Legal Aspects Of Insurance

legally binding agreement creating rights and duties for those who are parties to it.

-breached contract, when one party fails to perform its duties without a legal excuse

-allows one party the option of breaking the agreement because of an act (breach) or omission by the other party

-the party with the right to void the contract may choose to have the contract enforced

-a contract that a court will not enforce because from the beginning it lacks the elements of a valid contract

Ex: contract signed by a legally insane person is not valid

-temporary contract in property insurance, verbal or written before the formal written policy is issued. Meets all requirements of a legal contract. Temp in nature because it is valid for 30 days or less.

-purpose is to provide coverage during the time it takes to process an application. Written binder will state the amount covered, effective date, and parties to the binder.

-can provide temp coverage, contingent on applicant's ability to present evidence of insurability.

Ex: life insurance, evidence of good health must be provided.

1. offer and acceptance

2. consideration

3. capacity

4. legal purpose

-offer, proposal to make an exchange, must be reasonably definite& communicated clearly

-acceptance, second person agrees to exchange, unconditional, unequivocal, and communicated clearly.

-may be oral or in writing. Binder can be both but written is preferred so terms are clearly stated.

-value exchanged b/t 2 parties to the contract

-what each party gives the other.

-can be tangible or intangible

-insurance policy, insurer makes a contingency promise to pay insured. Insurer agrees to pay if covered loss occurs, if it doesn't, insurer not required to pay.

-in return, insured also agrees to make premium payments and follow provisions and stipulations in contract

-one party makes an enforceable promise. Insurance policy is a good example. Insured can cancel anytime or stops paying without recourse. Insurer is limited to specific situations before it can cancel.

-bilateral contract, both parties make enforceable promises. Insurance is not bilateral

-18 year old is considered end of being minor. If someone younger enters into a contract and minor chooses not to end contract, it can be ratified when minor turns 18.

-some states allow older minors, 15 or older to enter into binding agreements for insurance in specific instances.

-insurer must also be qualified to enter into contracts, have license to operate in the state where it wants to sell insurance

-an end or intention permitted by law

-contract with antisocial purpose are not legally enforceable

Ex: buying life insurance on a child and claiming to be his/ her parent, then child dies. Insurer would not pay because of false claim of being a parent. Lacks insurable interest-legally recognizable economic relationship

-the insured should be restored to the same financial position as before the insureds loss. any departure from this rule should be on the side of undercompensation.

-insurers enforce indemnity through insurable interest requirement, actual cash value settlements, operation of subrogation clauses

-life insurance

-replacement cost insurance

-valued insurance

-economic value of human life cannot be measure before death

-cannot be contract of indemnity

-one cannot be put in the same financial position because that position cannot be foretold

-when insurer promises to pay the amount equal the full cost of replacing or repairing the property w/o deductions or depreciation

Ex: if an old building burns down, the insured will be in a better position after replacement. This type of policy is typically used in homeowner's insurance & property insurance.

-exception to rule of indemnity

-limit is paid when there is a total loss

-value is agreed upon before policy is written. When loss occurs, could be more or less than stated amount but that amount is paid regardless. Usually art or collectibles.

-policyholder is not indemnified and enriched by a loss, which makes getting the policy a gamble. This law was put in place in the 1800s where insurers would try to benefit from murders / fraud. Prohibits insurance to be issued if policyholder lacks interest in the loss.

-interest must be shown to exist before benefiting from loss. Legally recognized form of ownership i.e deed, title or demonstrable financial interest.

-insurable interest not involving financial ownership includes: bailments, mortgage loans, or other loans where property is pledged as collateral.

-Policyowner must show a recognized interest in having the insureds life continue. Interest must be shown when policy is purchased.

-a person may purchase as much insurance as s/he would like since s/he has a interest in his own person

-husband/wife have an unlimited interest. Anyone else beyond close family must show an interest ie. biz partner, debtors, key employees.

-applicant who must show insurable interest at time of application, there must be an adequate relationship to the person being insured.

-the party who can enforce the contractual rights i.e. naming beneficiary, assigning policy, taking out loans from insurer, and designating dividend options.

-party receiving the funds at the time of the insureds death

-must demonstrate insurable interest at time of application

-insurer must know there is an adequate relationship between beneficiary and insured.

-replacement cost at time of loss, less depreciation

-used to implement principle of indemnity

-insured can only recover amt of loss, even if the insured amount was higher because property was over insured

-$required to rebuild a similar structure meeting the same building code requirements at the time the original structure was built

-not the same as fair market value because FMV includes land value. Location is important but not when calculating replacement cost.

-calculated as percentage

# of years in use / useful life of structure

Ex: bldg used for 15 yrs expected to have 60 yrs life would be 1/4 depreciated (15/60) and 3/4 undepreciated (45/60)

-not the same as accounting concept b/c acct concept is based on purchased price while depreciation for ACV calculation uses #of years in use and useful life of structure.

-sometimes insurers do not use ACV in their policy.

-old structures also often cannot be rebuilt exactly the same way so insurers provide coverage for replacement with modern construction techniques

-Rules behind functional replacement: wallboard substitute plaster wall, Plastic pipes in place of copper, plywood in place of hardwood

-legal substitution of one person in place of another.

-if one person can be held liable for another's debt, then s/he can collect debt on behalf of that person as well

-gives insurers the right to collect from a third party after paying its insured claims as in car insurance collision claim

-prevents insured from collecting twice for the same loss

-prevents negligent parties to escape from their acts

contracts can be discharged for the following reasons:

-Performance

-Condition precedent

-Condition subsequent

-Rescission

-Reformed

-in normal course of events, insurance contracts end by performance, each party has done what it agreed to do.

-insurer renders payment if loss occurs and stands ready if none occurs. Usually none occurs. Insurer still perform as required by standing ready to pay claim.

-insureds discharge by paying their premiums and abiding by contract

-something that must be done by one party to activate the other party's duty to perform

Ex: premiums must continue to be paid for continued coverage

EX: Prompt notice must be given within 60 days to insurer in case of loss in homeowner's policy.

-ends an existing duty of immediate performance

-for homeowner's policy, insured must contest any denied claims within 12 mos.

-an agreement by both parties to end the contract, all requisites of a contract are required. When both parties mutually agree to relinquish their rights, then rescission was mutual.

-if one party feels like s/he was a victim of fraud, it may ask the court the rescind the contract

EX: if a smoker lies on life insurance form and dies w/i contestable period, insurer may rescind the contract and only return premiums paid

-if mistakes have been made in a policy, it must be reformed. Policy must be corrected so that the other party is not taken advantage of.