Insurance - Part I

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Insurance: A formal social device used to reduce risks by transferring the risks of several individuals to a single entity, or an insurer, for a consideration or premium.
Law of Large Numbers: Insurance is based on this theory, that the theory that actual results obtained will approach the projected probable results as the number of risks or exposure increases.
Indemnity: This is the underlying principle of insurance; the concept of restoring someone to the same financial position they were in before a loss occurred.
Loss: Loss is the unintentional decline in or disappearance of value due to a contingency.
Direct Physical Loss: A loss in which the covered peril is the immediate or proximate cause of damage to property, such as hail damage to the roof of a house.
Indirect Consequential Loss: A loss in which the covered peril is not the direct cause of damage. If a restaurant suffers a fire, for instance, the fire is the direct cause of the loss. The loss of business while the restaurant is closed for repairs is an indirect loss.
Risk is...: The probability or uncertainty that a loss will occur. Risk may be financial or non-financial; it may be speculative or pure.
Pure risks: Situations that involve only the chance of loss or no loss. [Property ownership]
Speculative risks: Situations where there is a chance for either a loss or a gain. [Gambling]
To be considered insurable, a risk must be:: Due to chance. Measurable! predictable. Based on a large enough pool that the law of large numbers allows for the accurate prediction of loss.
Insurance deals with: financial and pure risks.
T/F - Speculative risks are generally insurable.: False
Risk may be...: avoided, retained, transferred, shared, or reduced.
Risk avoidance: Not engaging in the action that gives rise to the risk.
Retention: most common method of handling risk.
Transfer: Shifting the risk from one party (the insured) to another (the insurer) for a consideration or premium.
Exposure: A unit of measurement to which an insurance rate is applied.
Hazard: A condition that increases risk or the chance of a loss occurring.
Physical, Moral, Morale, Legal: There are four types of hazards:
Physical Hazard: Material or structural problems such as damaged steps or worn auto tires.
Moral Hazard: The insuredâ€™s habits, such as dishonesty or criminal activity.
Morale Hazard: Careless attitude on the part of the insured that increases the chance of loss.
Legal Hazard: Court or legislative action increases the risk of loss.
Peril: The cause of possible loss; the event insured against, for example, fire, lightning, or theft.
Accident: An undesirable, unforeseen, and unintended event.
Occurrence: Any event or incident.
Contract: A legally binding, enforceable agreement between two or more parties that requires each party to carry out 1 part of the agreement.
Deductible: The monetary amount an insured must pay on a loss before the insurer will begin payments. A risk-sharing concept included in most property insurance policies.
Coinsurance: A clause in a property insurance policy that requires a specified amount of insurance based on the value of the insured property. If the insured insures the property for less than this amount he/she must share in a percet of a loss to the same percent that the property is underinsured at the time of the loss.
Self Insurance: The concept of making financial preparations to meet risks by setting aside sufficient funds in advance to ni estimated losses, including enough to cover possible losses in excess of those estimated.
Applicant: An individual who requests insurance from an insurance company.
Insured: An individual who has insurance on his! her person, property or business through an insurer.
Insurer: Another name for an insurance company.
Binder: A written or oral contract to place insurance in force temporarily when it is not possible to issue a policy or endorse the existing policy immediately. A binder is subject to the premium and all the terms of the contract
Insurable Interest: The concept that insurance can only be purchased when the applicant has a potential for financial loss, if the insured person died, or if the insured item were destroyed or not in their possession.
In Property and Casualty insurance, insurable interest must be present at the: time of loss as well as at the time of application.
In Life Insurance, insurable interest is only required at the: time of application.
Burglary: Breaking and entering (a building, safe, etc.) with felonious intent and with visible signs of forced entry, for example, a broken window, jimmied door, or blown safe.
Robbery: The taking of the personal property of another by force or fear of force.
Larceny: The taking or removal of anotherâ€™s personal property with the intent to permanently deprive them of it. This could be burglary or robbery, but if property is taken without force, fear of force, or breaking and entering, it is still larceny. Walking into someoneâ€™s house through an unlocked door and picking up jewelry is an example of larceny.
