Declarations. INSU 2500 Chapter 9 CHAPTER 9. Common Elements of Insurance Contracts. Insuring Agreement Example

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INSU 2500

Chapter 9 October 10, 2006

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CHAPTER 9 BASIC PROPERTY AND LIABILITY

INSURANCE CONTRACTS

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Common Elements of

Insurance Contracts

Declarations Insuring Agreement Deductibles Definitions Exclusions Conditions Endorsements & Riders 4

Declarations

• Facts of Policy

• Usually first page of an insurance

contract contains such things as:

– Identifies the insurance company – Identifies the named insured – Policy period

– Policy limits – Deductibles – Premium

– Identifies forms and / or endorsements

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Insuring Agreement

• The words that give force to the contract

and describe in broad language the rights

and duties of both parties to the contract.

– Broadly describes what is covered and the

insurer’s and the insured’s rights,

obligations, and duties.

• Example:

– Auto (PAP): Personal auto policy

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Insuring Agreement Example

“We will pay for bodily injury and property

damage for which an insured person is legally

liable. Liability must arise from the ownership,

maintenance or use of your insured aircraft or

use of the premises on which it is stored. The

bodily injury and property damage must occur

during the Policy Period and be caused by an

accident. When bodily injury and property

damage are covered under this Insurance, we

will also provide an insured person with a legal

defense against such claims for bodily injury

and property damage.”

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Definitions

• Found in the contract when words or

phrases are to be defined in a specific

way.

• Try to minimize ambiguous terms and

words in the contract for legal

interpretation purposes.

• Also reduces word count when words

that need to be defined are used multiple

times.

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Exclusions

• Identify losses that are not covered.

• Designed to:

– Eliminate catastrophic events - flood, war

– Eliminate moral or morale hazards - intentional loss, failure to protect property

– Require extra charge - unfair to charge all insureds for covering $100,000 gun collections

– Eliminate coverage where another policy is specifically designed for the coverage – To truncate the doctrine of proximate cause

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Endorsements

• Modify standard insurance contracts in

predetermined ways

• Examples:

– Expand coverage

– Delete exclusions in contract

– Change definitions

• e.g.: “Baby-sitting is NOT a “business”

– Add locations / insureds / perils

– Add additional insureds

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Conditions

• If you want the claim paid, you must meet the

conditions stated in the contract. These

include:

– No Concealment or Fraud – No Suspension of coverage – Cancellation – policy must be in force

– Other insurance does not apply or loss is shared – Meet your duties after a loss

– Abide by the appraisal procedure – Agree to salvage

– Agree to claims payment - time limits

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Fraud

• Homeowners contract:

– Intentionally concealed or misrepresented any

fact or circumstances;

– Engaged in fraudulent conduct; or

– Made false statements; relating to the

insurance.

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Cancellation

• The insured may cancel the HO contract at any

time and receive a refund for any unearned

portion of the premium.

– When the insureds cancel, the short-rate cancellation schedule is used (allowing insurers to recover expense).

• Insurers also may cancel property policies.

– When the insurers cancel, the pro rata cancellation method is used.

• What is the difference between the two

approaches?

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Other Insurance

• If a loss covered by this policy is also

covered by other insurance, the insurer

will pay only the portion of the loss that the

limit of liability that applies under this

policy bears to the total amount of

insurance covering the loss.

• <Example> A $250,000 house insured

with 2 insurance contracts (each contract

covers up to $250,000). What happens if

the house is totally destroyed by fire?

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Insured’s Duties After Loss

Homework!

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Appraisal

• Appraisal procedure:

– Unsettled disagreements about the property

losses.

– Appraisers selected

– Umpire then chosen by the appraisers

– If still not settled, the case goes to the court

– Each party pays its own appraiser; and

– Bear the other expenses of the appraisal and

umpire equally.

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Deductibles

• Straight deductible - amount paid by insured

before the insurer pays any money

– Example: from the loss v. from the claim • $25,000 loss

• $20,000 coverage • $ 1,000 deductible • Deductible from the loss

– $25,000 - $1,000 = $24,000; $20,000 paid because hit policy limit

• Deductible from claim

– $20,000 - $1,000 = $19,000; deductible taken from claim

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Reasons for Deductibles

• Reduces moral and morale hazard since

insured pays a small portion of each loss

• Eliminates the expenses involved in small,

frequent claims and most losses are small

• As a result premiums are lower.

