Declarations. INSU 2500 Chapter 9 CHAPTER 9. Common Elements of Insurance Contracts. Insuring Agreement Example

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1 Declarations INSU 2500 Chapter 9 October 10, 2006 Facts of Policy Usually first page of an insurance contract contains such things as: Identifies the insurance company Identifies the named insured Policy period Policy limits Deductibles Premium Identifies forms and / or endorsements 4 CHAPTER 9 BASIC PROPERTY AND LIABILITY INSURANCE CONTRACTS Insuring Agreement The words that give force to the contract and describe in broad language the rights and duties of both parties to the contract. Broadly describes what is covered and the insurer s and the insured s rights, obligations, and duties. Example: Auto (PAP): Personal auto policy 2 5 Common Elements of Insurance Contracts Declarations Insuring Agreement Deductibles Definitions Exclusions Conditions Endorsements & Riders 3 Insuring Agreement Example We will pay for bodily injury and property damage for which an insured person is legally liable. Liability must arise from the ownership, maintenance or use of your insured aircraft or use of the premises on which it is stored. The bodily injury and property damage must occur during the Policy Period and be caused by an accident. When bodily injury and property damage are covered under this Insurance, we will also provide an insured person with a legal defense against such claims for bodily injury and property damage. 6 1

2 Definitions Conditions Found in the contract when words or phrases are to be defined in a specific way. Try to minimize ambiguous terms and words in the contract for legal interpretation purposes. Also reduces word count when words that need to be defined are used multiple times. 7 If you want the claim paid, you must meet the conditions stated in the contract. These include: No Concealment or Fraud No Suspension of coverage Cancellation policy must be in force Other insurance does not apply or loss is shared Meet your duties after a loss Abide by the appraisal procedure Agree to salvage Agree to claims payment - time limits 10 Exclusions Identify losses that are not covered. Designed to: Eliminate catastrophic events - flood, war Eliminate moral or morale hazards - intentional loss, failure to protect property Require extra charge - unfair to charge all insureds for covering $100,000 gun collections Eliminate coverage where another policy is specifically designed for the coverage To truncate the doctrine of proximate cause 8 Fraud Homeowners contract: Intentionally concealed or misrepresented any fact or circumstances; Engaged in fraudulent conduct; or Made false statements; relating to the insurance. 11 Endorsements Cancellation Modify standard insurance contracts in predetermined ways Examples: Expand coverage Delete exclusions in contract Change definitions e.g.: Baby-sitting is NOT a business Add locations / insureds / perils Add additional insureds 9 The insured may cancel the HO contract at any time and receive a refund for any unearned portion of the premium. When the insureds cancel, the short-rate cancellation schedule is used (allowing insurers to recover expense). Insurers also may cancel property policies. When the insurers cancel, the pro rata cancellation method is used. What is the difference between the two approaches? 12 2

3 Other Insurance If a loss covered by this policy is also covered by other insurance, the insurer will pay only the portion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss. <Example> A $250,000 house insured with 2 insurance contracts (each contract covers up to $250,000). What happens if the house is totally destroyed by fire? 13 Deductibles Straight deductible - amount paid by insured before the insurer pays any money Example: from the loss v. from the claim $25,000 loss $20,000 coverage $ 1,000 deductible Deductible from the loss $25,000 - $1,000 = $24,000; $20,000 paid because hit policy limit Deductible from claim $20,000 - $1,000 = $19,000; deductible taken from claim 16 Insured s Duties After Loss Homework! Reasons for Deductibles Reduces moral and morale hazard since insured pays a small portion of each loss Eliminates the expenses involved in small, frequent claims and most losses are small As a result premiums are lower. Deductibles can be treated as risk assumption or risk transfer? Appraisal Appraisal procedure: Unsettled disagreements about the property losses. Appraisers selected Umpire then chosen by the appraisers If still not settled, the case goes to the court Each party pays its own appraiser; and Bear the other expenses of the appraisal and umpire equally. 15 Objective Question #1 Deductibles a. Cause the insured to pay the first dollars of a loss. b. Cause the insurance company to pay the first dollars of a loss. c. Cause the loss to be deducted from the policy face. d. Cause the policy face limit to be deducted from the loss. 18 3

