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BUSI 346 > Chapter 3: Insurance and Guarantees > Flashcards

Chapter 3: Insurance and Guarantees Flashcards

1
Q

Who regulates the contract of insurance?

A

Regulated by statute in each province.

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2
Q

What are the four basic provisions for the contract of insurance?

A
  • The nature of the risk covered.
  • The amount of for which it is insured (extent of “coverage”).
  • The duration of the protection (“tern” of policy)
  • The amount of the premium
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3
Q

What are the types of insurance?

A
  • Property insurance
  • Business Insurance
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4
Q

What is property insurance?

A

Insures against damage from fire, theft, loss, etc.

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5
Q

What are types of business insurance?

A
  • Business interruption
  • Credit insurance
  • Fidelity insurance
  • Key person life insurance
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6
Q

What is business interruption insurance?

A

Insurance coverage that replaces business income lost in the event that business is halted due to direct physical loss or damage. Such as might be caused by a fire or a natural disaster.

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7
Q

What is credit insurance?

A
  • Guarantees a lender will be repaid if a borrower is unable to pay his or her debt due to, for example, death or disability.
  • Although credit insurance is solely for the benefit of the lender, it is purchased and paid for by the borrower.
  • Business owners may be required to purchase credit insurance as a condition of borrowing the money.
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8
Q

What is fidelity insurance?

A
  • Insurance policies that protect policyholder companies from wrongful acts committed by employees.
  • Offers an employer protection against losses that are caused by its employees’, fraudulent or dishonest actions.
  • Also known as an honesty bond, this form of insurance can protect against monetary or physical losses.
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9
Q

What is key person life insurance?

A
  • An insurance policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums.
  • It is a life insurance policy a company buys on the life of a top executive or another critical individual.
  • Such insurance is needed if that person’s death would be devastating to the future of the company.
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10
Q

What are the types of liability insurance?

A
  • Liability for negligent acts and omissions
  • Product liability
  • Occupier’s liability
  • Professional liability
  • Third-party liability (motor vehicle)
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11
Q

What is liability insurance for negligent acts and omissions?

A

Financial protection for a business or practice designed to meet the cost of defending claims and compensatory damages which the business may be legally obligated to pay following an alleged error, omission or negligent act arising out of their professional services.

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12
Q

What is product liability?

A

The legal liability a manufacturer or trader incurs for producing or selling a faulty product.

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13
Q

What is occupier’s liability?

A

An area of civil law regulating to the duties of a property owner or occupier. The occupier of a piece of land owes certain duties to the people that enter their property. While this theory provides visitors with a legal claim for injuries in some cases, it does not apply to every accident that occurs on the property of another person. To recover on a claim, you must establish that the property owner failed to act reasonably in response to a hazard.

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14
Q

What is professional liability?

A
  • Most regulators require insurance for members
  • Professional liability insurance protects professionals such as accountants, lawyers, and physicians against negligence and other claims initiated by their clients. Professionals with expertise in a specific area require this type of insurance because general liability insurance policies do not offer protection against claims arising from negligence, malpractice, mistakes, or misrepresentation.
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15
Q

What is third-party liability (motor vehicle)

A
  • Often minimum coverage required
  • Is a policy purchased by the insured (first party) from the insurance company (second party) for protection against the claims of another (third party). It covers an individual or firm against a loss caused by some third party.
  • An example is automobile insurance which will compensate the insured if another driver causes damage to the insured’s car.
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16
Q

What does liability insurance cover?

A
  • Amount of any judgment against the insured.
  • Costs of defending a lawsuit against the policyholder related to an insured risk.
  • Up to the amount of a policy limit.
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17
Q

What are special aspects of insurance contracts?

A
  • Legality of object
  • Exclusions often included in policies.
  • Interesting cases that arise in the grey area
  • Insurable interest
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18
Q

What is legality of object?

A
  • Common law: policy will be denied following the insured’s criminal or deliberately wrongful act
  • Exception that will not prevent recovery by beneficiaries who were not involved in the wrongdoing
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19
Q

What are exclusions often included in policies?

A

Ex. if death by suicide, not covered.

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20
Q

What are interesting cases that arise in the grey area?

A

When a deliberate act results in an unintentional death?

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21
Q

What is insurable interest?

A
  • “An insurable interest is the genuine loss that would be suffered by the insured from damage to or destruction of the thing insured, or from the death of or injury to the person insured.”
  • Insurable interest is not confined to ownership of property.
  • Timing is important: insurable interest must be present when the contract is formed and when the claim arises
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22
Q

When is the offer made in the formation of the insurance contract?

A
  • Offer is made by a person seeking insurance when the application form is submitted
  • Quotes are invitations to treat
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23
Q

When is a contract formed in the formation of the insurance contract?

