Fundamentals Chapter 2.pptx

 Important Terms So Far Students take two minutes to write down one important term that has been discussed so far in the course, in the chat window. Remember the Forgetting Curve!  CHAPTER 2: INSURANCE CONTRACTS DEALING WITH RISK Categories of Risk Insurance → managing risk, provid...

 Important Terms So Far Students take two minutes to write down one important term that has been discussed so far in the course, in the chat window. Remember the Forgetting Curve!  CHAPTER 2: INSURANCE CONTRACTS DEALING WITH RISK Categories of Risk Insurance → managing risk, providing financial compensation if there is a loss PERSONAL RISK ○ Loss to health or life PROPERTY RISK ○ Owned property is lost or damaged LIABILITY RISK ○ When people’s actions end in injury or damage to others and the law wants hold them financially responsible  DEALING WITH RISK i) Avoidance of Risk Avoid risk → all chance of financial loss is gone There is no risk of losing a furniture store if you don’t have one NOT PRACTICAL ii) Controlling of RIsk Doing something to reduce frequency and severity of losses - installing burglar or fire alarms Loss controls → reduce or mitigate risk, but doesn’t eliminate financial loss ○ Preventative measures aren’t always effective ○ Some perils (wind, hail, lightning) can’t be controlled  DEALING WITH RISK iii) Retention of Risk (or self-insurance) Corporations (CP or CN Railways, government) take the financial responsibility for their own losses as self-insurance is cheaper than what they would be offered (Usual) People/businesses can’t finance their own losses Deductibles are a way for insureds to be a part of the risk - Amount of the loss that insured is willing to pay before involving the insurer WHEN RETENTION IS PRACTICAL - When a business is not concerned about some risks (employee dishonesty) they may choose to self-insure (or not buy insurance) iv) Transfer of RIsk When people decide they can’t withstand financial consequences of a POTENTIAL LOSS, they might transfer their risk through insurance *Automobile Insurance is mandatory in Canada because of the high potential for financial loss  DEALING WITH RISK ONLY CERTAIN TYPES OF RISK ARE INSURABLE Two types of risk Speculative Risk ○ Possibility of financial loss OR gain ○ Interest of society isn’t served if people profit from their failure (ie. failure of a business) and insurers WON’T INSURE risks that are speculative in nature ○ Gambling is a speculative risk Pure Risk ○ Chance of financial loss BUT NO GAIN ○ Only pure risk is insurable.  UNDERSTANDING INSURANCE CONTRACTS UNDERSTANDING INSURANCE CONTRACTS Insurance companies agree to assuming risks of others by a contract → an agreement between two or more parties (enforceable by law) EXAMPLES OF CONTRACTS ○ Lease agreements, automobiles, cell phone contracts  FIVE ELEMENTS OF CONTRACTS i) Agreement - has an agreement been reached? First an agreement on the subject and terms of contract ○ Offer must be made ○ Unconditional acceptance of terms of offer NO AGREEMENT if parties are still negotiating ○ Doesn’t have to be in writing ○ An oral agreement is just as binding as a written agreement ○ If the insurance company issues a policy with a $500 deductible and not a $100 deductible as agreed, then there is no agreement OFFER IS ACCEPTED ○ When insurer issues policy for the offer  FIVE ELEMENTS OF CONTRACTS ii) Consideration There must be the presence of consideration → exchange of something of value between parties Insured pays a premium (or promise to pay later) Giving consideration is EVIDENCE of parties intent to be bound by the contract iii) Legality of Object Contracts have legal purpose A contract on an illegally acquired property is unenforceable by law → SIMILAR TO paying fraudulent claims  FIVE ELEMENTS OF CONTRACTS iv) Legal Capacity of Parties to Contract Law enforces contracts if persons are competent (have the legal capacity to contract) Incompetents → don’t have the legal capacity to contract; are protected by law from exploitation ○ MINORS → common law: person is competent at 21 years old, some provinces say 19 or less, HOWEVER minors have right to contract for necessities of life (food, clothing, lodging) A child buying an expensive video-gaming console, but the store has to let the child return it because it is not a “necessity of life” Minors can void contracts WITHIN A REASONABLE TIME FRAME Students renting apartments, own automobiles, homes may enter into a contract  FIVE ELEMENTS OF CONTRACTS MENTAL INCOMPETENTS Insane, senile, other mental defects where they don’t have legal capacity NOT SUFFICIENT → ignorance, mental weakness Brokers aren’t qualified to assess mental capabilities of others (clients) Legality of contract with a mental incompetent person will fall to the courts and professionals PERSONS UNDER INFLUENCE OF ALCOHOL OR DRUGS Must be shown that ○ Persons were TOTALLY incapable of understanding a contract was being entered to ○ Consequences not understood ○ Persons were deliberately drugged/made drunk A high level of proof is necessary  FIVE ELEMENTS OF CONTRACTS LEGAL ENTITIES Sole proprietorships, partnerships, corporations have the same right to contract as natural persons ○ LEGAL for sole proprietor, partnership, corporate to operate under own legal names ○ Butlers incorporated their business as BB Investments Ltd. Incorporation → Butlers won’t be personally liable Contract of a corporation doesn’t have to identify the names of owners to be lawfully enforceable TRADE NAME - NO LEGAL CAPACITY TO CONTRACT Trade name is on advertising Insurance policy issued to the name of the Trade Name is unenforceable because law assigns no legal status to trade name Contracts with an operating and trade name must identify the legal names of the owners  FIVE ELEMENTS OF CONTRACTS v) Genuine Intention Both/All parties had genuine intention to enter into the contract MUST SHOW PARTIES WEREN’T AFFECTED BY ○ Fraud - one party deliberately uses falsities (suggestion, tricks, cunning, cheating) ○ Duress - use of force/illegal imprisonment to force the other to act against their free will ○ Concealment - misrepresenting past/present facts, fail to disclose pertinent facts Usually done by the applicant → grounds to void the contract ○ Mistake - or Error  The Muddiest Point Students take two minutes to write down the most confusing concept for you right now. What do you find difficult to understand? Remember the Forgetting Curve!  