Exam II Flashcards
What is the principle of indemnity?
The insured should not profit from a covered loss, but should be restored to the same financial position prior to the loss.
What are the purposes of the principle of indemnity?
- Prevent the insured from profiting from a loss
- To reduce moral hazard or the temptation to be dishonest
What are exceptions to the principle of indemnity?
- A valued policy
- Replacement cost insurance
- Life insurance
What is a valued policy?
Pays the face amount of insurance if a total loss occurs
What is replacement cost insurance?
There is no deduction for depreciation in determining the amount paid for a loss
What is the principle of insurable interest?
To be legally enforceable, all insurance contracts must be supported by an insurable interest. The insured must be in a position to lose financially if a loss occurs.
What are the purposes of the principle of insurable interest?
- To prevent gambling
- To reduce moral hazard
- To reduce the mount of the insured’s loss
What is the principle of insurable interest supported by?
- Ownership of property
- Legal liability resulting from contracts
- Secured creditors
- Contractual rights
When must insurable interest exist?
- For Property insurance: At the time of the loss
- Life Insurance: Only at inceptions of the policy
What is the Principle of Subrogation?
One who has indemnified another’s loss is entitled to recovery from reliable third parties who are responsible.
What are the purpose of the principle of subrogation?
- To prevent the insured from collecting twice for the same loss
- To hold the negligent person responsible and financially accountable for his actions
- Keeps insurance premiums below what they would otherwise be
What are exceptions to the principle of subrogation?
- Subrogation does not apply to life insurance contracts and most types of health insurance
- Subrogation does not give the insurer the right to collect against the insured, even if insured if negligent
What is the 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.
What are the 3 legal doctrines that support that Principle of Good Faith?
- Representations
- Concealment
- Warranty
What are representations?
Statements made by the applicant for insurance. Contract is voidable if the representation is material, false and relied on by the insurer.
What does material mean in regards to representations?
Material means that if the insurer knew the true facts, the policy would not have been issued or would have been issued on different terms.
A Misrepresentation of a material fact, if relied on by the insurer makes the contract voidable.
What is concealment?
Intentional failure of the application for insurance to reveal a material fact to the insurer even if; the disclosure of the facts might result in the rejection of the application or the payment of a higher premium. Has the same legal effect as misrepresentation.
What is warranty?
A clause in an insurance contract stating that before the insurer is liable: A certain fact, condition or circumstance affecting the risk must exist. Creates a condition of the contract and any breach of warranty, even if immaterial, will void the contract. This is the central distinction between a warranty and representation.
What is an express warranty?
Warranty stated in the contract.
What is an implied warranty?
A warranty not found in the contract but is assumed by the parties to the contract.
What is a promissory warranty?
A warranty that describes a condition, fact or circumstance to which the insured agrees to be held during the life of the contract.
What is an affirmative warranty?
A warranty that must exist only at the time the contract is first put into effect.
What are the 4 requirements of an insurance contract?
- Offer and Acceptance
- Consideration
- Competent parties
- Legal purpose
What does it mean for an insurance contract to be be aleatory?
Immediate value exchanged is not equal.
What does it mean for an insurance contract to be unilateral?
Only the insurer makes a legally enforceable promise.
What does it mean for an insurance contract to be conditional?
Policyowner must comply with all policy provisions to collect for a covered loss.
What does it mean for an insurance contract to be personal?
Insurance policy cannot be validly assigned to another party without the insurer’s consent
What does it mean for a contract to be of adhesion?
The insured must accept the entire contract with all of its terms and conditions
Courts have ruled that any ambiguities or uncertainties in the contract are construed against the ____.
Insurer
The principles of reasonable expectations states what?
That an insured is entitled to coverage under a policy that he or she reasonably expects it to provide and that to be effective exclusions or qualifications must be conspicuous plain and clear.
What several laws govern the actions of agents and their relationship to insureds?
- There is no presumption of an agency relationship
- An agent must be authorized to represent the principle
- A principal is responsible for the acts of agents acting within the scope of their authority
- Limitations can be placed on the powers of agents
An agent’s authority comes from what three sources?
- Express authority
- Implied authority
- Apparent authority
What is a waiver?
Is defined as the voluntary relinquishment of a known legal right
When does estoppel occur?
Estoppel occurs when a representation of fact made by one person to another person is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation.
What are the AM best rating categories and their classifications?
A++ Superior
A+ Superior
A Excellent
A- Excellent
B++ Good
B+ Good
B Fair
B- Fair
C++ Marginal
C+ Marginal
C Weak
Insurance companies manage ___ risk.
pure
_____ are situations or conditions that increase the chance of loss.
Hazards
Predictions in insurance are made by the ___________________.
law of large numbers.
