On October 23rd, 2014, we updated our
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Premium is the consideration to be paid to the insurer.
Underwriter (usually an insurance company).
Broker v. Agent.
The Concept of Risk Pooling
All insurance companies spread the risk among a large number of people - the pool - to make premiums small in comparison with the coverage offered.
Insurance companies correlate data over a period of time to estimate fairly accurately the total amount they will have to pay if they insure a particular group, as well as the rates they will have to charge each member of the group so they can make the necessary payment and still show a profit.
Classification of Insurance
Insurance is classified according to the nature of the risk involved.
See Exhibit 50-1 in textbook for Insurance Classifications.
A person can insure anything in which he or she has an insurable interest .
Types of insurable interest:
Key-Person Life Insurance.
Anyone who has an insurable interest.
Must have a reasonable expectation of benefit from the continued life of another.
Insurable interest must exist at the time the policy is obtained.
Policy remains valid, even after interest no longer exists (divorce).
Key-person insurance -- insurance obtained by an organization on the life of a person important to that organization.
Anyone who has an insurable interest.
A person who derives a pecuniary benefit from the preservation and continued existence of the property.
Insurable interest must exist when the loss occurs .
Case 50.1: Sotelo v. Washington Mutual Insurance Company (1999).
§ 2: The Insurance Contract
Governed by the general principles of contract law, and regulated by the state.
Application is an offer, which insurance company can either reject or accept.
Acceptance sometimes conditional.
Parties need capacity.
The Insurance Contract 
Application For Insurance.
Provisions and Clauses.
Interpreting Provisions of an Insurance Contract.
Basic Duties and Rights.
Defenses Against Payment.
Application For Insurance
Filled in application attached to the policy and made a part of the contract.
Misstatements or misrepresentation can void a policy, specially if company can show it would not have issued policy if it had known the facts.
Broker is agent for the applicant.
Agent is agent for the insurance company. He can issue a binder, if some consideration is paid, which will immediately bind the insurance company, depending on certain conditions being met.
Parties may agree contract will not be effective until policy is issued and delivered or sent to applicant.
Parties may agree policy will be binding, not be effective, until first premium paid, or physical exam passed.
Provisions and Clauses
Provisions Mandated by Statute.
Appraisal and Arbitration Clauses.
Multiple Insurance Coverage.
Provisions Mandated by Statute
Provisions which are mandated by statute to be included in the insurance policy will be deemed to be in the insurance policy -- whether they are in the policy or not.
State statutes sometimes provide that once a life or health insurance policy has been in force for a specified length of time, the insurer cannot contest statements made in the application.
If owner insures her property for at least 80% of its value, owner will be able to recover up to the face value of the policy.
If owner insures for less than 80%, owner will be responsible for a proportionate share of the loss.
Amount of insurance recovery Coinsurance percentage = percentage (80%) x Property value
Appraisal and Arbitration Clauses
If insurer and insured cannot agree on value of property, an appraisal can be demanded.
Contract may also provide for arbitration.
Multiple Insurance Coverage
If insured has multiple insurance policies and the amount of coverage exceeds the loss, the insured can collect from each insurer only the company’s proportionate share of the liability, relative to the total amount of insurance.
Policy does not lapse automatically upon nonpayment of premium.
Insured has a grace period of thirty or thirty-one days within which to pay the overdue premium.
The insurer may be required to extend the insurance for a period of time.
Insurer may issue a policy with less coverage to reflect the amount of the payments made.
The insurer may pay the insured the cash surrender value of the policy.
Interpreting Provisions of an Insurance Contract
Courts interpret ambiguity against the insurance company.
Uncertainty as to whether policy actually exists is resolved against the insurance company.
Insurer must adequately notify insured of any change in policy under an existing policy.
Insured can cancel policy at any time, and the insurer can cancel according to terms of policy.
Insurer must give written notice of cancellation .
Basic Duties and Rights
Insured must act in good faith.
Insurer has duty to investigate to determine the facts.
Third party claims: Insurer is obligated to make reasonable efforts to settle the claim, and policy provides that in this situation insured must cooperate.
Case 50.2: Columbia National Insurance Co. v. Freeman (2002).
Defenses Against Payment
Insurance company can raise any of the defenses that would be valid in any ordinary action or contract:
Not if information given was optional.
Not incorrect statement of age.
Concurrent causation doctrine.
Case 50.3: Paul Revere Life Insurance Co. v. Firma (1997).