Module 4 Flashcards
Risk Avoidance
If a business wants to ensure that it will not have windows broken by vandals, it can avoid the risk by not having windows.
Risk reduction
business wants windows but is still concerned about vandals, it may choose to have windows made of a material that is very difficult to break.
Risk retention
the individual or business retains the risk. If a loss occurs, the individual or business pays the cost.
Risk transfer
This is primarily insurance, but can also be accomplished via
waivers or subcontracting.
High Frequency, High severity
risk avoidance/reduction
high frequency, low severity
risk retention/reduction
low frequency, high severity
risk transfer
low frequency, low severity
risk retention
Risk Retention Groups
insure their own members. The group must be
willing to engage in all of the activities of an insurance company, including (1) investing its own capital, (2) setting up insurance operations (underwriting,
administration, and claims handling), (3) approaching and finding willing reinsurance companies, and (4) pricing the product efficiently.Membership in the risk
retention group is limited to persons engaged in businesses or activities that share a similar position with regard to a given type of liability exposure.
Purchasing Groups
not insurers but rather are any group of persons, companies, or associations with similar risk exposures that form an organization with the purpose of purchasing insurance on a group basis. Unlike risk retention groups, these groups do not have to invest capital, submit a feasibility study, or make any
long-term commitments. Many insurance companies issue a master policy to the purchasing group, with
certificates to the insured members.
seven factors that insurance companies use to
limit an insurer’s liability covering losses.
Insurable interest. Actual cash value of the loss. Policy limits or face value. Other insurance. Coinsurance. Deductibles. Subrogation.
Insurable interest
insurable interest exists when the interested party will suffer a financial loss if the insured loss occurs
Actual cash value of the loss
Actual cash value, which is used with property
losses, is the replacement cost minus depreciation.
Policy limits or face value
the maximum amount that will be paid when the insured loss occurs.
Other insurance
Either one policy is considered primary with the other
paying for any uncovered loss, or the policies pay prorated shares of the loss
Coinsurance
It may be a splitting of costs, or it may refer to a minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses
Deductibles.
A deductible is a retained risk. It is the portion of insured losses that the insured is expected to pay before the insurance company pays anything.
Subrogation
This prevents the insured from collecting twice for the same loss from two different companies.
Moral hazard
a result of the client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.
morale hazard
is indifference
Torts
When someone causes physical, emotional, or financial harm to another
four elements of negligence:
- A duty is owed (e.g., individuals have the duty to drive their vehicles in a
safe manner). - The duty was breached (e.g., the individual rear-ended another car).
- There were actual damages (e.g., the damage to the other car).
- There was proximate cause (i.e., an uninterrupted sequence of events that
brought about the damage).
collateral source rule
states that a tortfeasor (i.e., one who commits a tort)
will be liable for the full damages caused, regardless of other sources of reimbursement available to the victim.
subrogation clause
in an insurance policy prevents the collateral source rule from violating the principle of indemnity (the victim should be reimbursed for loss but not profit from it) by giving the insurer the right to recover an amount
from the tortfeasor that is up to the amount the insurer has paid to the victim
Survival of tort actions
means that the right to sue generally survives the death of
either the victim or the tortfeasor.
Attractive nuisance
to something about a property (e.g., a swimming pool)
that is likely to attract and possibly injure children.
Negligence per se
where the duty or standard of care owed by the defendant is determined by reference to a statute. This can happen where there is a statute that was enacted to protect the class of people to which the plaintiff belongs against the type of harm that occurred in the case. The other elements of a tort still must be proved.
Absolute liability
the standard imposed when a person or organization is held responsible for any damages, even where there has been no negligence in the usual sense of the word. Generally, there is no defense to absolute liability claims.
Vicarious liability
is when someone is held liable for the acts of another (e.g., the
person’s child, employee, or agent).
Legal Defenses to Liability
Assumption of the risk
If the party recognizes and understands the danger in an activity and voluntarily chooses to encounter it, then another cannot be held responsible for the injury.
Legal Defenses to Liability
Contributory negligence
If any negligence on the part of the injured party
contributes to the injury, it absolves the other party of liability.
Legal Defenses to Liability
Comparative negligence
If the jury determines that the injured party was 20% to blame for the injury, the plaintiff’s award might be reduced by 20%.
Legal Defenses to Liability
Last clear chance
immediately prior to the accident, had a last clear
chance to prevent the accident but failed to seize the chance
Requirements of an enforceable contract are:
Offer and acceptance Consideration Legal object Competent parties Legal form
bilateral
Contracts under which both parties have made
enforceable promises
unilateral
only one party to the contract makes a promise
aleatory contract
one where the outcome is controlled by chance, and the
dollars that change hands are generally of substantially unequal amounts
Adhesion
means that if you wrote the contract, you are stuck with any ambiguities that you created. prepared by one party and either accepted or rejected by the other.
indemnity
based on the idea that when persons suffer a loss,
they should be made whole.
personal contracts
Insurance contracts. because the nature of the risk is
related to the individual who owns the contract
utmost good faith
The insurance company can make three claims if it believes that good faith was not maintained:
misrepresentation,
warranties, or
concealment.
