02.01. Distinguishing Characteristics of Insurance Policies

  1. Indemnity
    • principle of indemnity: the policyholder should not profit from insurance
    • valued policies violate the principle of indemnity
    • to reduce moral hazard, insurance policies should not overindemnify the insured or indemnify more than once per loss
  2. Duplicate recovery
    • in specific cases, duplicate recovery is available and justifiable
    • eg: auto and health insurance
    • if insured paid fair premium under both policies, entitled to recover twice
    • collateral source rule: the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources
  3. Utmost Good Faith
    • information asymmetry: when one part has information important to the contract that the other party does not
    • verification: insurer attempts to gather as much relevant information as possible during uw process
    • adverse selection: insurer may improperly price insurance policies by charging a higher-risk insured a lower than actuarially fair premium
    • fraud is reporting a claim that didn't occur while build-up is inflating the claim amount of a legitimate claim
  4. Fortuitous Losses
    • losses that happen accidentally or unexpectedly
    • reasonable uncertainty must exist about its probability or timing from the insured's point
    • not necessarily covered by insurance (eg: EQ)
  5. Contract of Adhesion
    • any contract in which one party must either accept the agreement as written by the other party or reject it
    • any ambiguities or uncertainties in contract are to be construed against the party who drafted the agreement
    • insurance policies typically involve little or no negotiation
    • an insurer generally chooses the exact wording in the policies offered, and the insured generally has little choice but to accept it
  6. Level of Sophistication of the insured
    • unsophisticated insured: true of most homeowners and personal auto insurance policies. Ambiguities in these cases are typically interpreted against the insurer
    • sophisticated insured: contract of adhesion doctrine may not apply
  7. Factors used by court to determine level of sophistication
    • size of insured organization
    • size of insured organization's risk management department
    • use of an insurance broker or legal counsel with expertise in insurance policies
    • relative bargaining power of insured in relation to insurer
  8. Reasonable expectations doctrine
    • legal doctrine that provides for an ambiguous insurance policy clause to be interpreted in the way that an insured would reasonably expect
    • it's an extension of the contract of adhesion
    • it accounts for the fact that most insureds are not practiced in policy interpretation
    • not recognized by all courts
  9. Exchange of Unequal Amounts
    • consideration offered by insured is premium
    • consideration offered by insurer is to indemnify the insured in the event of a covered loss
    • there is no requirement that the amounts exchanged be equal in value
    • intangible value depends on insured's level of risk aversion. When paired with tangible value, closer to insured's consideration
  10. Equitable Distribution of Risk Costs
    • although tangible values exchanged may not be equal, in general they are equitable
    • premium charged is directly proportional to the insured's expected losses on an actuarially sound basis
    • finite risk insurance policies: premium often close to PV of limit - function more like loan
  11. Conditional Contract
    • insurer is obligated to pay losses only if insured fulfilled all policy conditions
    • insurer can waive the condition, like when paying for a claim without inspection
  12. Nontransferable
    • insured cannot assign the policy to a third party without the insurer's written consent
    • eg: when selling a property, the insurance contract covering it is not transfered
    • insurers can transfer contracts to other insurers, but must notify insured
    • if insurer transfers to third party, insured can either cancel policy and buy elsewhere, or pursue claims through the courts based on the notion that the consideration offered by the transferee is lower than the transferor
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02.01. Distinguishing Characteristics of Insurance Policies
Distinguishing Characteristics of Insurance Policies