___________ allows an insurance company to cede some or all risk to another company.
Reinsurance
_________ losses are the type of losses that cannot be statistically predicted.
Catastrophic
An insurance policy provides ________ as a form of risk management.
risk transfer
An insurance company taking on too many high risks is _________.
adverse selection.
____________ companies pay dividends to stockholders.
Mutual insurance
When a producer signs a contract with a company they are given the _________________.
power of agency.
A group of agents working under a corporate or trade name is an _______.
agency.
A company that is domiciled in another state is ______.
foreign.
_____________ is temporary until policy is issued or denied.
Binder coverage
A ________ is voluntary abandonment of legal rights.
waiver
________ is a feature of insurance that means values given by the two parties are unequal.
Aleatory
An ____________ in contract laws means an agreement has been made.
offer and acceptance
The insured’s consideration is both _________________.
Premium and application
Declarations pages are:
- Statements that provide information about the particular property or activity to be insured.
- For Underwriting and rating purposes.
- Usually the first page of the policy
In property insurance, the declaration page contains:
- Name of the insured
- Location of property
- Period of protection
- Amount of insurance
- Premium and deductible information.
Insurance contracts typically contain a page or section of ______.
Definitions
Insuring Agreements:
- Summarize the major promises of the insurer.
- Are the “heart of the insurance contract”
Two Basic forms of an insuring agreement in property insurance are:
- Named Perils
- Open Perils
Named peril agreements:
Only those perils specifically named in the policy are covered.
Open peril / All Risk agreements:
Where all losses are covered except those losses specifically excluded.
All Risk / Open Peril Agreements coverage has fewer gaps and the burden of proof is placed on the _______________.
insurer to deny a claim.
What are the 3 major types of exclusions?
- Excluded Perils
- Excluded Losses
- Excluded Property
Why are exclusions necessary?
- Some perils are not commercially insurable
- Extraordinary hazards are present
- Coverage is provided by other contracts
- Moral hazard problems
- Attitudinal hazard problems
- Coverage not needed by typical insureds
Definition of “insured”:
An insurance contract must identify the persons or parties who are insured under the policy.
The named insured:
Is the person or persons named in the declarations section of the policy.
The first named insured has ________________________________ that do not apply to other named insureds.
certain additional rights and responsibilities
Additional Insureds may be added using an _____________.
endorsement
A deductible is a:
provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable.
What is the purpose a deductible?
- Eliminate small claims that are expensive to handle and process
- Reduce premiums paid by the insured
Under the large loss principle:
Insurance should pay for high severity losses, small losses can be budgeted out of the person’s income.
Straight deductible:
The insured must pay a certain amount before the insurer makes a loss payment.
Aggregate deductible:
Means that all losses occur during a specified time period are accumulated to satisfy the deductible amount.
Franchise Deductible:
No liability if the loss is under a certain amount, but once the amount is exceeded the entire loss is paid in full.
Calendar Year Deductible:
Type of aggregate deductible where once the deductible is satisfied during the calendar yearn no additional deductibles are imposed on the insured.
Corridor Deductible:
A deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense plan. Must be satisfied before a major medical plan pays any benefits.
The waiting period is the
stated period of time at the beginning of a loss during which no insurance benefits are paid.
In property and liability insurance an ____________ is a written provision that adds to, deletes from, or modifies the provision in the original contract.
endorsement
In life and health insurance, a ___________ is a provision that amends or changes the original policy.
rider
In property insurance contracts, coinsurance clauses encourage
the insured to insure the property to a stated percentage of its insurable value. If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer.
The coinsurance ratio is:
(Amount of Insurance Carried / Amount of Insurance Required) x Loss = Amount of Recovery
What is the purpose of a coinsurance clause?
To achieve equity
Health insurance policies frequently contain a coinsurance clause (usually 20% is paid by insured) The clause requires the insured to pay a certain percentage of covered medical ____________.
expenses in excess of the deductible.
Pro Rata Liability Provision:
Each insurer’s share of the loss is based on the proportion that insurance bears to the total amount of insurance on the property.
Contribution by Equal Shares:
Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy or until its policy limits are exhausted.
Primary and Excess Provisions:
The primary insurer pays first and the excess insurer pays only after the policy limits under the primary policy are exhausted.
Coordination of Benefits provision in group health insurance is designed to
prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan.
Title Insurance provides protection to a company’s directors and officers if they are sued for ________.
mismanagement.
