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Chapter 49 Insurance


Washington Mutual sent Sotelo a check for $220,576.17. ... Washington Mutual (Insurable Interest) Case 49.2: American Guarantee v. Liability Insurance Co. ... – PowerPoint PPT presentation

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Title: Chapter 49 Insurance

Chapter 49Insurance
  • Insurance is a contractual arrangement for
    transferring and allocating risk.
  • Risk.
  • Prediction concerning potential loss based on
    known and unknown factors.
  • Risk Management.
  • Involves the transfer of certain risks from the
    individual to the insurance company by a
    contractual agreement.

1 Insurance Terminology and Concepts
  • Insurance Terminology.
  • The Concept of Risk Pooling.
  • Classification of Insurance.
  • Insurable Interest.

Insurance Terminology
  • Policy (Insurance contract).
  • Premium is the consideration to be paid to the
  • Underwriter (usually an insurance company).
  • Broker v. Agent.

The Concept of Risk Pooling
  • All insurance companies spread the risk among a
    large number of people - the pool - to make
    premiums small in comparison with the coverage
  • Insurance companies correlate data over a period
    of time to estimate fairly accurately the total
    amount they will have to pay if they insure a
    particular group, as well as the rates they will
    have to charge each member of the group so they
    can make the necessary payment and still show a

Insurance is Classified According to the Risk
  • Insurance is classified according to the nature
    of the risk involved.
  • See Exhibit 49-1 in textbook for Insurance

Insurable Interest
  • A person can insure anything in which he or she
    has an insurable interest.
  • Types of insurable interest
  • Life.
  • Property.

Life Insurance
  • Anyone who has an insurable interest.
  • Must have a reasonable expectation of benefit
    from the continued life of another.
  • Insurable interest must exist at the time the
    policy is obtained.
  • Policy remains valid, even after interest no
    longer exists (divorce).
  • Key-person insurance -- insurance obtained by an
    organization on the life of a person important to
    that organization.

Property Insurance
  • Anyone who has an insurable interest.
  • A person who derives a pecuniary benefit from the
    preservation and continued existence of the
  • Insurable interest must exist when the loss

2 The Insurance Contract
  • Governed by the general principles of contract
    law, and regulated by the state.
  • Application is an offer, which insurance company
    can either reject or accept.
  • Acceptance sometimes conditional.
  • Need consideration.
  • Parties need capacity.

The Insurance Contract 2
  • Application For Insurance.
  • Effective Date.
  • Provisions and Clauses.
  • Interpreting Provisions of an Insurance.
  • Cancellation.
  • Basic Duties and Rights.
  • Defenses Against Payment.

Application For Insurance
  • Filled in application attached to the policy and
    made a part of the contract.
  • Misstatements or misrepresentation can void a
    policy, specially if company can show it would
    not have issued policy if it had known the facts.

Effective Date
  • Broker is agent for the applicant.
  • Agent is agent for the insurance company. He can
    issue a binder, if some consideration is paid,
    which will immediately bind the insurance
    company, depending on certain conditions being
  • Parties may agree contract will not be effective
    until policy is issued and delivered or sent to
  • Parties may agree policy will be binding, not be
    effective, until first premium paid, or physical
    exam passed.

Provisions and Clauses
  • Provisions Mandated by Statute.
  • Incontestability Clauses.
  • Coinsurance Clauses.
  • Appraisal and Arbitration Clauses.
  • Multiple Insurance Coverage.
  • Antilapse Clauses.

Provisions Mandated by Statute
  • Provisions which are mandated by statute to be
    included in the insurance policy will be deemed
    to be in the insurance policy -- whether they are
    in the policy or not.

Incontestability Clauses
  • State statutes sometimes provide that once a life
    or health insurance policy has been in force for
    a specified length of time, the insurer cannot
    contest statements made in the application.

Coinsurance Clauses
  • If owner insures her property for at least 80 of
    its value, owner will be able to recover up to
    the face value of the policy.
  • If owner insures for less than 80, owner will be
    responsible for a proportionate share of the loss.

Amount of insurance recovery
Coinsurance percentage percentage (80) x
Property value
Appraisal and Arbitration Clauses
  • If insurer and insured cannot agree on value of
    property, an appraisal can be demanded.
  • Contract may also provide for arbitration.

Multiple Insurance Coverage
  • If insured has multiple insurance policies and
    the amount of coverage exceeds the loss, the
    insured can collect from each insurer only the
    companys proportionate share of the liability,
    relative to the total amount of insurance.

Anti-lapse Clauses
  • Policy does not lapse automatically upon
    nonpayment of premium.
  • Insured has a grace period of thirty or
    thirty-one days within which to pay the overdue
  • The insurer may be required to extend the
    insurance for a period of time.
  • Insurer may issue a policy with less coverage to
    reflect the amount of the payments made.
  • The insurer may pay the insured the cash
    surrender value of the policy.

