Study 1: Claims and the Law - Summary

Question 1

Adjuster

Answer 1

• One who investigates insurance claims, makes recommendations regarding the payment of benefits from insurance policies, and negotiates payments and settlements.
• Represents the insurance company with respect to a claim on a policy.

Question 2

Public adjuster

Answer 2

• An adjuster who represents an insured in the claims settlement process.
• An insurance claims adjuster represents an insured on a fee basis in a claims settlement.

Question 3

Persons exempted from the definition of an adjuster

Answer 3

An adjuster is not a

• barrister or solicitor acting in the usual course of his or her occupation;
• trustee or agent of the property insured;
• salaried employee of a licensed insurer while acting on behalf of such insurer in the adjustment of losses;
• person who is employed as an appraiser, engineer, or other expert solely for the purpose of giving expert advice or evidence; or
• person who acts as an adjuster of marine losses only.

Question 4

Role of the loss adjuster

Answer 4

Loss adjusters must assess and evaluate the amount of damage and then apply the terms of the insurance policy—interpret the policy wording—to determine whether a loss is covered.

Question 5

Claims handlers and claims examiners

Answer 5

• A claims handler takes the initial report of a loss. Can perform any duty in the adjusting process, including taking the initial report of a loss, adjusting the loss, or handling the salvage or subrogation aspects of claims.
• A claims examiner, as an employee of an insurance company, directs the investigations of staff adjusters and independent adjusters, reviews their reports, and approves claim settlements.

Question 6

Structure of civil law in Canada

Answer 6

Civil law concerning the private rights of individuals unfolds in two systems:

• Common law system in all provinces and territories except Quebec
• Civil Code of Québec in Quebec

Civil law as it applies to insurance claims is concerned mainly with the law of contract and the law of tort.

Question 7

Civil Law

Answer 7

• Legal precedents form the basis for deciding court cases
• Common law provinces and territories are broadly similar but have their own insurance act, statues, regulations and body of case law

Question 8

Civil Code of Québec

Answer 8

• Courts rely on formal written code to interpret the law rather than on legal precedent as in the common law system
• Statutes outside the Civil Code may also affect loss adjustments

Question 9

Contract Law and claims

Answer 9

• Knowledge of contract law is useful to adjusters when interpreting policy wordings, hold-harmless agreements, lease agreements etc.
• Privity of contract is the term used in common law for the special relationship that exists between two parties because they have entered into a contract. This principle limits the scope of the insurance policy (a type of contract) to a private relationship between the person insured and the insurance company.

Question 10

Requirements for a contract to be legally binding under common law

Answer 10

1. Agreement
2. Capacity to contract
3. Consideration
4. Genuine intention
5. Legality of object

Question 11

Agreement

(contract)

Answer 11

• There must be an agreement between the contracting parties.
• To form a contract, one party must make a definite offer to another party, and then the other party must accept it as offered.
• An invitation to transact business is not an offer (ex. an insurance application is not a contract)

Question 12

Capacity to contract

Answer 12

• Each party to the contract must be legally able to enter into contracts.
• Limitations arise from the status of parties. Laws are in place to protect minors and other vulnerable people.

Question 13

Consideration

Answer 13

• One party must give consideration in exchange for the act or promise of another party: for example, a fee in exchange for services.
• In insurance, consideration is the premium the insured agrees to pay in exchange for the promise of indemnity in the event a covered loss occurs.

Question 14

Genuine intention

Answer 14

There must be intent between the parties to create a legally enforceable agreement and fulfill the mandate of the contract.

Question 15

Legality of Object

Answer 15

• The purpose for which the contract is formed must be legal.
• A contract cannot be established for a purpose that violates a civil statute, criminal law, or public policy.

Question 16

Four elements for a contract to be binding under the Civil Code

Answer 16

1. Consents (Articles 1386–1408)
2. Capacity to contract (Article 1409)
3. Cause of contracts (Articles 1410–1411)
4. Object of contracts (Articles 1412–1413)

Question 17

Consents

(Civil Code)

Answer 17

• Similar to mutual agreement in common law.
• One party makes the offer, and the other decides whether to accept it.

Question 18

Capacity to Contract

(Civil Code)

Answer 18

The person purchasing the policy must be legally able to enter into a contract. The requirements are similar to the common law. This clause protects minors and other vulnerable people.

Question 19

Cause of Contracts

(Civil Code)

Answer 19

The reason that each party enters into the contract. For example, in a contract of insurance, the insured’s motive is peace of mind or financial security. The insurer’s motive is to charge a premium in order to earn a profit.

Question 20

Object of Contracts

(Civil Code)

Answer 20

The obligation each party must fulfill under that contract. For example, under an automobile insurance contract, the insurer’s obligation is to indemnify the insured in the event of a car accident. The insured’s obligation is to pay the premium.

Question 21

Additional Legal Requirements of Insurance Contracts

Answer 21

• Principle of indemnity
• Insurable interest
• Utmost good faith

Question 22

Principle of Indemnity

Answer 22

• Claim payments restore policyholders to the same financial position they were in immediately prior to a loss.
• Principle operates to minimize moral hazard: the situation where an insured intentionally causes a loss in order to profit from it.

