Assignment
1. List the four requirements that must be met to form a valid insurance contract.
(a) There must be an offer and acceptance.
(b) There must be consideration to support the contract.
(c) There must be competent parties.
(d) To be enforced, the contract must be for a lawful purpose.
2. a. Explain the meaning of an insurable interest and how does it help enforce indemnity?
b. How does the requirement of insurable interest in property insurance differ from the insurable interest in life insurance?
3. Provide an example of each of the following legal doctrines as they would relate to life insurance:
a. Misrepresentation.
Representations are statements made by the applicant for insurance. A misrepresentation is a statement that is material, false, and relied on by the insurer. A material misrepresentation allows the insurer to void the policy.
b. Concealment
Concealment is the intentional failure of the applicant for insurance to reveal a material fact to the insurer. The legal effect of a material concealment is the same as a misrepresentation-the contract is voidable at the insurer's option.
c. Warranty
A warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects. For example, a bank may warrant that a guard will be on the premises 24 hours a day. In the past, under the common law, any breach of the warranty, even if slight, permitted the insurer to deny liability for the claim. However, this harsh doctrine has been substantially modified by court decisions and legislation.
4. Insurance contracts have certain legal characteristics that distinguish them from other contracts. Explain the following legal characteristics of insurance contracts.
a. Aleatory contract
The insurance contract is aleatory. The values exchanged are not equal. If a loss occurs, the insured may recover an amount in excess of the premiums paid. In a commutative contract, theoretically, there is an equal exchange of values.
b. Unilateral contract
The insurance contract is unilateral since only the insurer makes a legally binding promise. Most ordinary contracts are bilateral, and either party may be sued for breach of contract.
c. Conditional contract
The contract is conditional. In order to collect, a number of duties must be complied with, such as giving prompt notice of loss and submitting proof of loss.
d. Personal contract
A property insurance contract is personal. Personal characteristics of the insured influence the insurer's willingness to issue a policy. Accordingly, these contracts can be validly assigned only with the consent of the insurer. A life insurance policy is not a personal contract and can be freely assigned.
e. Contract of adhesion
Insurance is a contract of adhesion in that it is not bargained. Rather, the policy is offered on a "take-it-or-leave-it" basis, and any ambiguity is construed against the insurer.
5. a. Why is the Principle of Indemnity important to the success of insurance?
b. How does the concept of subrogation support the principle of indemnity? Please provide an example of the use of subrogation in automobile insurance.
6. Johnathon owns a laptop computer that was stolen. The laptop cost $1000 when it was purchased five years ago. A similar laptop computer today can be purchased for $500. Assuming that the laptop was 50 percent depreciated at the time the theft occurred, what is the actual cash value of the loss?
ACV is replacement cost less depreciation. Replacement cost of a new computer is $500. Depreciation is $250 because the laptop is 50 percent depreciated. Johnathon would collect $250.
7. A drunk driver ran a red light and smashed into Lisa's car. The cost to repair the car is $8000. She has collision insurance on her car with a $500 deductible.
a. Can Karen collect from both the negligent driver's insurer and her own insurer? Explain your answer.
No. If Karen collects from her own insurer, she gives her insurer the right to subrogate against the negligent driver who caused the accident. Her insurer then has the legal right to collect damages from the negligent driver or negligent driver's insurance company.
b. Explain how subrogation supports the principle of indemnity.
Subrogation supports the principle of indemnity since the insured does not profit from the loss. By giving up subrogation rights, the insured does not collect twice for the same loss, which supports the principle of indemnity.