INSURANCE AS A RISK MANAGEMENT TOOL

Property insurance can protect you financially if your home is destroyed or your possessions are stolen.

CONTRACT OF INSURANCE
In between the insured and insurer INSURED:Party effecting insurance, (Individual, Company, Firm, Corporate body etc., with legal status) Party granting the protection under an insurance policy. Is the evidence of contract
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INSURER:-

Policy:-

Insurance contracts are governed by laws of Jamaica which states that to be legally valid following elements should be in order.
A.
B. C. D. E.

Offer and acceptance

Consideration Agreement between the parties Capacity of the parties Legality of the contract

UTMOST GOOD FAITH:

The greatest degree of good faith by law, is expected from the proposer, that is the main reason why good faith in case of Insurance contracts becomes UTMOST good faith. It is the duty of the proposer to disclose all material facts not only already known but also extends to material facts which he ought to know.

PROPERTY RISKS
Damage to Physical Assets

PEOPLE RISKS
Loss to Employees

Acts of God Accidents Break down

ILL Health and accident Death Overseas travel

FINANCIAL RISKS
Monetary Loss from

LIABILITIES RISKS
Loss from Operations

Theft and Burglary Business interruption Bad credit

Product liabilities Public liability Directors & Officers liabilities Errors & Omissions liabilities

Real property is property attached to land, like a house, business, garage, or other building.

Personal property consists of possessions that

can be moved, like furniture, jewelry, and electronic equipment.

Liability insurance protects you from the costs of injuries to others on your property.
Pays for:

Actual damages for which you are held liable Legal expenses for the accident in case youre sued

Standard fire policy insures against damage due to fire or lightning.

Extended coverage protects against damage from riots, car or airplane crashes, windstorms, hail, and even explosions.

The basic policy usually protect against personal liability and property destroyed by:
Fire/lightning Smoke Windstorms/hail Vehicles Explosion Property removed in danger of fire etc.

Riots Aircraft Theft Vandalism Breaking glass

Capable of being acquired, owned, used A legally protected right or interest over which the owner has the ability to exercise dominion. A bundle of rights - that are recognized and enforced by law, and protected under the Constitution. Property has a unique status, second in importance only to liberty. No person shall be deprived of life, liberty or property, without due process of law ...and just compensation.

The earths crust and all things firmly attached. Immovable Includes subsurface rights, i.e., minerals Includes rights above land, i.e., radio towers Trees, shrubs, perennial vegetation Fixtures - Can it be removed w/o material damage? What is the partys intent; the purpose of the item?

Acquired and transferred easily.

Intangible - Intellectual property (patents, copyrights);stock; commercial paper (notes) Tangible - Anything that has a physical existence, generally moveable, cars, computers, books, animals, severed trees, crops that must be planted each year, i.e., corn, oats, potatoes

Buy it (Sale of Goods) Create it (knit a sweater) Take it (capture a deer) Trade it Inherit it Receive it as a gift Find it (abandoned or lost property) By accession By divorce By Confusion

Voluntary transfer without consideration, 3 elements are needed: Donors present intent to give a gift Donor must make delivery of the gift constructive delivery Acceptance Inter vivos Irrevocable Causa mortis Contingent upon death Must die as anticipated Revocable

Lost - unintentionally left. Finder is entitled to the property against everyone except the true owner. Exception for lost property found in the ground. Estray statutes Mislaid - Intentionally placed somewhere and accidentally left with no intent to relinquish ownership. Finder acquires no rights. Owner of premises, not finder, has first claim.

Abandoned - Intentionally left. Intent to relinquish ownership. First finder entitled to the property. Unclaimed Property escheats to the state

The right of the owner to any increase/improvement of the property, whether natural or human made Owner of cow acquires title by accession to any calves born to the cow

Improvements by thief by someone in good faith who believed he was an owner

The mixing or putting together of property so that it becomes difficult to distinguish who is the owner of their own individual property Co-mingling of fungible goods (oil, grain) Accident, Mistake, Agreement, each owner will bear the loss in proportion to his share By willful or wrongful act, he may lose his interest.

INSURABLE INTREST
In nutshell if property is the subject matter of insurance then the subject matter of insurance contract is the insureds pecuniary interest in that property. LEGAL RIGHT TO INSURE IS THE INSURABLE INTEREST. Insurable Interest is required to support the contract of Insurance in order to make it legal, other wise the contract is null and void.
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Insurable interest - A person has an insurable interest if the insured will derive an economic benefit or advantage from its preservation, or will suffer economic loss or damage from destruction. Must exist when the loss occurs but not necessarily at the time the policy is issued Acquired when goods are identified. Persons other than owners can have an insurable interest, i.e, lessees, secured creditors, grantors liable for a mortgage

HOW INSURABLE INTEREST ARISES:

1.
2. 3.

4.
5.

By ownership By Law By Contract By Legal liability Interest of a Person in Life

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WARRANTY:
means an assurance by the assured, that he will not do some particular things or will fulfill any conditions that are laid in advance.
WARRANTIES are further classified as express or implied.

