Principle of Indemnity

‐ the insurer agrees to pay no more than the actual amount of the loss

‐ Purpose:

o To prevent the insured from profiting from a loss

o To reduce moral hazard

‐ In property insurance, indemnification is based on the _________

of the property at the time of loss

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

means that the determination of ACV should include all relevant factors an expert would use to determine the value of

the property

O replacement cost less depreciation

o __fair market value__________ is the price a willing buyer

would pay a willing seller in a free market

o ____broad evidence rule__________ means that the determination

of ACV should include all relevant factors an expert would use to determine the value of

the property

pays the face amount of insurance if a total loss occurs. Example – life insurance

O a life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured’s death

that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law

means there is no deduction for depreciation in determining the amount paid for a loss.

Principle of Insurable Interest

‐ The insured must stand to lose financially if a loss occurs

‐ Purpose:

O to prevent gambling

O to reduce moral hazard

O to measure the amount of loss

When must insurable interest exist?

Property insurance:_______________________

Life insurance:______________________

at the time of the loss

only at inception of the policy (only when you buy it)

Principle of Subrogation

‐ Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss covered by insurance

‐ Purpose:

O to prevent the insured from collecting twice for the same loss(primary purpose of subrogation)***will be on test***

o To hold the negligent person responsible for the loss

o to hold down insurance rates

‐ the insurer is entitled only to the amount it has paid under the policy

‐ The insured cannot impair the insurer’s subrogation rights

‐ Subrogation does not apply to life insurance and to most individual health insurance contracts

‐ The insurer cannot subrogate against its own insureds

Principle of Utmost Good Faith

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

are statements made by the applicant for insurance

of a material fact, if relied on by the insurer,

makes the contract voidable

is intentional failure of the applicant for insurance to reveal a material fact to the insurer, it’s hard to prove the intent to conceal

 is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects

o statements made by applicants are considered representations, not warranties

values that each party exchange

with legal capacity to enter into a binding contract

values exchanged are not equal

only the insurer makes a legally enforceable

promise

policy owner must comply with all policy provisions to collect for a covered loss

property insurance policy cannot be validly assigned to another party without the insurer’s consent

since the insured must accept the entire contract as it is written , any ambiguities are construed against the insurer