THREE ESSENTIAL ELEMENTS TO INSURANCE CONTRACTS i) Insurable Interest People have an insurable interest if they can show they would suffer financially if there were a loss ○ Owners of property (incl. Business partners) ○ Mortgagee - financial institution, whoever provides the loan ○ Bailees that property is entrusted for repair, service safekeeping EXAMPLE dry cleaners, appliance repair shops, ARE HELD RESPONSIBLE by law for some types of losses to customers’ property ○ Persons may be legally responsible for a third party for injury/damage People → financially responsible for actions and have an insurable interest in policy to cover the actions NO INSURABLE INTEREST → contract isn’t enforceable ○ Law → to prevent people from profiting from loss and protects society from the financial burden  THREE ESSENTIAL ELEMENTS TO INSURANCE CONTRACTS ii) Utmost Good Faith Complete honesty of both parties → necessary for a contract OBLIGATIONS OF INSUREDS/INSURER MUST COMPLY ○ The Insured Information in application determines if contract will be issued Insured must be relied upon for truth/honesty Onus → on insured to show utmost good faith in dealings with insurer ○ The Insurer Contracts can be confusing, and should be written in clear, understandable language Claims should be handled promptly and fairly and delays could show lack of good faith on part of insurer  THREE ESSENTIAL ELEMENTS TO INSURANCE CONTRACTS iii) Indemnity Law → paying insurance contracts only to amounts sufficient to indemnify insureds for losses (no more, no less)  STATUS OF CONTRACT WHERE ESSENTIAL ELEMENTS NOT PRESENT Contract must have EACH of the 5 + 3 elements, and if one element is absent/violated, contract can be: VOID ○ Unable (in law) to support its purpose ○ A contract that is considered TO NEVER HAVE EXISTED VOIDABLE ○ A void contract TO THE WRONGDOER BUT NOT void to the wronged party UNLESS wronged party elects to treat it that way  INSURANCE BINDERS ARE CONTRACTS OF INSURANCE COMMON → brokers bind insurer on a risk: the broker has made a commitment to insurer to provide an insurance contract on a subject matter as discussed ORAL CONTRACT ○ Just as binding as in writing WRITTEN CONTRACT ○ When insurer is bound on a risk, contract details will be on the cover note OR binder ○ BINDER → considered contracts ○ Documents are the BASIS of the contract until insurer prepares/distributes formal policy documents SAME TERMS AND CONDITIONS as other insurance contracts  INSURANCE BINDERS ARE CONTRACTS OF INSURANCE Insurance Binders must have all details necessary to be put into the policy Oral insurance binders SHOULD BE CONFIRMED IMMEDIATELY IN WRITING ○ Avoids potential for disagreement on terms, conditions, coverage limits if the loss happens before policy is issued ○ Binder → has details which are the basis for the insurance contract ○ Providing oral binders without written confirmation is a dangerous business practice for a broker. WHEN BINDING COVERAGE, brokers are delegated to: the insurer’s legal authority to contract (within limits of “binding authority.” ○ Agreement reached (broker - insured discussions) is the basis for the legal insurance contract Binding A Risk - Source of Broker’s Authority Usually, insurer’s Agency Agreement gives brokerages the authority to bind insurer for certain classes of risks/limits If brokers exceed limits of binding authority and there is a loss, the brokerage might have an errors and omissions claim ○ Brokerage (not insurer) is responsible for amount of loss NOTE: ○ If there is a change in market conditions, or there is a big loss, insurers may want to change the binding authority given to brokers ○ Extent of binding authority is usually in the insurer’s rate manual rather than the Agency Agreement (means that a whole new contract would need to be signed)  Termination and Changes of Insurance Contracts TERMINATION OF INSURANCE CONTRACTS Every contract has to give a basis for termination for both insurer and insured CHANGES TO INSURANCE CONTRACTS If a contract is for a long time, changes will usually be permitted BUT both parties must agree Contracts can be for one year If changes include broadening coverage, then an additional premium may be charged Changes will ALWAYS BE IN WRITING ○ Endorsements or Riders Acknowledges change in terms of contract  Termination and Changes of Insurance Contracts TERMS FLOATER AND RIDER ARE USED INTERCHANGEABLY Can be used for Floaters ○ Insureds may own property that is away from premises (designated location) and may need additional coverage ○ Provides coverage for property that is mobile Property that is often away from insured’s premises EXAMPLE: contractor’s equipment and/or tools, photographer’s equipment specific coverage for items that have a special limit (jewellery, furs)  Termination and Changes of Insurance Contracts Separate Policies Sometimes may be required to give additional coverage needed by insured ○ Endorsements, riders, or floaters may not cover what is needed No change to original contract SO an additional policy doesn’t have to be issued by original insurer TEXTBOOK REFERENCE INSURANCE BINDER (Form) 2-18  Create a “What” question Students take two minutes to create a “What” question based on the concepts covered so far, in the chat window. No question is too simple! Remember the Forgetting Curve!