• Deductibles can be treated as risk

assumption or risk transfer?

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Objective Question #1

• Deductibles

a. Cause the insured to pay the first dollars of a loss. b. Cause the insurance company to pay the first

dollars of a loss.

c. Cause the loss to be deducted from the policy face.

d. Cause the policy face limit to be deducted from the loss.

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Objective Question #2

If an insured cancels her insurance policy:

a. The short-rate cancellation table is used to

calculate the refund.

b. The Greenwich mean cancellation table is

used to calculate the refund.

c. The pro rata cancellation calculation is used

to calculate the refund.

d. The mensa table is used to calculate the

refund.

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Objective Question #4

The purpose of the declarations section of an

insurance policy is to:

a. Declare the insurance company’s intention to provide coverage.

b. Declare the insured’s intention to purchase insurance.

c. State the important facts about the coverage provided and personalize the coverage to a particular insured. d. Declare the policy to be canceled by mutual

agreement.

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Objective Question #5

The clause that creates a binding agreement

between the insurer and insured is called

the:

a. binding clause

b. mutual agreement

c. ratification clause

d. insuring agreement

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Objective Question #7

If an insured files a fraudulent claim after a loss

occurs, the most likely result will be:

a. The insured will go to jail.

b. The insurer will not pay the claim after the fraud is discovered.

c. The insurer will pay the claim, but try to recover the insurance proceeds by way of subrogation against the insured.

d. The insured will collect, but only for half the amount claimed, with half the loss being considered a “fraud” penalty.

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Objective Question #8

To settle disagreements over the amount of

property losses, the ___________

procedure is used:

a. appraisal

b. settlement / pro rata

c. disagreement

d. salvage

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Topic Objectives

• Types of Torts

• Defenses Against Negligence

• Liability and Risk

• Tort Liability Trends

• Tort Limitations

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• A tort is a legal wrong for which the law

A tort is a legal wrong for which the law

allows a remedy in the form of money

damages.

What is a Tort?

• Person harmed: plaintiff or

claimant.

• Person alleged to cause the

harm: defendant or

tortfeasor.

• Intentional Torts

 Intentional act or

omission that causes harm

 Examples: assault,

trespass, fraud, libel and slander.

• Absolute Liability

 Injurer liable for

damages, regardless of negligence.  Examples: Work injuries, blasting, explosives, foods, medicine, wild animals.

Types of Torts

• Negligence

 Injurer is liable for damages to the injured when he fails to exercise the proper ‘standard of care’.

• Criteria

 Legal duty existed.  Duty not performed.  Damages were incurred.  Failure to perform duty proximate cause of damages.

Types of Torts (cont.)

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Types of Damages

• Special Damages

 can be determined & documented

 e.g., wage loss, medical expense, property damage

• General Damages (Non-Economic)

 cannot be measured  e.g., pain and suffering

• Punitive Damages

 intended to punish and discourage others from committing the same wrongful act

• Contributory Negligence

 No damages if person hurt contributed to injury.

• Comparative Negligence

 Financial burden shared according to relative fault.

• Last clear chance rule

• Assumption of risk

Injured person recognized

risk inherent in activity.

Defenses Against Negligence

• Imputed Negligence

Employer-Employee

Vicarious Liability

Family Purpose Doctrine

Dram Shop Laws

• Res Ipsa Loquitur

“The things speaks for

itself”

presumption of negligence

e.g., doctor amputates

wrong leg

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Potential Tort Situations

• Property Owners

• Attractive Nuisance Doctrine

• Owners/Operators of Autos

• Governmental Liability

erosion of sovereign immunity

• Charitable Institutions

• Employer and Employee Relationship

• Parents and Children

• Animals

• What is the traditional purpose of tort

law?

• Liability, compensation & deterrence

• Tort law and insurance.

 Moral Hazard?  Adverse Selection?  Principle of Indemnity?

Liability and Risk

• Recent expansion of

liability, i.e.

increased

willingness of courts

to find one party

liable for damages.

• Products Liability &

Professional Liability

have become

problems

Trends in Tort Law

• Traditional standard:

contributory negligence

 Many states have moved to

comparative negligence

standard.

 Assumption of risk defense has weakened over time.

• Expansion of liability for product defects

 Demise of “Privity of Contract” principle.  Expansion of defects to include design defects.  Extension of defects to include “failure to