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Agenda for today:
1. General Definition2. Distinct Legal Characteristics of Insurance
Contracts
3. Legal Requirements of an Insurance Contract4. Fundamental Legal Principles5. Basic Parts of an Insurance Contract
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1. General Definition
Complex legal documents that reflects the
general rules of law
Legal act between Insurer & Insured
Insurer is offering protection and is coveringthe perils (risks), paying indemnity/certainamount of money
Insured is transferring the perils (risks) andis paying the premiums
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2. Distinct Legal Characteristics of Insurance
Contracts
To show how insurance contract differ
from other contracts
Characteristicsa. Aleatory
b. Unilateralc. Conditional
d. Personal
e. Of adhesion
f. With obligations for all parts
g. Consensual
h. Unique
i. With successive execution
j. Pecuniary
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a. Aleatory contract
The essence of an aleatory contract is
CHANCE or the occurrence of somefortuitous event
Rather aleatory than commutative
ALEATORYthe values exchanged are notequal, one party may receive value out of all
proportion to the value that is given
COMMUTATIVEthe values exchanged byboth parties are theoretically even
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b. Unilateral contract
Only one party makes a legally
enforceable promise
Insurer -> to pay a claim or provide
other services to the insured
In contrast, most of the commercial
contracts are bilateral in nature
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c. Conditional contract
The insurers obligation to pay a claim
depends on whether or not the insured orthe beneficiary has complied with all policyconditions
CONDITIONSprovisions inserted in thepolicy that enumerate the rights and dutiesof both parties
The insurer is not obligated to pay a claim ifthe policy conditions are not met
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d. Personal contract
The contract is between the insurer and the
insured
E.g.a property insurance contract does
not insure property, but the owner ofproperty against loss
The owner of the property is indemnified ifthe property is damaged/destroyed
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e. Contract of adhesion
The insured must accept the entire contract,
with all of its terms and conditions
There is no bargaining over terms ->normally possible under most commercialcontracts
The courts have ruled that any ambiguities
or uncertainties in the contract areconstrued against the insurer (Common LawSystem)
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3. Legal Requirements of an Insurance Contract
a. Offer and acceptance
b. Consideration
c. Competent parties (capacity ofcontracting)
d. Legal purpose
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a. Offer and acceptance
Must be an offer and an acceptance of
its termsfirst requirement of a
binding insurance contract
General rulethe applicant for
insurance makes the offer, and the
company accepts or rejects the offer
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b. Consideration
Refers to the value that each party gives to
the other
The insureds consideration payment ofthe first premium / or a promise to pay the
first premium & an agreement to abide bythe conditions specified in the policy
The insurers consideration promise to do
certain things as specified in the contract: Paying for a loss from an insured peril Providing certain services (e.g. loss prevention,
safety services, defending the insured in aliability lawsuit)
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c. Competent parties
Each part must be legally competent
The parties must have legal capacity to enterinto a binding contract
Most adults are legally competent to enterinto insurance contracts, but there are someexceptions: insane persons, intoxicated
persons, corporations that act outside thescope of their authorized authority, minorsetc.
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d. Legal purpose
The insurance contract that
encourages or promotes something
illegal or immoral is contrary to the
public interest and cannot be enforced
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4. Fundamental Legal Principles
A.Principle of IndemnityB.Principle of Insurable InterestC.Principle of Subrogation
D.Principle of Utmost Good FaithE. Causa proximaProximate causa
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A. Principle of Indemnity
The insured should not profit from a loss but
should be restored to approximately the
same position after the loss as existed
before the loss
Standard method of indemnifying theinsured in property insurancebased on
actual cash value
Actual cash value = Replacement cost
Depreciation
Exceptions: valued policies, replacement
cost insurance and life insurance
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B. Principle of Insurable Interest
The insured must stand to lose financially if
a loss occurs, or must incur some other kindof harm if the loss take place
All insurance contracts must be supported
by an insurable interest to be legallyenforceable
3 purposes of the insurable risk
requirement: To prevent gambling
To reduce moral hazard
To measure the amount of loss
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C. Principle of Subrogation
Strongly supports the principle of
indemnity
Substitution of insurer in place of the
insured for the purpose of claiming
indemnity from a third person for the
loss covered by insurance;
The insurer is entitled to recover from a
negligent third party any losspayments made to the insured;
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Purposes of Subrogation
To prevent the insured from collecting
twice for the same loss
To hold the negligent person
responsible for the loss
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Importance of Subrogation
The insurer can retain any amounts recovered
through subrogation only after the insured is fullyindemnified;
The insured cannot impair the insurers subrogationrights;
The insurer can waive its subrogation rights in thecontract;
Subrogation does not apply to life insurance and to
most individual health insurance contracts;
The insurer cannot subrogate against its owninsurers.
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D. Principle of Utmost Good Faith
A higher degree of honesty is
imposed on both parties to an
insurance contract than is imposed
on parties to other contracts;
The principle is supported by three
important legal doctrines:a. Representations;
b. Concealment;
c. Warranty
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a. Representations
Statements made by the applicant for insurance;
The insurer can avoid the policy if therepresentation is both (1) materialand (2) false
materialif the insurer knew the true facts, the policywould not have been issued, or would have been issued on
different terms
If the applicant for insurance states an opinion ofbelief that later turns out to be wrong -> the insurer
must prove that the applicant spoke fraudulentlyand intended to deceive the company before it canavoid the policy (e.g. case of Mc-Dowell vs. Fraser in1779)
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b. Concealment
Failure of the applicant for insurance to reveal a
material fact to the insurer;
Nondisclosurethe applicant for insurance is silent& deliberately withholds material information fromthe insurer;
The legal effectthe contract is avoidable at theinsurers opinion;
The applicant for insurance is required to disclosematerial information to the insurer even though thedisclosure may result in denial of the insurance, orrequire the payment of higher premiums
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c. Warranty
The clause in an insurance contract that prescribes,
as a condition of the insurers liability, the existenceof a fact affecting the risk (e.g. the existence of anoperational alarm system);
The clause describing the warranty becomes part of
the contract
Any breach of the warranty, even minor or notmaterial, allows the insurer to avoid the policy;
The harsh common law doctrine of warranty hasbeen modified and softened by court decisions andstatues.