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ASSIGNMENT
Assignment means transfer of rights and liabilities of an insured to another person who had acquired insurable interest in the property insured. Fire policies have to be assigned with the consent of the insurers, where as Marine cargo policies can be freely assigned without the knowledge or consent of the insurer. This is because the ultimate buyer is not known at the time of taking the cover.
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Entitles the insurer, to the extent it has paid for a loss, to any rights of its policy holder to recover from any third party.
If a loss is covered by the insureds own negligence, subrogation does not apply. Not applicable to life insurance and rarely to health insurance Subrogation precludes double recovery for the same loss

Methods of indemnification:
1.
2. 3.

4.

Cash payment Repair Replacement Reinstatement.

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Mode of indemnity:
Buildings: the cost of reinstating or repairing the damaged portion, is assessed, and from that an appropriate allowance is made towards depreciation, depending on the age and condition of the building. Allowances are made for improvement due to repairs.

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Machinery: Here the method of indemnity is supposed to

be the market value for a similar machine of same age and model as determined on the date of loss. In practice this is difficult so the measure of indemnity becomes the replacement value less depreciation. In case of repairs the cost of repairing is borne by the insured. However replacement of parts is subject to an allowance towards depreciation.
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Household goods:
Consideration similar to those applicable for machines. Stocks: In case of wholesalers or retailers, the measure of indemnity is the price at which he will be able to replace his goods. The element of profit will not be taken care of.

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Motor:
If the vehicle is a total loss, the sum insured or the value of the vehicle, which ever is less is paid. If the vehicle is damaged the cost of repairs is paid, if parts are replaced the cost of new part will be subjected to depreciation. In all the cases age and general maintenance of the vehicle are considered.

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Under insurance: Property insurances are generally subject to the condition of average, and if there has been under insurance, only that portion of the loss is payable.

Ex. value of property : $20,000 Sum insured : $15,000 Loss assessed : $10,000 Amount payable will then be: 15000 x 10000 = 7500 20000 The insured is then considered as his own insurer for the difference of the liability.
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EXCESS OR FRANCHISE
In some policies an EXCESS or FRANCHISE is incorporated, which means that under certain circumstances a part of the loss may have to be borne by the insured.

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SALVAGE
Property which is saved from loss or damage and still has some commercial value is called salvage.

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CONTRIBUTION:
An insured may have taken many policies on the same subject matter. The principal of contribution would lead to a situation in which the insured would be able to recover his loss from any one insurer, who then will have to effect proportionate recoveries from other insurers concerned. Normally the insurers seek to control additional insurances at the proposal stage itself. Remember at no cost an infringement to the principle of indemnity is accepted. The principle of contribution does not apply to personal accident policies.
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PROXIMATE CAUSE
Means the DIRECT, DOMINANT or effective cause of which the loss is the natural consequence. It is the cause which is most closely connected with the loss, not necessarily in time but in efficiency. Although the doctrine is clear in theory, it is difficult to determine the proximate cause, as a clear demarcation should be maintained between insured peril, excepted peril and un insured peril.

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Example: An insured sustained an accident while hunting. Due to shock and weakness, he was unable to walk and whilst lying on wet ground, he contracted cold which developed into pneumonia causing death ultimately. The proximate cause was considered to be the accident and not the pneumonia, the disease, which was only a remote cause. The claim was payable under personal accident policy.

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Exercising the right to rescind, abandon, abrogate or otherwise terminate a contract of insurance. The form and the notice of proper cancellation are determined by provisions in the policy. Both the insurer and insured can cancel. Restrictions on cancellation may apply (statutes, administrative regulations) may require that insurers give proper reasons for cancellation or nonrenewal.

Covers direct fire damage, and damage from smoke chemicals, water Also, policies usually cover wind, hail, and other forces of nature (not hurricanes) Pays insured a specified amount for property loss. Does not indemnify for lost profits, business interruption or other special matters unless there is a rider attached. Friendly Fire/Hostile Fire

Fire insurance policies may be issued on REINSTATEMENT value basis. Although the insured gets new property which is in similar condition and of same kind, To protect the basic of idea of indemnity the property will not be of superior nature.

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Protects your home or personal property from the eleven perils Provides for Additional Living Expenses pays for the cost of renting another place to live if your . is damaged home Provides Liability protection

Insurance companies recommend that you insure your home for 80 percent of its market value.

Insure personal property for Actual cash value Replacement value full cost of repairing or replacing property

Deductible

Location

Fire department Crime

Type of Building

Brick vs. Wood New vs. Old

Preventive Measures Deadbolts Burglar alarms Smoke detectors Fire extinguishers or sprinklers

Insured can be fully protected up to a percentage (usually 80%) of the value of the property. Encourages policy holders to insure property for an amount that is near to its full replacement cost. The coinsurance requirement applies only to partial losses. Total losses result in recovery of the face amount of the policy. Recovery = Face Value of Policy X Loss FMV of Property X Co-insurance %

$60,000 (Policy) $100,000 X 80%

X $50,000 = 37,500

Insurer pays $37,500

Graham is entitled to collect $36,600. Graham should have carried $96,000 fire insurance if the building was valued at $120,000 and the policy contained an 80% coinsurance clause. Since the property is under insured, the amount recoverable is computed by multiplying the amount of loss ($48,000) by a fraction, the numerator of which is the amount of the policy and the denominator of which is the amount the policy should have been ($72,000/$96,000)w