A

Acceptance of life insurance occurs when policy is delivered and first premium paid – contract formed when policy delivered and premium paid

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24
Q

In non-life insurance, what are agents authorized to accept?

A

insurance agents are usually authorized to accept offers for other types of insurance

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25
Q

When interpreting the terms of the contract, what happens if language is clear and unambiguous?

A
  • If language is clear and unambiguous, given their plain meaning.
  • Words will be given their natural and ordinary meaning.
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26
Q

When interpreting the terms of the contract, what happens if there is ambiguity in the language?

A
  • If there is ambiguity in the language, since an insurance policy is an example of a standard form contract—it is prepared unilaterally in advance by the insurer so contra proferentum rules are applied against the insurer.
  • It places fault on the party creating or introducing an ambiguous contract clause.
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27
Q

What is the contra proferentum rule?

A

It states that any clause considered to be ambiguous should be interpreted against the interests of the party that created, introduced, or requested that a clause be included. The contra proferentem rule guides the legal interpretation of contracts and is typically applied when a contract challenged in court.

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28
Q

How are terms describing coverage interpreted?

A

Terms describing coverage are interpreted broadly or inclusively to give the widest reasonable application; terms that exclude coverage are interpreted narrowly.

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29
Q

When interpreting terms of the contract, what happens with any remaining ambiguous words?

A

Any remaining ambiguous words are given the meaning most favourable to the insured.

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30
Q

What is the duty for the insured?

A
  • Insured has duty of utmost good faith
  • parties to the contract must act fairly and with integrity in their dealings with each other
  • Insured must disclose all material facts that were known, or should have been known

Exceptions to this: Information or knowledge of a general nature.

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31
Q

What is the duty for the insurer?

A
  • Insurer also has utmost duty of good faith
  • Insurer must process claims fairly (without undue delay)
32
Q

What is the right of subrogation?

A

The right of an insurer to step into the shoes of the insured to pursue any claim for losses against a wrongdoer where the insured has been fully compensated for loss.

33
Q

In subrogation, when can insurers recover amounts paid to the insured?

A

Insurers can also recover amounts paid to the insured where the insured has obtained compensation from a wrongdoer

  • Insured are not permitted double recovery
  • Insurer not entitled to recovery where insured not “made whole”
34
Q

What is a guarantee?

A

The promise to perform the obligation of another if that person defaults

35
Q

What is another name for the guarantor?

A

Surety

36
Q

Who is the guarantor or surety?

A

The organization or person that assumes the responsibility of paying the debt in case the debtor policy defaults or is unable to make the payment.

37
Q

Who is the principal debtor?

A

The person in respect of whose default the guarantee is given is called the “principal debtor”

38
Q

What is the principal debt?

A

Amount or thing which is borrowed by the principal debtor.

39
Q

What are the three characteristics of a guarantee?

A
  • The guarantor makes the promise to the creditor
  • The obligation arises immediately upon the default of the primary debtor
  • Can arise in other circumstances, such as landlord-tenant
40
Q

Types of guarantees

A
  • Limited guarantees
  • Continuing guarantees
41
Q

What are limited guarantees?

A

Limited to specific transactions

42
Q

What are continuing guarantees?

A
  • Covers a series of transactions
  • Contract will determine extent of liability
43
Q

What is the difference between a guarantee and indemnity?

A
  • Guarantee: obligation only arises when the debtor defaults
  • Indemnity: obligation exists independent of debtor’s default
44
Q

Rights of guarantor on default

A
  • Guarantor has same defenses as principal debtor
  • Subrogation: Having paid the creditor, the guarantor may claim against the principal debtor by stepping into the creditor’s shoes
45
Q

Most jurisdictions requirement for guarantees.

A

Most jurisdictions have legislation that requires guarantees be in writing.

46
Q

For guarantees, what is consideration?

A
  • Consideration is a requirement
  • Consideration must flow from each party OR contract must be under seal
  • Consideration of guarantor is the promise to pay in the event of debtor’s default
  • If guarantee is provided in response to default, consideration is often forbearance or more time for payment
47
Q

In discharge of guarantee, what does discharge mean?

A

Means the contract is at an end.

48
Q

What can cause discharge of guarantee?

A
  1. Creditor breaches terms of the guarantee.
  2. If contract between debtor and creditor is changed without the guarantor’s consent to the guarantor’s detriment.
  3. If the creditor breaches the contract with the debtor, which materially impacts the risk assumed.
  4. If creditor does something that impacts the value of the security given by the debtor, partial discharge.
49
Q

What does the agent do for the principal?

A

Agent acts on behalf of principal

50
Q

Agency

A

The legal relationship between agent and principal

  • Agent may be able to bind the principal to the contract.
  • Agent may merely be able to assist the principal.
51
Q

What governs agency

A

Agency is governed by common law and statute.