Theft: The unlawful taking of the property of another, including burglary, robbery and larceny.
Mysterious Disappearance: Personal property is missing, but there is no provable cause for its disappearance; the property might have been lost or stolen.
Liability: legally enforceable debt or obligation.
Sentimental Value: Someone might have strong emotional ties to a property such as an heirloom or an old car.
Re-Sale Value: The price that the individual could get for the property if it were sold.
Replacement Value: The price an insurer will pay to rebuild or replace property.
Replacement Cost: The cost to rebuild or replace property with materials of like kind and quality, and at the same location.
Guaranteed Replacement Cost: The cost to rebuild or replace the property, even if the actual cost is more than the stated value insurance amount.
Functional Replacement Cost: The cost to repair or replace damaged property with less expensive but functionally equivalent materials. An example would be custom woodwork that is replaced with standard woodwork.
Actual Cash Value: Replacement cost minus depreciation.
Market Value: The price property would likely fetch if sold on the market.
Stated Value: An agreed upon policy amount which is paid in the event of a total loss, regardless of the propertyâ€™s actual value.
Agreed Value: A provision that specifies a certain value that will satisf
Valued Policy Law: The insurer must pay the full amount stated in the policy as the amount insured regardless of the propertyâ€™s actual cash value at the time of loss if property is totally lost or destroyed. Many states require this by law.
Limit of Liability: The maximum amount an insurance company will pay to protect the insured under a given policy.
Fire Legal Liability: A form of liability insurance that covers damage to leased or rented property caused by fire or other specified perils. May be used in Personal or Commercial Lines rental policies.
Four principle Elements of a Legal Contract.: Agreement , Exchange of Consideration, Competent parties, Legal purpose
Agreement: An insurance policy is the written statement of the terms of the contract. There must be both an offer and an acceptance:
Offer: The applicant submits an application along with the correct premium.
Acceptance: The insurer issues the policy.
Exchange of Consideration: The applicantâ€™s consideration is the premium and the insurerâ€™s consideration is the promise to indemnify
Competent parties: All parties concerned must have legal capacity to enter into a contract. This is probably best shown by defining those who do not have legal capacity to enter into a contract. This includes minors, those legally declared incompetent, and people under the influence of drugs or alcohol. In the case of minors, the insurer may be required to uphold the terms of the contract while minors may not be.
Legal purpose: The insurance policy owner must have an insurable interest in the property or person being insured. Insurable interest, once again, is defined as having a financial interest wherein the insured could lose financial position if the property were damaged or destroyed, or if the person was injured or died.
insurance Contract: contract in which an insurer indemnifies the insured for losses in return for a consideration or premium.
Contract of Adhesion: Only one party to the contract, the insurer, prepares the contract and submits it to the other party, the insured, for acceptance. The insured cannot make any changes to the contract.
Contract of Utmost Good Faith: Is understood that both parties bargain in good faith in forming the contract.
Unilateral: Only one party is legally bound to perform any duties once premium is paid. In an insurance contract, only the Insurer makes any legally enforceable promise. The insured does not make a promise but pays a premium, each constitutes his part of the consideration.
Contract of Indemnity: insurer must restore the insured to the same financial position they were in before the loss occurred.
Aleatory: Unequal amounts of money are exchanged. The premium that the insured pays is less than the potential benefit he or she will receive in the event of a loss.
Conditional: Both parties must perform certain duties to make the agreement enforceable. The insured pays premiums and follows certain policy conditions. The insurer pays claims according to policy terms.
Insurance polices are: personal contracts. They cover the insurable interest of the individual insured and cannot be transferred or assigned to another individual- with the exception of life insurance.
There are four parts to an insurance policy which constitute what is called the entire contract:: The policy itself, The application, Any supplemental applications (i.e., additional insureds), Any riders and endorsements
No changes to the policy are valid unless signed by: an officer of the company (not the agent).