4 Objective Question #2 If an insured cancels her insurance policy: a. The short-rate cancellation table is used to calculate the refund. b. The Greenwich mean cancellation table is used to calculate the refund. c. The pro rata cancellation calculation is used to calculate the refund. d. The mensa table is used to calculate the refund. 19 Objective Question #7 If an insured files a fraudulent claim after a loss occurs, the most likely result will be: a. The insured will go to jail. b. The insurer will not pay the claim after the fraud is discovered. c. The insurer will pay the claim, but try to recover the insurance proceeds by way of subrogation against the insured. d. The insured will collect, but only for half the amount claimed, with half the loss being considered a fraud penalty. 22 Objective Question #4 The purpose of the declarations section of an insurance policy is to: a. Declare the insurance company s intention to provide coverage. b. Declare the insured s intention to purchase insurance. c. State the important facts about the coverage provided and personalize the coverage to a particular insured. d. Declare the policy to be canceled by mutual agreement. Objective Question #8 To settle disagreements over the amount of property losses, the procedure is used: a. appraisal b. settlement / pro rata c. disagreement d. salvage Objective Question #5 The clause that creates a binding agreement between the insurer and insured is called the: a. binding clause b. mutual agreement c. ratification clause d. insuring agreement Topic Objectives Types of Torts Defenses Against Negligence Liability and Risk Tort Liability Trends Tort Limitations

5 What is a Tort? A tort is a legal wrong for which the law allows a remedy in the form of money damages. Person harmed: plaintiff or claimant. Person alleged to cause the harm: defendant or tortfeasor. Types of Damages Special Damages can be determined & documented e.g., wage loss, medical expense, property damage General Damages (Non-Economic) cannot be measured e.g., pain and suffering Punitive Damages intended to punish and discourage others from committing the same wrongful act 28 Types of Torts Intentional Torts Intentional act or omission that causes harm Examples: assault, trespass, fraud, libel and slander. Absolute Liability Injurer liable for damages, regardless of negligence. Examples: Work injuries, blasting, explosives, foods, medicine, wild animals. Defenses Against Negligence Contributory Negligence No damages if person hurt contributed to injury. Comparative Negligence Financial burden shared according to relative fault. Last clear chance rule Assumption of risk Injured person recognized risk inherent in activity. Types of Torts (cont.) Negligence Injurer is liable for damages to the injured when he fails to exercise the proper standard of care. Criteria Legal duty existed. Duty not performed. Damages were incurred. Failure to perform duty proximate cause of damages. Other Types of Torts Imputed Negligence Employer-Employee Vicarious Liability Family Purpose Doctrine Dram Shop Laws Res Ipsa Loquitur The things speaks for itself presumption of negligence e.g., doctor amputates wrong leg 5

6 Potential Tort Situations Property Owners Attractive Nuisance Doctrine Owners/Operators of Autos Governmental Liability erosion of sovereign immunity Charitable Institutions Employer and Employee Relationship Parents and Children Animals 31 More Trends Traditional standard: contributory negligence Many states have moved to comparative negligence standard. Assumption of risk defense has weakened over time. Expansion of liability for product defects Demise of Privity of Contract principle. Expansion of defects to include design defects. Extension of defects to include failure to adequately warn of dangers. Liability and Risk What is the traditional purpose of tort law? Liability, compensation & deterrence Tort law and insurance. Moral Hazard? Adverse Selection? Principle of Indemnity? and More Trends Increased general damage awards Evidence suggests it is faster than the inflation rate. Total damage amounts vary more. At this time the family is grieving and suing. Trends in Tort Law Recent expansion of liability, i.e. increased willingness of courts to find one party liable for damages. Products Liability & Professional Liability have become problems Implications Greater safety? Avoidance of activities Higher insurance rates Higher consumer prices, diminished product choice I liked recess a lot better before the safety helmets. 36 6

7 Controlling Liability Costs Limits on pain and suffering Limits on joint and several liability Encourage dispute resolution No-fault insurance Thank you for not suing Pros and Cons of Tort Limits How are different interests affected? Moral hazard and deterrence? 7