Fundamentals of Insurance - Chapter 2 Insurance Contracts PDF

 Fundamentals of Insurance Chapter 2 Insurance Contracts FOI Dealing with Risk Insurance manages risk by providing financial compensation in case of loss. Categories of risk: Personal risk: Financial loss due to health or life issues. Property risk: L...

 Fundamentals of Insurance Chapter 2 Insurance Contracts FOI Dealing with Risk Insurance manages risk by providing financial compensation in case of loss. Categories of risk: Personal risk: Financial loss due to health or life issues. Property risk: Loss or damage to owned property. Liability risk: Responsibility for injury or damage caused to others. FOI Ways to Deal with Risk Four common ways to address risk: Avoidance of Risk Controlling Risk Retention of Risk Transfer of Risk Avoidance of Risk Avoidance eliminates all chances of financial loss. Examples: Selling a business to avoid financial risks. Avoiding driving to prevent accident liability. Practicality: Not always feasible for most risks. Controlling Risk Risk control reduces the frequency or severity of losses. Examples: Installing burglar or fire alarms. Implementing safety protocols. Limitations: Preventative measures may fail. Natural perils like hail and wind are uncontrollable. Retention of Risk Retention involves self-insuring or covering part of the risk. Examples: Large organizations self-insuring for cost efficiency. Using deductibles to retain manageable financial exposure. Practicality: Retention suits manageable or less critical risks. Transfer of Risk Risk transfer involves shifting financial responsibility to a third party. Examples: Insurance policies. Mandatory auto insurance in Canada. Most practical and popular method. Speculative Risk Speculative risks involve potential for financial gain or loss. Examples: Business ventures with potential success or failure. Gambling. Not insurable as society does not profit from failures. Pure Risk Pure risks involve financial loss without potential gain. Examples: Natural disasters. Theft or property damage. Only pure risks are insurable. Conclusion of Risk Categories Insurance focuses on pure risks to manage unforeseen losses. Methods to deal with risk vary by practicality and financial capacity. Balance between risk control, retention, and transfer ensures effective risk management. Understanding Insurance Contracts Insurance companies assume risk through formal contracts. A contract is an agreement enforceable by law. Contracts are a routine part of personal and business life: Lease agreements. Real estate purchases. Even buying a cup of coffee. Five Elements of Contracts Contracts must have five essential elements: 1.Agreement. 2.Consideration. 3.Legality of object. 4.Legal capacity of parties. 5.Genuine intention. Agreement Agreement requires: Offer. Unconditional acceptance. No agreement exists during negotiations. Both written and oral agreements are valid. Consideration Consideration: exchange of value between parties. In insurance: The insured pays a premium or promises to pay. The insurer provides coverage. Legality of Object Contracts for illegal purposes are unenforceable: Fraudulent claims. Contracts for stolen property. Insurance contracts must align with public good. Legal Capacity Parties must be legally competent. Incompetents include: Minors (except for necessities). Mentally incapacitated persons. Individuals under influence of drugs/alcohol. Genuine Intention Parties must genuinely intend to form a contract. Factors negating intention: Fraud. Duress. Concealment. Mistake. Insurable Interest Insurable interest exists if financial loss occurs from damage. Examples: Property owners. Mortgage lenders. Businesses entrusted with property. Utmost Good Faith Both parties must act with honesty and transparency. Insured: Disclose all relevant information. Insurer: Use clear contract terms. Handle claims promptly and fairly. Indemnity Insurance compensates only for actual loss. Principle of indemnity ensures: No profit from the claim. Restoration to pre-loss financial position. Void and Voidable Contracts Void contracts: Invalid from the beginning. Voidable contracts: Valid unless rejected by the wronged party. Insurance Binders Temporary agreements before policy issuance. Can be oral or written. Include essential terms and conditions. Summary of Essential Elements Five general elements: Agreement. Consideration. Legality of object. Legal capacity. Genuine intention. Three insurance-specific elements: Insurable interest. Utmost good faith. Indemnity. Binding a Risk — Source of Broker’s Authority Brokers operate under an insurer's Agency Agreement. Authority to bind the insurer is specified for: Dwelling and contents: $500,000. Commercial building and contents: $1,000,000. Industrial risks: Must be referred to the insurer. Dairy, hog, and poultry barns: Automatically declined. Brokers exceeding binding limits may face errors and omissions claims. Errors and Omissions Risks for Brokers Binding beyond authority can result in financial liability. Errors and omissions claims can damage a brokerage's: Financial stability. Reputation. Importance of training and adherence to binding authority limits. Checkpoi nt Challenge FOI Termination of Insurance Contracts Contracts must allow termination by both parties. Termination rules are: Stated in the policy contract. Governed by statutes where applicable. FOI Changes to Insurance Contracts Insurance contracts can be amended if: Both parties agree to the changes. Changes are common in contracts with longer terms (e.g., one year). Premium adjustments may apply for expanded coverage. Documentation of Contract Changes Changes to insurance contracts are always documented. Common documents used: Endorsements or Riders: Modify existing terms. Floaters: Add coverage for movable property. Separate Policies: Provide additional coverage outside the original contract. Endorsements or Riders Acknowledge and document changes to the policy. Commonly used to adjust terms, add or remove coverages. Floaters Provide coverage for movable property. Initially designed for property away from designated locations. Examples: Tools, equipment, or jewelry. Separate Policies Issued for additional coverage outside the original contract. May be provided by a different insurer. Examples of Policy Changes Increasing coverage limits through an endorsement. Adding floater coverage for business tools. Purchasing a separate flood insurance policy. Importance of Written Documentation Ensures clarity and avoids disputes. Provides legal evidence of agreed changes. Summary of Broker’s Role Adhere to binding authority limits. Ensure changes to contracts are documented. Protect the brokerage from errors and omissions risks. Key Takeaways Binding authority defines a broker’s ability to commit the insurer. Insurance contracts allow changes but require agreement from both parties. Documentation ensures clarity and legal enforceability. Checkpoi nt Challenge FOI Questions? FOI