Ambiguities in a contract of adhesion: Any doubt or ambiguity found in an insurance policy will be found in favor of the party that did not draw up the
Doctrine of Reasonable Expectations: The reasonable expectations of policy owners or beneficiaries will be honored even though the strict terms of the policy do not support these expectations.
Concept of Indemnity: The principle behind insurance is to get the insured back to the same financial position they were in before the loss occurred, not to allow them to benefit from the loss.
Utmost good faith: Applicants and insureds are expected to make a full, fair and honest disclosure of facts. Insurers are expected to promptly indemnify the insured in the event of loss according to the contract.
Warranty: The insuredâ€™s guarantee that facts as stated are correct in reference to the risk, or that specified conditions will be fulfilled to maintain the contract. (Property Insurance example: The insured states there is a sprinkler system in the building and that it will be kept in working condition.)
Representation: Statements made by one party that are believed to be true. The insuredâ€™s misrepresentation will not affect the insurance contract or policy unless it affects the conditions under which the policy would be issued or not. An agentâ€™s misrepresentation, whether intended or not, is more likely to void a policy. For example, an agent may falsely represent that certain coverage is contained in the policy, when in fact it is not.
Concealment: The willful failure to disclose material facts. An applicantâ€™s concealment of information from the insurance company could affect the insurerâ€™s decision whether or not to insure the property and could void the policy. (Property insurance example: The insured states a garage is used only for autos, knowing that it is actually used for storing a hot air balloon and tanks, which are an obviously different risk.)
Fraud: Deceit, intentional misrepresentation, or the concealment of material facts with the intention of causing injury to another party.
Waiver: The voluntary abandonment of a known or legal right or advantage.
Estoppel: The concept that, once a fact has been admitted to be true by a previous action, it can no longer be denied to be true.
Multi-line Insurance Companies: Insurers that write more than one line of insurance.
Stock Insurers: Companies organized under the laws of the state in which they are incorporated. Owned by shareholders who elect officers and directors and who share in profits through stock growth and dividends.
Mutual Insurers: Companies owned by policyholders. The policyholders share in profits through dividends and can attend and vote at company meetings:
Risk Retention Groups: A type of mutual company that insures people in the same profession or business.
Assessment Mutual Insurers: Losses are shared among group members.
Pure Assessment Group:: No advance premium; losses are assessed to each member as they occur.
Advance Premium Assessment Group:: Premiums are paid at the beginning of each assessment period and claims are paid from these premiums. If there are more claims than premiums paid in, additional assessments must be levied against each member. If there is money left at the end of period the money is returned to the group members.
Reciprocal Companies: Groups which exchange insurance on each other.
Syndicate Insurers: Not true insurance companies.
Governmental Insurance and Residual Market Insurance: Covers certain types of insurance that private insurers cannot or will not insure. Insurers in each state are required to participate in shared or involuntary markets. These markets provide coverage for high-risk insurance applicants that do not meet normal underwriting standards. Some states require that these high-risk applicants be assigned to individual insurers on a predetermined basis while others require that losses from these individuals be shared.
Property insurance FAIR plans:: Provide insurance to property owners in inner-city and other high risk areas who are unable to obtain insurance through normal market channels because of property location or other situations over which they have no control. If turned down in the normal market, the property owner applies for insurance through the stateâ€™s FAIR plan and the state follows its own guidelines to insure the property.
Examples of federal government insurance include: Social Security, Medicare, flood insurance, and federal crop and crime insurance. State governments sometimes offer competitive funds that compete with private insurers, or monopolistic funds that will not allow insurers to compete in certain areas. One such example is that some states provide Workers Compensation insurance benefits.
Reinsurers: Insurance companies that insure other insurance companies against catastrophic losses such as earthquakes. The company transferring some of their loss potential to the reinsurer is called the â€œcedingâ€ company.
