A. The Basics
Principal of Indemnity
The insured should not profit if a loss occurs and should go by the actual cash value
Principal of Insurable Interest
Insured stands to lose financially if loss occurs
Principal of Subrogation
Insurer's right to recover from a negligent 3rd party for any loss payment made to the insured
Example of Subrogation: Your neighbor has a bbq that catches fire and toasts your house. Your homeowner insurance policy kicks in, but now the insurance company has the right to go after your neighbor in court for negligence.
Principal of Utmost Good Faith
A higher degree of honesty is put on both parties of an insurance contract than the parties to other contracts.
B. Basic Contract Requirements
You need to understand the basic contract law requirements in order to further understand insurance. This is because insurance is primarily based on contracts. People pay to be insured from risks, and the insurance comes from a contract which enforces the agreement.
Offer and Acceptance
One party must make an offer and the other must accept the offer being presented
Consideration
A means of value which is given to one party for the completion of a contract. (i.e. money)
Competent Parties
Both parties must be able to understand the contract in which both parties enter
Legal Purpose
The contract must abide by language that is prescribed by state law. An insurer must follow proper procedure for filing and gaining state approval of their contracts.
C. Special Characteristics of Insurance
1. Insurance is an Aleatory contract
Aleatory means values exchanged are not equal.
(i.e. You can pay small premiums each month, but at any moment the contract is valid, the full benefit of insurance is given. Even though the total premiums paid does not match the total benefit received, the full benefit must be paid out because the contract is aleatory)
2. Insurance is a Unilateral contract
One sided contract
3. Insurance is a Conditional contract
4. Insurance is a Personal contract
5. Insurance is a Contract of Adhesion
General Agency Rule
Agents may bind principal by express, implied or apparent authority.
Doctrines of Waiver & Estoppel
Waiver - voluntary relinquishment of a known legal right.
Estoppel - representation of fact made and relied on to the detriment of one person
Reason for Government Regulation
1. Maintain Insurer Solvency
2. Compensate for inadequate Consumer knowledge
3. Ensure reasonable rates
4. Make insurance available
History of Government Regulation
1. State Chartered Companies
2. Paul v. Virginia - Ruled that the Federal Government had no right to regulate insurance
3. Southeastern Underwriters Association - Reversed Paul v. Virginia and ruled interstate
4. McCarran-Ferguson Act (Public Law 15)
- States regulate & tax insurance
- Feds handle anti-trust and areas states do not regulate
There are three methods for regulating insurance companies:
1. Legislation
2. Courts
3. State Agencies Governing Insurance
Areas of Government Regulation
1. Formation & Licensing of Insurers
2. Financial Regulations
3. Rate Regulation
4. Policy Forms
5. Sales Practices & Consumer Protection