Insurance Act Final

8/8/2019 Insurance Act Final

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Amity Business School


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Definition of InsuranceInsurance is the pooling of fortuitous lossesby transfer of such risks to insurers, who

agree to indemnify insured for such losses,to provide other pecuniary benefits on theiroccurrence or to render services connectedwith the risk

Commission on Insurance Terminologyof the American Risk and Insurance

Association


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Amity Business SchoolRequirements of an

Insurance ContractTo be legally enforceable, an insurancecontract must meet four requirements:

Offer and acceptance of the terms of thecontract

Consideration the values that each partyexchange

Legally competent parties, with legal capacityto enter into a binding contract

The contract must exist for a legal purpose


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Amity Business SchoolDistinct Legal

Characteristics of Insurance Contracts

Aleatory: values exchanged are not equal

Unilateral: only the insurer makes a legally enforceable

promise

Conditional: policy owner must comply with all policyprovisions to collect for a covered loss

Personal: property insurance policy cannot be validly

assigned to another party without the insurer's consent Contract of adhesion: since the insured must accept the

entire contract as it is written, any ambiguities are construedagainst the insurer


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Insurance vs. GamblingInsurance

Insurance is a techniquefor handing an already

existing pure risk

Insurance is sociallyproductive: both parties have a

common interest in theprevention of a loss

Gambling

Gambling creates anew speculative risk

Gambling is not sociallyproductive The winners gain comes

at the expense of theloser


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Insurance vs. HedgingInsurance

Risk is transferred by a

contract Insurance involves thetransfer of insurable risks

Insurance can reduce theobjective risk of an

insurer through the Lawof Large Numbers

Hedging

Risk is transferred by a

contract Hedging involves risksthat are typicallyuninsurable

Hedging does not result

in reduced risk


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Types of Insurance Private Insurance

Life and Health

Property and Liability

Government Insurance

Social Insurance

Other Government Insurance


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Fundamental Legal

Principles


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Legal Principles Principle of Indemnity

Principle of Insurable Interest

Principle of Subrogation Principle of Utmost Good Faith


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Principle of IndemnityThe insured agrees to pay no more than the

actual amount of the loss

Purpose:

To prevent the insured from profiting from a

loss To reduce moral hazard


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Principle of Indemnity In property insurance, indemnification is based on

the actual cash value of the property at the time ofloss

There are three main methods to determine actualcash value: Replacement cost less depreciation

Fair market value is the price a willing buyer would pay awilling seller in a free market

Broad evidence rule means that the determination ofactual cash value should include all relevant factors anexpert would use to determine the value of the property


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Principle of Indemnity There are some exceptions to the principle of indemnity:

A valued policy pays the face amount of insurance if atotal loss occurs

Valued policy law that requires payment of the faceamount of insurance to the insured if a total loss to realproperty occurs from a peril specified in the law

Replacement cost insurance means there is nodeduction for depreciation in determining the amountpaid for a loss

A life insurance contract is a valued policy that pays astated sum to the beneficiary upon the insureds death


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Principle of Insurable InterestThe insured must stand to lose financially if a loss occurs. A

contract entered into without insurable interest is wageringagreement.

Purpose:

To prevent gambling

To reduce moral hazard

To measure the amount of loss

When must insurable interest exist?

Property insurance: at the time of the loss

Life insurance: only at inception of the policy


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Principle of SubrogationSubstitution of the insurer in place of the insured

for the purpose of claiming indemnity from athird person for a loss covered by insurance.

Only in case of Marine and Fire Insurance

Purpose: To prevent the insured from collecting twice for the

same loss To hold the negligent person responsible for the loss

To hold down insurance rates


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Principle of Subrogation The insurer is entitled only to the amount it has

paid under the policy

The insured cannot impair the insurerssubrogation rights

Subrogation does not apply to life insurance and

to most individual health insurance contracts

The insurer cannot subrogate against its owninsurer.


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Principle of Utmost Good Faith

A higher degree of honesty is imposed on both parties toan insurance contract than is imposed on parties to othercontracts

Supported by three legal doctrines:

Representations are statements made by theapplicant for insurance

A contract is voidable if the representation ismaterial, false, and relied on by the insurer

An innocent misrepresentation of a material fact, ifrelied on by the insurer, makes the contractvoidable


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Principle of Utmost Good Faith

A concealment is intentional failure of the applicant

for insurance to reveal a material fact to the insurer

A warranty is a statement that becomes part of theinsurance contract and is guaranteed by the maker to

be true in all respects

Statements made by applicants are considered

representations, not warranties


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Amity Business SchoolDOUBLE INSURANCE

Insurance of same person or an asset with two different

companies.

Full amount in case of life insurance.

Loss amount in any other insurance.

Loss is paid in proportion of the loss by different

companies.


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Amity Business SchoolRe-Insurance

Done by the insurer

To reduce risk

Delegation of risk

Insured doesnt have to deal with the new insurer

Re-insurance can be in full or a part of policy.


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Made by:-

Akhil Suneja (D-23)

Aneesh Bajaj(D-52)

Chaitanya Gandhi(D-28)

Shrikant Yadav(D-38)

Viresh Arora(D-27)

Insurance Act Final

Documents

Transcript of Insurance Act Final