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Insurance
Pooling of fortuitous losses by a transfer of risk to insurers who agree to indemnify insureds for such losses, to provide other pecuinary benefits on their occurance, or to render services connected with the risk.
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Pooling
the sharing of total losses among a group
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6 General Requirements of an Insurable Risk
- 1. Large Number of Homogeneous Exposure Units
- 2. Accidental and Unintentional Losses
- 3. Determinable and Measurable Losses
- 4. Non-Catastrophic Losses
- 5. Calculable Chance of Loss
- 6. Economically Feasible Premium
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Indemnity
insured is restored to approximate financial position as before a loss; there should be no gain after a loss
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Actual Cash Value (ACV)
what the insurance company usually pays;ACV=Replacement Cost (RC) - Depreciation
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Insurable Interest
insured must demonstrate a loss in order to collect
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When must insurable interest exist for property/ casualty insurance?
Insurance can be purchased for anything; interest isn't checked until a claim is filed, and one cannot collect on a claim without insurable interest
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When must insurable interest exist for life insurance?
Interest is only checked on the day the contract is signed, as long as premiums are paid, one can collect on a policy
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Subrogation
substitution of the insurer in the place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance; reinforces the idea of indemnity
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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
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Requirements of a Valid Contract
legality, capacity, offer and acceptance, consideration
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Representations
oral or written statements made before a contract starts to induce a party to enter the contract
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What can void a contract/ revoke coverage?
false and material representations, concealment, breaches of warranty
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Concealment
silence when there is an obligation to speak; generally involves an element of deception
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Warranty
a statement that becomes part of the insurance contract and is guranteed by the maker to be true in all respects
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Types of Warranties
Express, Implied, Promissory, Affirmative, Combination
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Promissory Warranty
condition to continue throughout a contract period
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Affirmative Warranty
exists at contracts inception and promises nothing about the future
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Who always makes the contract offer?
the applicant
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When does property insurance coverage usually begin?
as soon as the contract is signed; the agent has binding power
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When does life insurance coverage usually begin?
as soon as the company accepts a signed offer; agents cannot bind agreements
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Consideration
the value that each party gives to the other
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People not considered competent to enter into a contract:
- 1. Intoxicated Persons
- 2. Minors
- 3. Mentally Insane Persons
- 4. Corporations acting outside of the scope of its charter
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Distinguishing Characteristics of Insurance Contracts
Aleatory, unilateral, conditional, personal, contract of adhesion
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Aleatory Contract
Dollar outcome is unequal between parties, but this is not necessarily unfair
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Unilateral Contract
only one party legally has to perform, the insurer
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Conditional Contract
insurer only has to perform if the insured adheres to the conditions of the contract
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Personal Contract
require privity of contract; contract is solely between insured and insurer, meaning coverage can't transfer with the sale of item
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Contract of Adhesion
ambiguities are construed against the contract's writer (the insurance co)
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Benefits of Insurance
- Reduced reserve requirements
- Lower cost of capital
- Reduced credit risk
- Business and social stability
- Facilitates offering of new products and services
- Loss control activities (offer incentives of premium discounts)
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Costs of Insurance
- Fraudulent claims
- Inflated claims
- Expense loading to insured (paying cost to run insurance business)
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Major parts of an Insurance Policy
- Declaration
- Insuring Agreement
- Exclusions
- Conditions
- Definitions
- Basis of Recovery
- Clauses limiting the amount of recovery
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Declaration
first page of the policy that provides information about the particular property or activity to be insured
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Insuring Agreement
most crucial part of the agreement; states what the insurer agrees to do and major conditions under which it so agrees
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Named Perils Agreement
covered perils are specified in contract; if a peril is not on the list, it isn't covered
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Open Perils Agreement
states that it is the insurer's intention to cover risks of accidental loss to the described property except for perils specifically excluded
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Named Insured
person or organization that is to receive the benefit of the coverage period; is often the person listen on the declarations page
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Exclusions
used to define and limit the coverage provided by an insurer; used to restrict coverage of given perils, losses, property, and locations
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Excluded Perils
- Perils that are basically uninsurable
- Perils to be covered elsewhere
- Perils covered under endoresement at an extra premium
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Specific Dollar Limits
restrict payments to a maximum amount on any one type of loss
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Aggregate Dollar Limits
restrict payments on any one group of property items or losses from the same peril to some overall maxiumum
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Deductible
a specific dollar amount that will be brone by the insured before the insurer becomes liable; helps reduce the number of small claims
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Straight Deductible
applies to each loss and is subtracted before any loss payment is made
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Aggregate Deductible
applies for an entire year; the insured absorbs all losses until a certain dollar level is reached
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Calendar-year Deductible
aggregate deductible in the health insurance industry
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Disappearing Deductible
the size of the deductible decreases as the size of the loss increases
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Franchise Deductible
expressed either as a percentage or dollar amount; there is no liability on the part of the insurer unless the loss exceeds the stated amount. once the loss exceeds this amount, the insurer pays the entire claim
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Coinsurance
- Property-->device used to make the insured bear a portion of every loss when he or she is underinsured
- Health-->functions like a straight deductible, expressed as a percentage (copayment)
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