Misrepresentation
occurs when a false statement is made that at least partially induces the company to issue the contract. For a misrepresentation to void a contract, it must be material
warranty
a statement by the applicant that all of the information on the application is absolutely true. Under strict application of the warranty doctrine, any mistake, however insignificant, would permit the company to void or rescind the contract
Concealment
the intentional failure to provide material information, violates the requirement of utmost good faith even if no specific question arises about that information
Offer and acceptance
An offer must be made by one party and accepted by
the other party
Consideration
Each party must give the other something of value. The
insured pays an initial premium, and the insurer binds coverage
Legal object
The contract must not be contrary to public policy (e.g., a contract will not be enforced if the object of the contract is illegal).
Competent parties.
Parties to the agreement must be capable of contracting in the eyes of the law. Minors are capable of entering into a legal contract. However, such contracts may be voidable by the minor
Legal form
The contract must satisfy any legal requirements specifying its form (e.g., contracts for the sale of land must be in writing, insurance application, etc.).
void contract
is not enforceable. It lacks one or more of the preceding requirements of an enforceable contract.
voidable contract
is a contract where one party has the option of voiding the contract, but the other party is bound
The four basic sections of insurance policies are:
declarations,
insuring agreement,
exclusions, and
conditions.
parol evidence rule
not a remedy but a rule of substantive law. Under this rule, when the parties put their agreement into a final,
complete, written form, evidence of prior understandings—whether oral or written—will not be
admitted to contradict the writing.
Doctrine of waiver
cant deny a claim if it previously accepted claim without requiring certain action. waived its right
Doctrine of estoppel
prevents a company for claiming they can deny a claim, when they had waived their right through the doctrine of waiver
Equitable remedies
Rescission and reformation are the remedies used when a contract must be changed
Rescission
is an equitable remedy by which the original contract is
deemed null from its beginning
Reformation.
is the equitable remedy by which the written instrument
between the parties is changed to express the original intentions of the parties
Waiver provision
inserted in insurance contracts to protect the insurer.insurance companies have not always benefited from this clause
Independent Agents
represent several insurance companies. may affiliate with a producer group. Producer
groups generally are made up of high-end independent agents.
Captive Agents
sell property and liability insurance for companies that are known as direct writers. represents only one company or one group of companies under common ownership.
Career Agents
generally life insurance agents in a general agency or a company-owned office under the agency management or the branch office systems. In some cases, career agents are also captive agents, but in many situations career agents maintain selling contracts with other companies to better serve their clients. have access to benefits and must earn a minimum level of commissions to maintain.
Producing General Agents
generally produce the majority of their income by selling insurance
personally,
do not have specified territories, and
frequently do not hire agents to work for them, although they have authority
to do so if they wish
PGA contract
A PGA contract allows an insurer to pay a producer an expense allowance, in addition to the normal commissions, in order to “encourage” the PGA to place more business with the insurer. Even with expense allowances, the PGA companies may be spending less in distribution costs than other companies spend using traditional agencies
Brokers
individuals who are licensed with and can work with many insurers. A broker is the agent of an insurance buyer. cannot bind the insurer
Surplus-Line, Excess-Line Brokers, or Agents
handle any type of insurance that cannot be purchased using normal distribution channels within a given state. These are found almost exclusively in the
property and casualty field
Solicitors
Solicitors generally cannot bind the insurer or issue policies. They find insurance prospects and then handle the business through an independent agent, a
broker, a company branch, or a service office. Not every state allows solicitors to operate.
all agents
Acts of an insurance agent within the scope of express, implied, or apparent authority are considered
acts of the insurer
Express authority
specifically conferred on the agent. This authority is stated in the agent’s contract with the insurer. The insurer may specify the types of policies, the types of coverage, and the amount of insurance that the agent may
write.
Implied authority
authority not expressly granted, but which the agent is
assumed to have in order to transact the insurer’s business
Apparent authority
a doctrine of ostensible authority (another name
sometimes used interchangeably), is the appearance of, or assumption of, authority based on the actions, words, or deeds of the agent/insurer
state legislature
passes laws that govern conduct of the insurance business in the state. These laws cover the requirements involved in organizing an insurance
company, standards of solvency, regulation of rates and investments, and licensing of agents.
state insurance department
headed by the state insurance commissioner, sets regulations implementing legislation and
administers compliance. It also exercises judicial power in interpreting and enforcing the state insurance code—making rulings that have the force of law
insurance commissioner
Areas of insurer operations regulated: examination of companies rates guarantee funds involuntary markets competence of agents unfair practices company insolvencies policy forms access to insurance social pricing investments licensing of companies reserves
