Chapter 50
Insurance
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Introduction
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.
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§ 1: Insurance Terminology
and Concepts
Insurance Terminology.
The Concept of Risk Pooling.
Classification of Insurance.
Insurable Interest.
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Insurance Terminology
Policy (Insurance contract).
Premium is the consideration to be paid to
the insurer.
Underwriter (usually an insurance company).
Broker v. Agent.
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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
offered.
 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
profit.
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Classification of Insurance
Insurance is classified according to the nature of
the risk involved.
See Exhibit 50-1 in textbook for Insurance
Classifications.
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Insurable Interest
A person can insure anything in which he or she
has an insurable interest.
Types of insurable interest:
 Life.
 Key-Person Life Insurance.
 Property.
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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.
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Property Insurance
 Anyone who has an insurable interest.
 A person who derives a pecuniary benefit from the
preservation and continued existence of the property.
 Insurable interest must exist when the loss occurs.
Case 50.1: Sotelo v. Washington Mutual
Insurance Company (1999).
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§ 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.
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The Insurance Contract [2]
Application For Insurance.
Effective Date.
Provisions and Clauses.
Interpreting Provisions of an Insurance Contract.
Cancellation.
Basic Duties and Rights.
Defenses Against Payment.
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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.
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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 met.
 Parties may agree contract will not be effective until
policy is issued and delivered or sent to applicant.
 Parties may agree policy will be binding, not be
effective, until first premium paid, or physical exam
passed.
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Provisions and Clauses
Provisions Mandated by Statute.
Incontestability Clauses.
Coinsurance Clauses.
Appraisal and Arbitration Clauses.
Multiple Insurance Coverage.
Antilapse Clauses.
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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.
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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.
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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
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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.
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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 company’s
proportionate share of the liability, relative to the
total amount of insurance.
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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 premium.
 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.
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Interpreting Provisions
of an Insurance Contract
Courts interpret ambiguity against the insurance
company.
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.
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Cancellation
Insured can cancel policy at any time, and the
insurer can cancel according to terms of policy.
Insurer must give written notice of cancellation.
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Basic Duties and Rights
Insured must act in good faith.
Insurer has duty to investigate to determine the
facts.
Third party claims: Insurer is obligated to make
reasonable efforts to settle the claim, and policy
provides that in this situation insured must
cooperate.
Case 50.2: Columbia National Insurance Co. v.
Freeman (2002).
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Defenses Against Payment
Insurance company can raise any of the defenses
that would be valid in any ordinary action or
contract:
 Fraud, misrepresentation.
• Not if information given was optional.
• Not incorrect statement of age.
 Concurrent causation doctrine.
Case 50.3: Paul Revere Life Insurance Co. v.
Firma (1997).
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§ 3: Types of Insurance
Life Insurance.
Fire and Homeowner’s Insurance.
Automobile Insurance.
Business Liability Insurance.
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Life Insurance
Types of Life Insurance:
 Whole life.
 Limited-Payment Life.
 Term Insurance.
 Endowment Insurance.
 Universal Life.
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Life Insurance [2]
Features of rights and liabilities:
 Liability.
 Adjustment Due to Misstatement of Age.
 Assignment.
 Creditors’ Rights.
 Termination.
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Fire and Homeowner’s
Insurance
Standard Fire Insurance Policies:
 Liability.
 Proof of Loss.
 Occupancy Clause.
Homeowner’s Insurance:
 Assignment Property Coverage.
 Liability Coverage.
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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.
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Business Liability Insurance
General Liability.
Product Liability.
Professional Malpractice.
Worker’s Compensation.
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Law on the Web
Insurance contracts at Consumerlawpage.com.
Anderson Kill law firm.
Legal Research Exercises on the Web.
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