Question 23

Insurable Interest

Answer 23

Insured must have a financial relationship to the property to be insured:

• Owner of the property
• Mortgagee as a lender who accepts the interest in land as security for a loan
• Lessee who takes possession of leased property
• Bailee who accepts custody of property for some purpose but does not own the property
• Consignee who has purchased goods that are in transit to him or her
• Anyone else in a position to lose should the property be lost or damaged

Question 24

Three conditions to qualify insurable interest in a fire insurance policy

Answer 24

1. There must be a physical object capable of being destroyed by an insured peril.
2. The physical object must be the subject matter of the insurance.
3. The insured must have a relationship to the property recognized by the law, in which a benefit results when the property is held safe and a detriment results by its loss.

Question 25

Utmost Good Faith

Answer 25

• Higher standard of honesty and trust from both parties
• Applies to loss adjusters - must act in a balanced and resonable manner to preserve rights of policyholders
• In Quebec, the Civil Code obligates parties to operate in good faith. “Utmost good faith” is reserved for marine insurance.
• When an insurance company has operated in bad faith, it becomes liable for punitive damages.

Question 26

Objectives of awarding punitive damages

Answer 26

• Punish those who act in bad faith.
• Deter any similar behaviour in the future.
• Publicly condemn the behaviour.

Question 27

Representations

Answer 27

• A representation is a statement that an applicant makes to an insurer about the risk to be insured.
• An insurer is legally entitled to rely on the accuracy of representations made by the applicant.
• Misrepresenting a material fact would allow an insurer to void the contract.
• A representation is material if the underwriter would have declined the risk or negotiated different terms if he or she had known it to be false.
• If an insured believed a representation was true but it was in fact false, the insurer cannot void the policy after a loss occurs, since the insured relied on the policy. However, if the insured was negligent or careless about the truth or committed fraud, the insurer can void the policy even after a loss.
• If a material change occurs to the insured property during the term of the policy, the insured must promptly advise the insurer of the change.

Question 28

Warranties

Answer 28

• A promise made by an insured to maintain certain conditions of the risk during the term of the policy.
• If the insured breaches a warranty, the insurer has grounds to void the policy from the date of the breach.
• A promissory warranty promises not only that a fact is presently true but that it will continue to be true during the policy period
• An affirmative warranty states that a fact is true when the insurance policy is purchased

Question 29

Remedies for Breach of Contract

Answer 29

When a breach of contract occurs, the injured party may

• sue for damages that resulted from the breach and also for reimbursement of the part of the contract that the injured party already performed;
• compel performance of the terms of the contract or ask to be released from further contractual obligations; or
• ask for an injunction to restrain the other party.

Question 30

Insurer remedies for a breach of policy obligations

Answer 30

• Repudiate the policy contract and treat it as void.
• Treat the policy contract as valid notwithstanding the breach.
• Treat the policy contract as valid despite the breach but cancel it as prescribed in the policy.

Question 31

Relief from Imperfect Compliance

Answer 31

When a contract stipulates that performance must occur within a certain amount of time, the courts may grant relief to a policyholder who failed to perform the obligation in time.

Question 32

Lawsuits Against Insurers

Answer 32

• If a policyholder is denied policy benefits, he or she is entitled to sue the insurance company, but actions may be limited.
• Depending on the line of insurance or the jurisdiction, the insured typically has one to three years from the date of the loss or damage to initiate a lawsuit against the insurer.

Question 33

Waiver and Estoppel

Answer 33

• Waiver is the intentional relinquishment of a known right with consent or implied consent.
• Estoppel is a common law doctrine that prevents a party from taking a certain course of action and then sometime later revoking it after someone else has relied on such information to his or her detriment.
• Maracle v. Travellers Indemnity Co. of Canada - court found that the insurer’s offer to settle a claim was no longer binding on them since the insured issued a statement of claim after the expiry of the one-year limitation period

Question 34

Proof of Loss Form Requirement

Answer 34

• A blank proof of loss form must be provided to a policyholder within 60 days of the notice of loss
• If insured cannot or refused to provide proof or notice of loss, an agent or anyone to whom insurance money is payable may give notice and proof
• The insurer providing proof of loss form is not an admission that a policy is in force

Question 35

Criteria to forgo a formal proof of loss

Answer 35

• The amount of the loss is under a specified threshold.
• There is no suspicion of fraud surrounding the claim.
• There is no possibility of subrogation.
• There is no threat of litigation by the insured.

However, the insured must still prove the loss under the policy and document their claim.

Question 36

Loss Mitigation

Answer 36

• The duty to mitigate damages holds true of any claim, even a third-party claim.
• Tort law upholds the notion that a person presenting a claim must do what is possible to reduce the loss—that is, take all reasonable steps to protect damaged items from further damage after a loss, or, in the case of bodily injury, accept appropriate treatment to maximize recovery and minimize recovery time.

Question 37

Subrogation

Answer 37

• The right of subrogation passes to the insurer from the insured when a loss is paid.
• For auto claims in direct compensation provinces, subrogation between drivers is usually not permitted.