of warranty

  39. Basic Requirements of an Insurance Contract

  40. Four requirements must be met for a valid insurance contract: -There must be an offer and acceptance. -There must be consideration to support the contract. -There must be competent parties. -To be enforced, the contract must be for a lawful purpose.

  41. Offer and Acceptance

  42. The applicant usually makes the offer

  43. The insurer accepts or rejects the offer

  44. Agent's authority to bind the insurer varies by type of insurance - Property and liability insurance - Life insurance

  45. Consideration

  46. Insured's consideration generally is payment of the first premium

  47. Insurer's consideration is the promise to perform the contract

  48. Competent Parties

  49. Each party must be legally competent and have legal capacity to enter into a binding contract.

  50. The applicant for auto liability insurance must not be a minor, insane, or intoxicated when he or she applies for insurance. Also, the liability insurer must have legal authorization to sell auto liability insurance.