Chapter 51 Insurance Law McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

The Nature of the Insurance Relationship Insured Party: Party who makes a payment (a premium) in exchange for a payment in the event of damage/injury to property/person Insured Party: Party who makes a payment (a premium) in exchange for a payment in the event of damage/injury to property/person Premium: Payment on policy Premium: Payment on policy Insurer (Underwriter): Party who receives premiums from insured party Insurer (Underwriter): Party who receives premiums from insured party Beneficiary: Person who receives insurance proceeds Beneficiary: Person who receives insurance proceeds Policy: Document that expresses agreement between the insured party, beneficiary, and insurer Policy: Document that expresses agreement between the insured party, beneficiary, and insurer Risk: Potential loss Risk: Potential loss Insurable Interest: Economic interest in life/property Insurable Interest: Economic interest in life/property Life interest must exist at time policy obtained Life interest must exist at time policy obtained Property interest must exist at time of loss Property interest must exist at time of loss 51-2

The Insurance Contract Application For Insurance: Party with insured interest makes an offer to purchase insurance (Based on information described in application, insurance company evaluates the risk and determines whether to accept/reject offer) Application For Insurance: Party with insured interest makes an offer to purchase insurance (Based on information described in application, insurance company evaluates the risk and determines whether to accept/reject offer) Effective Date: Date policy becomes effective Effective Date: Date policy becomes effective Binder: Gives temporary insurance until decision to accept/reject application made Binder: Gives temporary insurance until decision to accept/reject application made 51-3

Elements of the Insurance Contract Incontestability Clause: Ensures insurance company cannot contest statements made in insurance application after certain period of time Incontestability Clause: Ensures insurance company cannot contest statements made in insurance application after certain period of time Anti-Lapse Clause: Grace period for insured to pay premium Anti-Lapse Clause: Grace period for insured to pay premium Appraisal Clause: Insured party and insurer select disinterested appraiser for second opinion on damages Appraisal Clause: Insured party and insurer select disinterested appraiser for second opinion on damages Arbitration Clause: Disputes must be submitted to an arbitrator Arbitration Clause: Disputes must be submitted to an arbitrator 51-4

Canceling the Insurance Policy While insurer/insured may cancel policy at specified times, insurer limited as to when it may cancel the policy; if either party breaches its duties as established in the insurance policy, the other party has legal remedy 51-5

Insurer and Insured Obligations Insurer Duties: Insurer Duties: Defend insured; insurer must defend insured party from claims for which insured party liable Defend insured; insurer must defend insured party from claims for which insured party liable Pay sums owed by insured Pay sums owed by insured Insured Duties: Insured Duties: Disclose material (significant, relevant) information on application Disclose material (significant, relevant) information on application Cooperate with insurer (on defense of claims) Cooperate with insurer (on defense of claims) 51-6

Insurer’s Defenses For Non-Payment of Claims Include (but are not limited to): Breach of contract; Breach of contract; Lack of insurable interest; and Lack of insurable interest; and Illegal activity Illegal activity 51-7

Types of Insurance Individual Insurance: Insured party is party purchasing insurance Individual Insurance: Insured party is party purchasing insurance Group Insurance: Party who is neither insured party nor insurer purchases insurance Group Insurance: Party who is neither insured party nor insurer purchases insurance Personal Insurance: Covers individual’s life/health Personal Insurance: Covers individual’s life/health Commercial Insurance: Covers business interests Commercial Insurance: Covers business interests Property Insurance: Protects property from loss/damage Property Insurance: Protects property from loss/damage Casualty Insurance: Protects person/property from accidental injury Casualty Insurance: Protects person/property from accidental injury Liability Insurance: Protects business from tort liability to third parties Liability Insurance: Protects business from tort liability to third parties Commercial General Liability Policy: Protects business against broad range of risks Commercial General Liability Policy: Protects business against broad range of risks 51-8

Exhibit 51-2: Types of Liability Insurance Contractor’s Liability Insurance: Protects contractors against liability for injuries that might occur while completing a job (excluding injuries to employees) Contractor’s Liability Insurance: Protects contractors against liability for injuries that might occur while completing a job (excluding injuries to employees) Garage Liability Insurance: Protects garage owner from liability to persons injured by operation of the garage Garage Liability Insurance: Protects garage owner from liability to persons injured by operation of the garage Product Liability Insurance: Protects producer or manufacturer of good from loss due to damages paid to people injured using the good Product Liability Insurance: Protects producer or manufacturer of good from loss due to damages paid to people injured using the good Professional Liability Insurance: Protects members of specific professions from liability associated with their professional acts Professional Liability Insurance: Protects members of specific professions from liability associated with their professional acts 51-9

Exhibit 51-3: Types of Property Insurance Fire Insurance: Protects property from loss or damage from fire Fire Insurance: Protects property from loss or damage from fire Livestock Insurance: Protects owner from loss due to injury or death of livestock Livestock Insurance: Protects owner from loss due to injury or death of livestock Water, Weather, and Natural Forces Insurance: Flood insurance, water damage insurance, weather insurance, hail insurance, lightning insurance, etc. Water, Weather, and Natural Forces Insurance: Flood insurance, water damage insurance, weather insurance, hail insurance, lightning insurance, etc

Life Insurance Whole-Life: Protection for entire life of insured Whole-Life: Protection for entire life of insured Term-Life: Provides coverage for specified term (beneficiary paid only if insured party dies during designated term) Term-Life: Provides coverage for specified term (beneficiary paid only if insured party dies during designated term) 51-11