Fraternal Insurers/Fraternal Benefit Societies: Membership is based on religious, ethnic, or national lines and noted mainly for social and charitable functions. Insurance is only offered to members or their families. A Fraternal Benefit Society is any society, order, or supreme lodge that has no capital stock whether incorporated or not: conducted solely for the benefit of its members and their beneficiaries, and is not for profit, operates on a lodge system with ritualistic form of work, has a representative form of government, provides benefits in accordance with a charter.
Self-Insurers: Those who choose to establish their own pool of reserves to cover losses that may arise, rather than transfer their share of a loss to an insurance company.
Domestic Insurer: Insurers transacting business in the state where they are chartered.
Foreign Insurer: Insurers transacting business in a state or U. S. territory other than where they are legally chartered.
Alien Insurer: Insurers organized under the laws of a jurisdiction outside the United States or its territories.
Admitted Insurer: Insurers authorized by a stateâ€™s insurance department to transact business in that state.
Non-admitted Insurer: Insurers that are not authorized to transact business in a state because they neither seek admission to the state, nor comply with state requirements.
Surplus Excess Lines Insurers: Insurers that offer insurance not offered through admitted insurers. The full amount or type of insurance must not be available through admitted insurers, and financial consideration cannot be a deciding factor. (Example:When no admitted insurers in a particular state offer insurance to cover potential gasoline leakage at service stations, a non-admitted insurer may offer such coverage. The non-admitted insurer is allowed to sell this coverage in the state as a â€œsurplus lines insurerâ€ because the coverage is not available otherwise. If an admitted Insurer later decides to offer the same coverage, the non-admitted insurer must stop selling insurance in the state because the coverage is no longer a surplus line.)
Exclusive Captive Agents: Agents appointed by an insurer to represent the company by selling and servicing policies on its behalf; representing only one company.
Independent Agents or Brokers: Agents that represent several insurers and can therefore offer various premiums to the customer.
Nonresident agent: An agent authorized to write insurance business in a state other than the one in which he lives
Direct Writer: An insurer that deals directly with insured through a salaried representative or captive! exclusive agent rather than through independent brokers.
Direct Mail Direct Response: Policies marketed from a companyâ€™s home office through direct mail, Internet, newspapers, magazines, radio, and/or Television, rather than through agents.
Many states require that insurance agents have their: fingerprints on file before being granted a producerâ€™s license.
Insurance companies are: principals of the insurance agent; the insurer empowers the agent to act as a representative of the company. The agent has no authority beyond which the insurer gives him! her. The agent is first and foremost the representative of the insurance company and has an ethical obligation to follow the rules of the insurer, to submit applications only for those risks that the insurer deems appropriate, and to service the policies of company customers. In return, the agent is paid a commission or salary by the company and is given authority to represent the company in conducting business on the companyâ€™s behalf.
Law of Agency: Any act of an agent of the company is the same as if the company itself performed the act. An agent represents the company through several types of authority or directives:
Express Directive: Authority expressly given the agent either orally or in writing, in his contract. For example, the countersigning and delivering of policies. Clauses to express directives include such things as scale of commissions, ownership of contracts sold, and contract cancellation procedures.
Implied Directive: Under the doctrine of â€œostensible authority,â€ agents have unwritten authority to perform incidental acts which the public assumes the agent to have.
Apparent Directive: Neither expressly given nor implied, apparent authority still exists because the agent has used it in the past without directions from the insurer to stop; or, it is authority that a person would reasonably assume an agent to have. If the agent has paid minor claims in the past and been reimbursed by the insurer, it is apparent that he has the authority to do so.
Agent responsibilities to the insured include:: Provide correct information about policy coverages. Process policy change or cancellation requests in a timely fashion. While the agent is the representative go-between for the company and the insured, primary responsibility is to the company as the principal, while treating the customer fairly and ethically.
Insurance Brokers: Insurance brokers represent the insured rather than one insurance company. Brokers do not have the power to â€œbindâ€ an insurer to a risk, but instead solicit business from clients and then submit the business to any of several companies he or she may represent, which insurers then accepts or declines coverage.

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