Companies obtain title insurance to
recover indemnification costs or provide protection when indemnification does not apply
Indemnification only applies for title insurance if:
- Corporation is sufficiently solvent
- Directors and officers acted in good faith and in best interest of the corporation.
D&O insurance _______ incentives of directors and officers because they are protected from the threat of litigation and personal liability.
weakens
Negligence is the basis for determining liability.
The definition of negligence is the
failure to exercise the degree of care that is required by law.
What are the types of liability damages?
- Bodily injury
- Property Damage
- Personal Injury
- Legal Expenses
What does civil law involve?
Wrongs against Individuals and organizations
Breach of contract & negligent acts go to _________.
civil court.
A tort is a
wrong to another that arises out of actions other than breach of contract.
What are the 4 elements of a negligent act?
- Existence of a legal duty to use reasonable care
- Failure to perform that duty
- Damages or injury to the claimant
- Proximate cause of loss
Contributory negligence:
Injured person cannot collect damages if his or her conduct contributed to the injury.
Comparative negligence:
Requires parties in a negligence action to share the loss in accordance with the degree of negligence
Last clear chance:
In the case of contributory negligence, the negligent plaintiff may have a cause of action against the defendant if the defendant had the last clear chance to avoid the accident but failed to do so.
Imputed liability:
Employers are liable for their employees
Vicarious liability:
- Liability for the negligence of another via a contract.
- Places liability on the owner of a car for the negligence of the driver
- Parents assume liability acts of their children
Contracted liability:
One’s liability may be imputed to another by contract
Ex: Leases
The duties owed to employees by employers via employer-employee liability are:
- Provide a safe place to work
- Must employ reasonably competent employees
- Must warn of danger
- Must furnish appropriate and safe tools
- Must set up proper rules of conduct for employees
3 Classes of People Give Rise to a property owner - tenant liability, those being:
- Invitees
- Licensees
- Trespassers (No Care Allowed)
Directors & Officers liability insurance: Covers company leaders from harming shareholders and employees harmed by ________________.
negligent acts and deceptive statements
Res ipsa loquitur means
“the thing speaks for itself”
Res ipsa loquitur is used frequently in
- Product liability cases
- Medical malpractice suits
Res ipsa loquitur is legal doctrine that enables a
plaintiff to collect for losses without proving negligence on part of the defendant.
Attractive nuisance doctrine means that the
Status of trespassing child may be changed to an invitee (Increase degree of care owed to a child, who is incapable of recognizing or appreciating danger)
Respondeat superior refers to:
Principal Agent Liability - Legal doctrine under which a principle is responsible for the acts of their agent
What is the enterprise risk management process?
(Implementation of ERM)
- Risk Identification
(Internal Environment)
- Risk Analysis
(Improved Outcomes)
- Selection of Risk Treatment Measures
(External Environment)
- Monitoring / Program Changes
Hazard Risk is
associated with the organizations property, liability and personnel-related exposures
Financial Risk:
Refers to risk created by the changing value of financial assets, commodities, currencies and interest rates
Operation Risk:
Is risk arising out of an organization’s operations
Government/Compliance Risk:
Refers to the risk of noncompliance with a regulation
A Risk map is
a grid on which risks facing the organization are charted based on potential frequency and severity of loss to the organization
Risk Score:
Qualitative or quantitative measure prioritizing the importance of the risk.
Risk Appetite:
The total exposure that an organization is willing to accept, given the risk and return trade off for an individual risk or aggregate for the portfolio of risk
Risk Tolerance:
The amount of uncertainty that an organization is willing to accept
Benefits of ERM are:
- Increased risk awareness
- Increased certainty of meeting strategic and operational objectives
- Assurance of compliance with regulatory and legal requirements
- Greater accountability for the management of risks the organization faces
- Greater efficiency in the management of risks the organization faces.
- Greater efficiency in the management of risks and potential cost savings
- Improves strategic making
- Increased value of the organization
Underwriting Cycle refers to the
cyclical pattern of underwriting stringency, premium levels and profitability.
Characteristics of a hard market are:
- Tight standards
- High premiums
- Unfavorable insurance terms
- More retention
Characteristics of a soft market are:
- Loose Standards
- Low premiums
- Favorable insurance terms
- Less retention
The combined ratio formula is:
(Paid Losses + Adjustment Expenses + Underwriting Expenses) / Premiums
Capacity is the
relative level of surplus.
Capacity can be affected by
a clash loss which occurs when several lines of insurance simultaneously experience large losses.
Surplus is the
difference between an insurers assets and liabilities
What does it mean for an insurance contract to be be aleatory?
Immediate value exchanged is not equal.
