Chapter 51 Insurance Law Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Overview • LO51-1: What is the nature of the insurance relationship? • LO51-2: What does the insurance contract include? • LO51-3: How is an insurance policy canceled? • LO51-4: What are the obligations of the insurer and the insured? • LO51-5: What is the insurer's defense for nonpayment? • LO51-6: What are the types of insurance available to consumers? 51-2 Chapter 51 Hypothetical Case • After years of heartache and despair, Wallace and Virginia Gwinnett are finally getting a divorce Five years ago, when the bonds of their holy matrimony first started fraying, Virginia took out a $251,000 life insurance contract on George without his knowledge The insurance contract was a 20-year term policy listing her husband as the measuring life and Virginia Gwinnett, herself, as the beneficiary • Virginia Gwinnett wonders: When the golden ring is off of her finger, can she keep the life insurance policy by continuing to pay the premiums on it? If she does, will she be entitled to the $251,000 if Wallace Gwinnett dies within the 20-year term period? 51-3 Chapter 51 Hypothetical Case • After 13 years of marriage between Ivan and Donita Raspail, love had turned to hate The two divorced, and as part of the divorce settlement, Donita Raspail received complete title to the home they had shared for so many years Six months later, the house was completely gutted by a fire The police ruled out Ivan as the perpetrator, since he had been gambling in Atlantic City, New Jersey, the night the fire occurred The total loss due to the fire was estimated at $615,000, based on the house's appraised value of $425,000 In addition, all of Donita Raspail's personal property was destroyed, a loss that amounted to $190,000 On the date of the loss, there was one existing homeowners' policy on the property with a maximum insurance value of $751,000, issued by Prentice-Towers Insurance Company Ivan Raspail is listed as the sole beneficiary of the homeowners' policy, and he has filed an insurance claim with Prentice-Towers requesting compensation for the $615,000 loss • Is Prentice-Towers legally and/or ethically obligated to pay Ivan Raspail the $615,000, since he was listed as the sole beneficiary of the homeowner's policy? If not, is Prentice-Towers legally and/or ethically obligated to pay Donita Raspail the $615,000, since she was the sole owner of the property at the time of the loss? 51-4 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 • Premium: Payment on policy • Insurer (underwriter): Party who receives premiums from insured party • Beneficiary: Person who receives insurance proceeds • Policy: Document that expresses agreement between the insured party, beneficiary, and insurer • Risk: Potential loss • Insurable interest: Economic interest in life/property • Life interest must exist at time policy obtained • Property interest must exist at time of loss 51-5 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) • Effective date: Date policy becomes effective • Binder: Gives temporary insurance until decision to accept/reject application made 51-6 Elements of the Insurance Contract • Incontestability clause: Ensures insurance company cannot contest statements made in insurance application after certain period of time • Antilapse clause: Grace period for insured to pay premium • Appraisal clause: Insured party and insurer select disinterested appraiser for second opinion on damages • Arbitration clause: Disputes must be submitted to an arbitrator 51-7 Canceling an 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 51-8 Insurer and Insured Obligations • Insurer duties • Defend insured; insurer must defend insured party from claims for which insured party liable • Pay sums owed by insured • Insured duties • Disclose material (significant, relevant) information on application • Cooperate with insurer (on defense of claims) 51-9 Insurer's Defenses for Nonpayment of Claims • Includes (but is not limited to): • Breach of contract • Lack of insurable interest • Illegal activity 5110 Types of Insurance • Individual insurance: Insured party is party purchasing insurance • Group insurance: Party who is neither insured party nor insurer purchases insurance • Personal insurance: Covers individual's life/health • Commercial insurance: Covers business interests • Property insurance: Protects property from loss/damage • Casualty insurance: Protects person/property from accidental injury • Liability insurance: Protects business from tort liability to third parties • Commercial general liability policy: Protects business against broad range of risks 5111 Types of Liability Insurance • Contractors' 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 • 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 • Fire insurance: Protects property from loss or damage from fire • 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 5112 Life Insurance • 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) 5113 Chapter 51 Hypothetical Case • Jerry Allenton has a small beach cottage on the Outer Banks of North Carolina He has owned his little piece of paradise for the past 21 years, and for that entire time, he has maintained hurricane insurance on the property through Homeland Underwriters, Inc Each and every year, Allenton has dutifully paid the annual hurricane insurance premium well before the due date of September He has never made a claim on the policy On August 2, Allenton receives a letter from Homeland Underwriters He believes the letter is a bill for the annual premium payment, but he is surprised to discover that it is a letter terminating his hurricane insurance coverage The letter states, in part, "Mr Allenton, we have valued our association with you over the past 21 years, but we regret to inform you that the Homeland Underwriters hurricane insurance policy on your property at 321 Clambake Drive is no longer renewable Effective September 1, your policy is terminated Best of luck, and please continue to consider Homeland Underwriters for any other insurance needs you might have." From a probability standpoint, Homeland Underwriters has determined that Outer Banks properties are no longer insurable risks • Does Allenton have any legal rights against Homeland Underwriters? In the interests of equity, would a court likely compel Homeland Underwriters to renew the hurricane insurance policy, especially if it would be difficult or impossible for Allenton to obtain such insurance elsewhere? From an ethical standpoint, and given Allenton's 21 years of customer loyalty, should Homeland Underwriters renew the policy? 5114 Chapter 51 Hypothetical Case • Stay-at-home mother Dorinda Niedermayer purchased a $2 million, 20-year life insurance policy for herself two years after the birth of their second child Her rationale for purchasing the policy was that her husband, Goran Vuckovic, would not only need additional income in the event of her death—he would also need to provide childcare for and pay for college for their children, Billy and Stephanie A year after she purchased the policy, Niedermayer began experiencing abdominal pain and nausea She suspected that she was pregnant again and visited her gynecologist The doctor confirmed that she was indeed expecting, but she also had terrible news: Niedermayer had stage four colon cancer and had been suffering from the disease, undetected, for several years Niedermayer and Vuckovic decided to forgo treatment for her cancer, and she carried the child, named Susan, to term Niedermayer died 10 days after her daughter was born • Because Niedermayer had colon cancer at the time she purchased the policy (even though she did not know it), does the insurer have to pay the $2 million to Vuckovic? 5115 ... Covers business interests • Property insurance: Protects property from loss/damage • Casualty insurance: Protects person/property from accidental injury • Liability insurance: Protects business. .. Protects business from tort liability to third parties • Commercial general liability policy: Protects business against broad range of risks 5111 Types of Liability Insurance • Contractors' liability