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FUNDAMENTAL LEGAL PRINCIPLES (PRINCIPLE OF INSURABLE INTEREST (Property…
FUNDAMENTAL LEGAL PRINCIPLES
PRINCIPLE OF INDEMNITY
- After the loss, the insured has to be placed in the same financial position in which he was immediately before the loss
- Insurer agrees to pay no more than the actual amount of the loss
Prevent insured from profiting from a loss
Reduce moral hazard
Actual cash value
of the damaged property at the time of loss
Replacement cost less depreciation
Current cost of restoring the damaged property with new materials of same kind and quality
Depreciation
: deduction for physical wear and tear, age and economic obsolescene
Fair market value
- often smaller than replacement cost less depreciation
Broad evidence rule
: determination of actual cash value should include all relevant factors (replacement cost less depreciation, fair market value, present value of expected income from the property, comparison sales of similar property, opinions of appraisers, etc)
Exceptions
Valued policy (antiques, rare paintings, heirlooms)
Valued policy laws (real property, total loss)
Replacement cost insurance (home, buildings, business, personal property)
Life insurance
PRINCIPLE OF INSURABLE INTEREST
The insured must be in a position to lose financially if a covered loss occurs
Purposes:
Prevent gambling
Reduce moral hazard
Measure the amount of the insured's loss
Property and Casualty Insurance
- the insurable interest must exist at the time of the loss
Ownership of property
Potential legal liability
Secured creditors (not unsecured ones)
Contractual right
Life Insurance
- the insurable interest must exist at the beginning of the policy, not at the time of death
Your own life
Close family ties, marriage (grandpa, husband) - not remote relationships like cousins
Pecuniary relationship (a corporation insures the life of a key personnel)
PRINCIPLE OF SUBROGATION
The insurer is entitled to recover from a negligent third party any loss payments made to the insured
Prevent insured from collecting twice for the same loss
Hold the negligent person responsible for the loss
Hold down insurance rates
Importance of subrogation:
The insurer is entitled to only to the amount it has paid under the policy
The insured must be reimbursed in full for the loss; the insurer is then entitled to any remaining balance up to the insurer's interest, with any remainder going to the insured
The insured cannot impair the insurer's subrogation
Subrogation does not apply to life insurance and to most individual health insurance
The insurer cannot subrogate against its own insureds
PRINCIPLE OF UTMOST GOOD FAITH
A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts
Representations
- statements made by the applicant for insurance
Contract is voidable at insurer's option if representations is:
material, false, relied on by insurer
Insurer must prove that applicant spoke fraudulently and intended to deceive the company
An innocent misrepresentation of a material fact makes the contract voidable
Fraudulent proof of loss or the value of items damaged => voidable
Concealment
- intentional failure of applicant to reveal material fact to insurer
Insurer must prove (1)
concealed fact was known by insured to be material
(2)
the insured intended to defraud
Ocean marine insurance: only need to prove material => voidable
Warranty
- statement that becomes part of contract, guaranteed to be true in all respects
Misrepresentation (not warranty) is not material => insurer cannot deny liability
Breach of warranty not increase the hazard => insurer cannot deny claim
Breach of warranty not contributed to the loss => insured can recover for a loss