Principles of Insurance Flashcards
Absolute Liability
liability without regard to negligence or fault (workers comp)
Adverse Selection
parties with greatest possibility of loss have the greatest desire for insurance. Want to AVOID
Aleatory Contract
if no loss occurs insurer pays nothing. Alternatively, if loss occurs, they may pay out more than premiums collected
Collateral Source Rule
damages assessed against negligent party not be reduced simply bc injured party has other resources of recovery avail. (insurance or employee benefits)
Common law contract
negotiable and can be modified (real estate contract)
Contract of adhesion
insurance contract is contract of adhesion - insurance co prepares the entire contract. Insured can accept or decline but cannot modify. “take it or leave it”
Can the consumer modify a contract of adhesion?
No
First part of insurance contract
insurable interest
2nd part of insurance contract
-determinable actual cash value
-amount recovered cannot be greater than the loss
3rd part of insurance contract
Subrogation- the insurance co must have the right to collect from a negligent 3rd party
Most property, liability and health insurance contracts are what
contract of indemnity
Contract of indemnity means what re:payment amount
payment only to the extent of financial loss or legal liability
Misrepresentation (contract of good faith)
if insured made a false statement, contract may be voided
Warranties (contract of good faith)
breach of warranty may cause contract to be voidable. warranty is a statement that is made part of the policy
Concealement (contract of good faith)
FAILURE of the insured to DISCLOSE MATERIAL FACTS concerning subject matter of the insurance could cause to be VOIDED
Dynamic risks
result from CHANGING ECONOMY (change in biz cycle, consumer taste), insurance doesn’t cover these risks
Estoppel
WHEN ONE PARTY IS NOT ALLOWED TO ASSERT A RIGHT due to having MISLED someone, and action is required by the other party
Financial risk
exposure to risk that may cause financial loss
Fundamental Risk
impersonal and usually a group risk (recession or earthquake) affects large segments of society at same time
Group insurance
insurance for more than one person through single contract issued to someone, usually employer, other than persons insured.
What is the contract called in a group insurance situation
master contract
What do people receive as proof of coverage in group insurance
certificate of insurance
Hazard
increases probability that a loss will occur
Physical hazard
physical characteristics of the person or property that increase the chance for loss (diabetic, house in flood zone)
Moral Hazard
-chance of loss from dishonesty
-OVERSTATES loss or INTENTIONALLY causes loss
-can happen when insured has weakened financial capacity
Morale Hazard
indifference to loss WHEN INSURANCE IS IN PLACE - creates carelessness and increases chance for loss (failure to lock doors)
Insurance broker
rep of the insured and not of insurance co. Broker has no authority to bind the insurer
Insurable interest
-right or relationship to subject matter of the contract such that OWNER would SUFFER FINANCIAL LOSS from damage, loss or destruction
Insurable interest is used to decrease what
moral hazard, prevent gambling, help measure actual losses
Property insurable interest needs to exist when
at the time of loss
Life insurance insurable interest needs to exist when
at the time insurance is purchased
Joint and several liability
negligence caused by 1 or 2 or more parties - each party can be held fully liable - party paying more than its own legal share can seek contribution from the others who have not paid their proportional share
Liability Risk
getting sued for intentional or unintentional injury to property or others (tort liability or civil suit)
Loss
partial or complete disappearance or reduction in value - undesired end result of risk
Negligence
failure to act how a reasonably prudent person would act
Negligence per se
act itself constitutes negligence - thereby relieving the burden to prove negligence (drunk driving)
particular risk
affects only the individual or small group at the same time, like if your home was burglarized
Peril
anything that causes a financial loss - unemployment, illness, old age, death, theft, fire, earthquake
Personal Risk
loss of income/asset from loss of ability to earn income through death, disability or sickness
Pure Risk
only the chance of loss or no loss at all
Res ipsa loquitor
“speaks for itself” - ie in a plane crash the negligence does not have to be proven by the injured party - affords reasonable evidence if the specific explanation of negligence isn’t readily available
Risk
possibility of an adverse deviation from an expected desired outcome
Speculative Risk
involves chance of loss or gain - gambling
Static Risks
-Factors other than change in economy (death of family breadwinner)
-tend to occur with regularity and can be insured against
Strict Liability
-resulting from extraordinarily dangerous activity
-negligence doesn’t have to be proved, however defenses may be allowed to refute or lessen liability
-strict parents wont let you do crazy shit
Tort
infringement on the rights of another. Wrongdoer is the tortfeasor - creates right for damaged party to bring civil action
Tort results in 2 forms of injury
bodily injury and property damage
What type of tort liability can be waived in banruptcy
general tort liability other than an intentional tort
4 elements to prove in tort
-duty owed by defendant
- must be breach of that duty
- damage or loss suffered by plaintiff
- breach of duty must be proximate cause of damage
Unilateral contract
insurance contract - only the insurer promises to do anything as there is no promise of the insured to pay the premium
Vicarious Liability
one person may become legally liable for the torts (negligence) of another - parent/child, employer/employee
Waiver
one party voluntarily relinquishes a right “I waive mt right to” and no action is required by the other party
Law of Large Numbers
-larger sample will improve the insurers estimate of the underlying probability
-In a perfect world premiums would equal losses
-As actual events differ from predictions, risk exists for the insurer
What type of liability is workers comp?