52
Q

Creation of agency

A
  1. Principal appoints agent.
  2. Agent negotiates contract on behalf of Principal with Third Party.
    3 Contract is formed between Principal and Third Party.
53
Q

Methods of Creation of Agency

A
  • Expressed agreement (some requirement of writing).
  • Partners in partnership
  • Acts on behalf of corporation
  • Person being represented as being agent
  • Subsequent ratification
54
Q

In agency relationships, what is the first relationship?

A

The first relationship creates the agency. This is between Principal and Agent.

55
Q

In agency relationships, what is the second relationship?

A

The second relationship is created by the contract formed between the Principal and Third party by the Agent.

56
Q

In agency relationships, what is the relationship between the Agent and Third party?

A

No contract is formed between the Agent and Third Party

57
Q

Actual Authority

A
  • Created through express agreement.
  • Authority is given to an agent to act on behalf of a principal.
58
Q

Apparent authority

A
  • Created through actions.
  • Created when principal’s actions give reasonable impression to third parties that agent has authority to act on behalf of principal
  • Contract created by agent with apparent authority just as enforceable as if agent had actual authority
59
Q

Ratification

A
  • When “agent” purports to contract without authority and principal later ratifies actions
  • Contract enforceable as if agent authorized at outset
60
Q

Ratification must be clear, and

A
  • Agent must identify principal at the time of contract
  • Principal must have capacity at the time of contract
  • Principal must ratify within a reasonable time
  • Principal must ratify the whole contract
61
Q

When is the Principal liable?

A

Principal liable if agent acts within authority.

62
Q

To determine if there is authority, courts balance…

A
  • Risk of binding principal to unwanted contracts with
  • Requiring parties to expend resources investigating the validity of the agent’s authority
  • Usual authority: Putting someone in a particular position. Usual authority is determined by reference to the authority of agents in similar situations in similar businesses.
  • Principal that is business organization is liable when an individual giving authority to an agent is permitted to do so under the allocation of responsibility within the organization
63
Q

When is Agent liable?

A
  • Agent usually not personally liable
  • Agent nevertheless liable if
    o Agent and third-party agree or court determines
    o Agent purports to act as principal: Undisclosed principal or agent may be held liable to third party
    o Agent lacks authority: Fraud, breach of warranty of authority.
64
Q

When agent lacks authority, what is fraud?

A

Fraud is intentional deception. Agent knew they lacked authority.

65
Q

When agent lacks authority, what is breach of warranty of authority?

A

Breach of warranty of authority - careless error

66
Q

When a principal is bound by the actors of an agent, the agent acts within the scope of the ACTUAL authority given by the principal to the agent created by…

A
  • Express delegation to the agent
  • Appointing the agent to a position with that authority
  • Implication from the circumstances
67
Q

When a principal is bound by the acts of an agent, the agent acts within the scope of the APPARENT authority created by the principal’s representation to the third party, which may consist of the…

A
  • Principal’s statement or conduct
  • Principal acquiescing to the agent acting with that authority.
  • Principal appointing the agent to a position that would usually have that authority.
68
Q

When a principal is bound by the acts of an agent…

A

Agent enters into a contract on behalf of an identified principal but without the principal’s authority, and the principal subsequently ratifies the contract.

69
Q

Agent’s duty to the principal

A
  • Perform contractual duties personally
  • Carry out principal’s instructions
  • Satisfy duty of care
  • Fulfill fiduciary duty
70
Q

Fiduciary Duty

A
  • Act in good faith and in best interest of principal
  • Agent strictly liable for breach of any duty.
  • Breach excused if principal instructs or consents
71
Q

In fiduciary duty, what does it mean to act in good faith and in best interest of principal

A
  • Avoid conflict of duty between self and principal
  • Do not profit from position as agent
  • Do not compete with principal
  • Disclose all information relevant to principal’s interests
72
Q

In fiduciary duty, what does it mean that agent is strictly liable for breach of any duty?

A

Ex. Breach actionable even if no loss to principal.

73
Q

Principal’s Duties to the Agent

A
  • Perform agency contractual obligations
  • Pay reasonable remuneration
  • Indemnify agent for liabilities and expenses reasonably incurred by agent
  • Principal’s obligations may be terminated upon breach by agent
74
Q

Methods to terminate agency relationship

A
  • Either party may provide notice of termination
  • Agency agreement may contemplate terminating event: E.g. agency agreement may contemplate specified period.
  • Performance may be rendered impossible
  • Principal may lose capacity: E.g. death, insanity, bankruptcy.
75
Q

Risk management issues for principals

A
  • Contracts
  • Torts
76
Q

Risk management issues for principals: Contracts

A

Apparent authority and unauthorized contract.

77
Q

Risk management issues for principals: Torts

A
  • Vicarious liability torts of agent in employee of principal.
  • Liability for agent’s actions: actions within actual or apparent authority.

BUSI 346 (6 decks)

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