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RMIN 4000 Exam 3|132 Questions and answers|100% Scores
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RMIN 4000 Exam 3|132 Questionsand answers|100% Scores
Legal Principles of Insurance - -Principle of Indemnity
Principle of Insurable Interest
Principle of Subrogation
Principle of Utmost Good Faith
- Principle of Indemnity - --The insurer agrees to pay no more than the
actual amount of the loss
-Purpose is to prevent the insured from profiting from the loss
- Replacement Cost - --The cost to replace property with an item of like kind
and quality (similar workmanship and materials)
-NOT the same as Historical Cost
- Actual Cash Value - --Replacement Cost less depreciation
-In property insurance, indemnification is usually based on the actual value
of the property at the time of loss
- What is the Value?
• Roof installed in 2014 for $5,000 (historical cost), has a useful life of 20
years.
• Will cost $6,000 to replace based on current costs (replacement cost).
• After depreciation, the actual cash value is $3,600. Depreciation is 40% (8
years old / 20 year useful lifespan). - -ACV= $6,000 - ($6000x40%)= $3,600
- Example 1 - What is the ACV?
Samsung 50" TV• Cost $750 when purchased in 2018.• Useful life is 10
years• Current model (like kind/quality) is $450. - -ACV= 450- (450X40%)=
$270
- Example 2 - What is the ACV?
Warehouse Building• Cost $2,500,000 when built in 2016.• Useful life of 20
years• Fire completely destroys building in 2022 • Current reconstruction
cost is $3,000,000 - -ACV= $3M-($3Mx33.3%)= $2.1M
- Other Types of Indemnity - -Market Value
Valued Policy
Valued Policy Law (in some states)
- Market Value - -Price a buyer would be willing to pay in a free market
, - Valued Policy - -A policy that pays the face amount of insurance if a total
loss occurs (life insurance)
- Valued Policy Law - -(in some states) 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
-Apply to real property only
- Principle of Insurable Interest - -the insured/beneficiary must be in a
position to lose financially if a covered loss occurs
-Why?
*Prevents gambling on losses
*Reduces moral hazard
- Examples of Insurable Interest - --Ownership of property (house, car)
-Potential legal liability (business owner)
-Secured creditors (mortgage company, auto lender)
-Contractual right (goods in transit)
- When Must an Insurable Interest Exist? - -property insurance:
- at time of loss
- can't collect on an insurance policy after you sell your home
life insurance:
- at inception policy
- ex-spouse can still collect on life insurance if listed as policy beneficiary
- Principle of Subrogation - -substitution of the insurer in place of the
insured for the purpose of claiming indemnity from a third party for a loss
covered by insurance
Ex: (can happen in many different situations)
-Someone else hits your car
-Your insurance co. pays you for the damages to your vehicle
-Your insurance co. sues the other driver for reimbursement
- Life Insurance makes you think - -about who you want as beneficiaries
because the endurable interest isn't determined at time of loss, but instead
when policy is written (issues)
-Can change beneficiaries at any time before policy expires
- Reasons for Subrogation - --Prevents insured from collecting twice (once
from insurer, once from responsible party)
-Holds the negligent party responsible for the loss
-Reduces insurance claims costs (and therefore rates)
*Helps reduce claims costs and decrease premiums
, - Principles of Utmost Good Faith - -A higher degree of honesty is imposed
on both parties to insurance contracts than is imposed on parties to other
contracts
-Insurer is responsible for accuracy decision (honesty)
-Supported by three legal doctrines:
*Representations
*Concealment
*Warranty
- Representations - --Statements made by the applicant for insurance
-Contract is voidable if statements are false (misrepresentations)
*Material, False, or Relied on by Insurer
- Contract is voidable if the misrepresentation is: - -1. material
2. false
3. relied on by the insurer
- Material - -If the insurance co knew the info (ex: that insured was a
smoker) they would not have issued insurance or would have done a higher
premium
- False Ad - -Known lie
- Relied upon by the insurer - -they were treating the lying information as a
fact
- Is the contract voidable?
• A smoker lies on their life insurance application and later dies in an auto
accident. - -Yes, it is voidable because the material fact is false
- Is the contract voidable?
• Insured's birthday on a application is listed as August 1 when it's August
11. - -No because 10 days apart will not impact the premium and what they
were paying
*However, if the year were a typo/different, it would be voidable because
that would impact insurance
- Concealment - -Intentional failure of the applicant for insurance to reveal a
material fact to the insurer
-Contract can be voided if:
*Concealed fact was known by the insured to be material
*Insured intended to defraud the insurer
- Contract can be voided if concealment is - --Concealed fact was known by
the insured to be material
-Insured intended to defraud the insurer
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