Insurance Contracts

1
Insurance Contracts
2
Elements of a Valid Contract

• Offer and Acceptance
• Consideration
• Capacity
• Legal Purpose

3
Offer and Acceptance

• Reasonably definite and communicated clearly
• Written or oral

4
Offer and AcceptanceProperty Insurance

• Agent solicits
• Applicant makes offer (application)
• Agent or Company accepts or rejects (cancels)

5
Offer and AcceptanceLife Insurance

• Agent solicits
• Applicant makes the offer (application)
• Conditional receipt only no binder
• Company accepts, rejects or counter offers
• Counter offer must be accepted or rejected

6
Consideration

• Company promises to pay valid claims
• Insured promises to pay premium
• Life insurance application must be accompanied by
  premium

7
Capacity

• The legal ability to enter into contract
• Capacity is assumed except
• 1. Minors
• 2. Intoxicated
• 3. Insane

8
Legal Purpose

• Contract not enforceable if it protects illegal
  activities
• Examples
• 1. Property used for illegal purposes
• 2. Life insurance with intent to commit
• murder

9
Principle of Indemnity

• May not profit from the loss
• Same financial position after as before the loss
• Insurable interest
• Actual cash value
• Subrogation

10
Insurable Interest

• Must show personal loss from the insured event
• Multiple insurable interests

11
What Constitutes Insurable Interest

• Ownership
• Leases
• Creditors
• Care, custody, control
• Improvements and betterments
• Legal Liability
• Life

12
When Must Insurable Interest Exist?

• Property Insurance at time of loss
• Life Insurance at inception of contract

13
Actual Cash Value

• ACV Replacement cost Depreciation
• Replacement means repair or replace with material
  of life kind and quality
• Depreciation is a percentage based on the age and
  condition of the property
• Replacement cost is an option however the
  property must be replaced to collect
• Law and Ordinance or Building Code Coverage is an
  option

14
Subrogation

• Insurance Company inherits the right of the
  insured to seek recovery from a negligent third
  party
• Subrogation applies after the insurance company
  pays the insureds loss
• Insured may waive subrogation in writing prior to
  loss (ex lease or hold harmless)
• Insurance Company can not subrogate against an
  insured
• No subrogation in life insurance

15
Subrogation Examples

• Automobile physical damage claims
• Property damage claims resulting from defective
  products or installation

16
Exceptions to Principle of Indemnity

• Valued policy values agreed based on appraisal
• Valued policy law (SC) insurance company must
  pay policy limit if total fire loss
• Replacement cost
• Law and Ordinance coverage

17
Principle of Utmost Good Faith

• Insured is held to the highest standard of
  honesty
• Insured must disclose all known circumstances
  that affect the risk
• Warranty
• Representations
• Concealment

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Utmost Good FaithWarranties

• Any breach of warranty will allow the insurance
  company to void the contract
• The contract may be voided even if the breach is
  not material to the loss
• Examples
• 1. Ocean Marine ship is seaworthy
• ships origin and destination
• 2. Inland marine contracts jewelry in a
• vault

19
Utmost Good FaithRepresentations

• Statements made in the application or after a
  loss
• Statements must be material and false in order to
  void the contract.
• Example Homeowners application in which age is
  stated as 1950 and actual age is 1905.
• False statements in life insurance application
  (Two year Incontestable Period)

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Utmost Good FaithConcealment

• Failure to disclose material information
• Generally involves an element of deception

21
Aleatory Contract

• Unequal dollar exchange
• Premium payment for promise to pay claim in future

22
Contract of Adhesion

• Ambiguity in the contract is construed against
  the writer
• Examples
• World Trade Center loss
• Beirut Holiday Inn

23
Personal Contract

• Insurance contract is with a specific person
• Property contracts are generally not assignable
• Life insurance policies may be assigned with
  proper notice to the insurance company

24
Homework Assignment

• Read Chapter 9
• Read and be prepared to discuss the Material
  Misrepresentation and Contract of Adhesion cases
  on pages 166 and 167