Managing Risk and Insurance Contracts Flashcards
what are the 3 categories of risk and give a brief description of each:
1) personal risk - health or life
2) property risk - financial loss due to property lost or damaged
3) liability risk - your actions result in injury or damage or death to others
what are the 4 steps of dealing with risk?
1) avoidance of risk
2) controlling risk
3) retention of risk
4) transfer of risk
what is meant by avoidance of risk?
eliminating all chances of financial loss, this is impractical (Ex: have no belongings, dont drive, dont have a house)
what is meant by controlling risk?
taking measures to reduce frequency and severity of losses (ex: install alarm, dont run red lights, dont jaywalk across busy streets)
what is meant by retention of risk?
self insurance (ex: police cruisers, govt)
how does transfer of risk occur?
through insurance
what are the 2 types of risk?
speculative and pure
what is speculative risk?
possibility of financial loss OR gain, is not insurable
what is pure risk?
possibility of financial loss with NO chance of financial gain, INSURABLE
what are the 5 elements needed to enforce a contract?
1) Agreement
2) consideration
3) legality of object
4) legal capacity of parties to enter into a contract
5) genuine intention
what is meant by ‘consideration’?
paying insurance premiums
what are incompetents?
persons who do not have the legal capacity to enter into a contract
what is the exception to the rule of those who can enter contract?
minors, when it is regarding a contract for necessities of life (food, clothing, shelter)
to prove genuine intention, it must be shown that the agreement was not affected by:
fraud, duress, concealment, or mistake
what are the 3 elements unique to insurance contacts?
1) insurable interest
2) “uberrima fides” (utmost good faith)
3) indemnity
what is meant by insurable interest?
people have an insurable interest if they can show they would suffer financially by a loss
ex: mortgagees
what us “uberrima fides”
utmost good faith, complete honesty
what is indemnity?
the law restricts payment under insurance contracts to ensure people receive the actual amount of their loss (back to financial position they were in one second before peril) no more and no less
what is meant by ‘void’?
that the contract is considered never to have existed in the first place, completely refund the client all their premiums
what is the latin term for void
ab initio
what does voidable mean
contract is void to the wrongdoear, but not void as to damage to the affected third parties
give an example of voidable
if I arson my own house, and neighbor’s house catches fire, my house is not covered but neighbor’s is. no refund of premium