Absolute liability
Adverse Selection example
people in california purchase earthquake insurance more than people in new york
4 Elements of insurable risk
- reasonably predictable
- definite and measurable
- fortuitous or accidental
- must not be catastrophic
Biz Self insurance
-biz sets aside own funds to cover certain non-catastrophic risks
-Biz predicts exposure and sets aside cash to cover
-needs to purchase catastrophic risk insurance as well
Risk Management Process
- Identify risk
- Measure frequency, severity and variability
- Choose method to treat - avoid, retained and/or transferred to ins. co
- Evaluate and review effectiveness of choices
Essential coverage
ins. required by law for possibly disastrous results required for biz or household
Desirable coverage
losses that would seriously impair but not totally wipe out the financial position of the household or biz.
Available coverage and cash flow available for premiums
evaluate all available insurance coverage and establish budget to pay premiums
Risk control
actions taken to minimize exposure to risk. - loss prevention and control efforts
Risk avoidance/Strict liability
risk has catastrophic potential and can’t be reduced or transferred - athlete piloting a plane, bungee jumping etc.
Risk diversification
duplication of assets or activities at different locations - separate buildings, inventory at various warehouses, duplicate record of will
Risk Reduction
all techniques designed to reduce loss - security systems, fire detectors, physical exams, seatbelts
Risk financing
guarantees that funds are available to meet losses when they occur - 2 ways to do this - risk retention and risk transfer
Risk retention
you retain the risk of loss arising out of the exposure, either intentional or unintentional
Risk transfer
shift as much of the $ burden of the risk to another person or entity. when insurance in used a premium payment is required
What type of contract is insurance contract?
Contract of adhesion
Can a common law contract be modified?
Yes
What would someone with moral hazard do?
Overstate loss or intentionally cause loss
Does a broker have the power to bind the insurer?
No - they are an agent of the insured
Loss is the end result of what
risk
Subrogation
Insurance companies right to collect $
In a tort, the wrongdoer is the what
tortfeasor
What does a tort create for the damaged party
creates right for damaged party to bring civil action
Insurance is regulated at what level?
The state level
Enforceable Contracts Must have What
Competent parties, legal purpose, consideration, offer and acceptance
Is a tort civil or criminal in nature?
Civil
An agent is responsible to ____ not to the _______
Their Principal, not to the client
A condition that increases the probability loss will occur
Hazard
An event that causes loss such as fire, lightning, smoke or theft
Peril
The possibility of an adverse deviation from an expected outcome
Risk
Adverse selection says people who are what are the most likely to purchase insurance
Most in need of insurance
Required elements to make a risk insurable
-must be reasonably predictable
-definite and measurable
-must be fortuitous or accidental
Low Severity of loss and high probability of loss - what should you do with the risk
Reduce the risk
High severity of loss and high probability of loss what should you do with the risk
Avoid the risk
Low severity of loss and and low probability of loss what should you do with the risk?
Retain the risk
High severity of loss and low probability of loss what should you do with the risk
Transfer the risk
When must insurable interest exist for property and casualty insurance?
when the policy is written and when the loss happens
Can you reinstate your life insurance policy if the premiums lapsed?
Yes as long as the insurable interest still exists and the insured is still insurable
What rule states the damages assessed against the negligent party won’t be reduced because they have insurance in place?
Collateral source rule
speculative risk can be described how
risk that results in an uncertain degree of gain or loss
Hazard that deals with negligence or carelessness
Morale hazard