Interpreting Provisions of an Insurance Contract
  • Courts interpret ambiguity against the insurance
  • Uncertainty as to whether policy actually exists
    is resolved against the insurance company.
  • Insurer must adequately notify insured of any
    change in policy under an existing policy.

  • Insured can cancel policy at any time, and the
    insurer can cancel according to terms of policy.
  • Insurer must give written notice of cancellation.

Basic Duties and Rights
  • Insured must act in good faith.
  • Insurer has duty to investigate to determine the
  • Third party claims Insurer is obligated to make
    reasonable efforts to settle the claim, and
    policy provides that in this situation insured
    must cooperate.

Defenses Against Payment
  • Insurance company can raise any of the defenses
    that would be valid in any ordinary action or
  • Fraud, misrepresentation.
  • Not if information given was optional.
  • Not incorrect statement of age.
  • Concurrent causation doctrine.

3 Types of Insurance
  • Life Insurance.
  • Fire and Homeowners Insurance.
  • Automobile Insurance.
  • Business Liability Insurance.

Life Insurance
  • Types of Life Insurance
  • Whole life.
  • Limited-Payment Life.
  • Term Insurance.
  • Endowment Insurance.
  • Universal Life.

Life Insurance 2
  • Features of rights and liabilities
  • Liability.
  • Adjustment Due to Misstatement of Age.
  • Assignment.
  • Creditors Rights.
  • Termination.

Fire and Homeowners Insurance
  • Standard Fire Insurance Policies
  • Liability.
  • Proof of Loss.
  • Occupancy Clause.
  • Homeowners Insurance
  • Assignment Property Coverage.
  • Liability Coverage.

Automobile Insurance
  • Liability Insurance.
  • Collision and Comprehensive Insurance.
  • Other Automobile Insurance.
  • Uninsured Motorist.
  • Accidental Death Benefits.
  • Medical Payment Coverage.
  • Other-Driver Coverage.
  • No-Fault Insurance.

Business Liability Insurance
  • General Liability.
  • Product Liability.
  • Professional Malpractice.
  • Workers Compensation.

Case 49.1 Sotelo v. Washington
Mutual(Insurable Interest)
  • Delhurst Country Inn was owned by Randco,
    mortgaged to Sotelo for 389,000, and insured by
    Washington Mutual under a policy with a 432,000
  • When a fire destroyed the Inn, Randco owed Sotelo
    395,545.37, including 12,763.62 in late payment
    penalties, on two validly recorded mortgages.
  • Washington Mutual sent Sotelo a check for
  • Sotelo sued claiming the amount was not enough.

Case 49.1 Sotelo v. Washington
Mutual(Insurable Interest)
  • Sotelos recovery was to be based on the
    outstanding mortgage debt and late payment
    penalties totaling 395,545.37, minus what she
    had already been paid, plus interest.
  • The amount owed by the mortgagors for back taxes
    was not to be deducted.
  • Generally, the mortgagees insurable interest is
    the amount of the mortgage debt since the debt
    represents its personal interest in the property.

Case 49.2 American Guarantee v. Liability
Insurance Co.(Insurance Interpretations)
  • Ingram Micros entire operation depends on the
    proper functioning of Impulse, a computer network
  • American Guarantee insured Ingrams property,
    business income and operations. The policy
    insured against all risks of direct physical
    loss or damage from any cause. Ingrams
    computers, including Impulse, were insured under
    the policy.
  • Ingram experienced a power outage that caused the
    computer network to be totally disrupted for 8
    hours. Ingram filed a claim.

Case 49.2 American Guarantee v. Liability
Insurance Co.(Insurance Interpretations)
  • The court concluded that physical damage to a
    computer, under a policy insuring against that
    risk, is not restricted to the physical
    destruction or harm of the circuitry but includes
    loss of access, loss of use, and loss of
  • In this case, there was property damage. Impulse
    was physically damaged for eight hours. Ingram
    employees repaired Impulse by physically
    bypassing a malfunctioning matrix switch. Until
    this restorative work was conducted, Ingrams
    mainframes and Impulse were inoperable.

Case 49.3 Paul Revere Life Insurance Co. v.
Fima(Defenses Against Payment)
  • Fima applied to Paul Revere for a disability
  • Fima stated that his income was 105,000 in the
    previous year and 85,000 in the current year.
    His actual income was 21,603 and 6,320. The
    policy had a two-year incontestability clause.
  • Three years later, Revere discovered the truth,
    and filed a suit in a federal district court
    against Fima to have the policy declared void ab
    initio on the ground of lack of an insurable

Case 49.3 Paul Revere Life Insurance Co. v.
Fima(Defenses Against Payment)
  • The U.S. Court of Appeals for the Ninth Circuit
    held that Every person has an insurable interest
    in his or her own life and health. Thus, the
    policy was not void ab initio.
  • Also, because the period for contesting the
    policy has passed under the incontestability
    clause, Revere may not now challenge the terms of
    the policy or the extent of Fimas insurable

  • HELD