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Law and the insurance agent
An insurance contract normally is sold by an
agent who represents the principal
There are three general rules of agency thatgovern the actions of agents and theirrelationship to insured:
There is no presumption of an agency relationship
An agent must have the authority to bind the principal
A principal is responsible for the actions of the agents
An agent can bind the principal based onexpressed powers or implied powers
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E. Causa proxima Proximate cause
Active and effective cause determining
a loss without the intervention of
another independent force, determined
by a new source
it is not the 1st or the last, but the
dominant, effective and active
Direct linkcause & effect
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F. Contribution
Co-participation of many insurers to
the same loss
If the insured is coved more than once
for the same risk
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5. Basic Parts of an Insurance Contract
5.1 Main clauses
5.2 Contractual parts
5.3 Specific compulsory elements
5.4 Phases of contracting5.5 Effects of the contract
5.5 The end of the contract
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5.1 Main clauses (I)
Insurance contracts generally can be
divided into the following parts: Declarations
Definitions
Insuring agreement Exclusions
Miscellaneous provisions
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5.1 Main clauses (II)
Declarationsare statements concerning the
property or activity to be insured
The definitionspage or section defines thekey words or phrases so that the coverage
under the policy can be determined moreeasily;
The insured agreementsummarizes thepromises of the insurer. There are two basictypes of insuring agreements:
Named-perils coverage
All-risks coverage
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5.1 Main clauses (III)
All policies contain one or more exclusions.
There are three major types of exclusions: Excluded perils
Excluded losses
Excluded property
Exclusions are necessary for severalreasons:
The peril may be considered uninsurable by privateinsurers;
Extraordinary hazards may be present;
Coverage is provided by other contracts; Moral hazard is present to a high degree;
The coverage is not needed by the typical insured
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5.1 Main clauses (IV)
Conditionsare provisions that qualify or
place limitations on the insurers promise toperform. The conditions section imposescertain duties on the insured if he or shewishes to collect for a loss
Miscellaneousprovisionsin property andliability insurance include cancellation,subrogation, requirements if a loss occurs,assignment of the policy, and other
insurance provisions.
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5.2 Contractual parts
Insurer and insured
Within contract , may be interested:
Contracted of the insurancewhen the
contract is done for a 3rd party) Insured
Beneficiary
The person mentioned within contract(the case of the 3rd part liabilitycontracts)
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5.3 Specific compulsory elements
A. Risk
B. Sum Insured
C. Premium
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A. Risk
Uncertain, possible and future event
Goods, patrimony, life, helth andphisical integrit of a person may beexposed to the risks
Insured riskconditions: Possibility to be produced
To be aleatory
The event must be produced independently of
the wish of insured or insurance beneficiary To be moral (some risks cant be insured
because they are incompatible with & society)
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B. Sum Insured
Maxim amount of claims paid by insurer,
following the producing of risk
Contribute to the calculation of premiums
Differences Non l i fe vs . Li fe:
For non life insurance the good is evaluated
For life insurance is settled
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C. Premium
Received by insurer
Paid by insured, transferring risks, in exchange ofprotection promised in the case of loss (if theagreed risks are produced)
There are many factors that may influence the levelof the premium
Gross Premium = Net Premium + Premium adaosulde prim
Types of premium:
Effective (current) Fixed
Premium tariffs
Premium discounts
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Equitable Premiums
Claims
The contributions of the many to meet the losses of the few
POOL
The insurers
benefit
from the law of
large numbers
What is Insurance?
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Calculation of Premiums
Premium =Sum InsuredX Rate
Value of
Propertyat risk
Reflects theDegree of
Hazard
% or 0/00 %
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Calculation of Premium
The rate per cent is set by the leading underwriter,
based on the likelihood of having to pay a claim.
The greater the risk (chance of loss) the higher therate charged
E.g. A rate of 1.5% meansthat 1.50 is charged
for every 100 of risk
insured.
Per mille, pounds
per thousand
insured
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Premium Calculations
Losses(actual claims made)
Values at risk(total possible claims)
X100 = Rate%
E.g. 450m worth of property insured gives rise to 9m claims:
9,000,000
450,000,000X 100 =
9
450= 2%
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ClaimsPrem.
and the premium must
also cover
expenses and overheads!
Premium Calculations
The premium must be, at the very
least, sufficient to meet all
expected claims!
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The insurance cycle and financial performance
higher profits
higher capacity for that class
lower prices
Lower profits
Capacity withdrawn
Higher prices
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5.4 Phases of contracting
Request (declaration) of insurance
Request (declaration) of insurance
analysis
Insurer -> obliges contracting risks
The moment when contract is signed
The implementation of contract -> time
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5.5 Effects of the contract
The rights and obligations of insured till the insured risk is produced
after the insured risk is produced
The rights and obligations of insurer till the insured risk is produced
after the insured risk is produced
5 5 Th d f th t t
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5.5 The end of the contract
Usual ways:
To get to the end
The insured risk is produced
Unusual ways:
Denunciation, resolution and annulations
of the contract
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Legislatie
Cod Civil
Cod Comercial
Legea privind asigurarile si reasigurarile in Romania, nr.
136 / 29.12.1995
Legea 32/2000 privind societatile de asigurare
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Thank you for your
time &
consideration