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Topic Objectives
Outline basic legal principles underlying insurance contracts. Explain their purpose and how they work.
Why do we care? Legal provisions enforce economic principles. They also determine our rights in contracts.
Principle of Indemnity
Insured should be restored to approximate financial position prior to loss, not better. Purposes
prevent insured from profiting from insurance reduce moral hazard
ACV Example
Couch cost $800 when new. 5 years later, couch is destroyed by fire from cigarette. Couch is estimated to be 60% depreciated. Cost of replacing couch is $1,000. ACV = $1,000 - .6 x $1,000 = $400
Variations of ACV
Fair Market Value
price that would be paid in free mkt. FMV may be less than ACV market value policies common in home insurance
Life Insurance
policy pays face amount amount of loss difficult to determine
Insurance to Value
Insurers have encouraged homeowners to choose adequate policy limits; why? If insured has inadequate coverage, they could suffer uninsured losses in event of total loss. This problem has arisen in the aftermath of California wildfires. Property owners may fail to raise policy limits when the value of their homes increases.
Insurable Interest
Any contingency that will cause loss or harm to person or firm. Purposes
prevent gambling reduce moral hazard measure loss
Subrogation
Allows insurer to collect loss payments to insured from 3rd party. Purposes
prevent dual payments discourage negligence
Conditions
insured must be fully indemnified only used for property-liability ins.
How might subrogation be used in insurance claims stemming from Firestone tire problems?
Company-Agent Relationship
Participants
principal - insurance company agent - acts on behalf of company
Agent has authority to bind company under certain conditions. Principal is responsible for acts of agents. Potential conflicts?