Fundamentals Chapter 3.pptx

 What do you remember? Students have three minutes to write 3-4 sentences about what they remember from last class. If you can give an example, that is even better! Remember the Forgetting Curve!  CHAPTER 3 - THE ROLE OF GOVERNMENT IN THE INSURANCE INDUSTRY 1) REGULATIO...

 What do you remember? Students have three minutes to write 3-4 sentences about what they remember from last class. If you can give an example, that is even better! Remember the Forgetting Curve!  CHAPTER 3 - THE ROLE OF GOVERNMENT IN THE INSURANCE INDUSTRY 1) REGULATION OF INSURERS Both federal and provincial statutes regulate the general insurance industry Role of Federal Government ○ Licensing by the federal government is only given to companies that have met financial standards (by the Office of the Superintendent of Financial Institutions) ○ Ongoing monitoring to ensure stability  THE ROLE OF GOVERNMENT IN THE INSURANCE INDUSTRY Role of Provincial Government There is a Superintendent of Insurance for each province who administers the Insurance Act ○ Supervises terms and conditions of insurance contracts All private insurer contracts: SUBJECT TO provincial approval ○ Licensing of insurers All insurers must be licensed in the province they transact business ○ Monitor financial stability of provincially licensed insurers Usually Superintendents monitor financial stability of insurance companies who operate under a provincial charter  THE ROLE OF GOVERNMENT IN THE INSURANCE INDUSTRY 1) REGULATION OF INSURERS Monitoring Financial Solvency Government regulation - monitors financial strength of insurers ○ If an insurer can fulfill financial obligations → solvent ○ If an insurer CANNOT fulfill financial obligations → insolvent THE PROCESS ○ License is granted to insurer and financial strength will be monitored continuously ○ Annual reports must be filed with Superintendent on company’s assets, liabilities, receipts, expenditures, loss statistics ○ If Superintendent audits insurers, the company’s operations may be suspended until issue is resolved Extreme situations: Superintendent may take possession/control of insurer’s assets  THE ROLE OF GOVERNMENT IN THE INSURANCE INDUSTRY 1) REGULATION OF INSURERS 1992 Amendment to Federal Insurance Company Act All federally licensed insurers → responsible to consumer for losses incurred WHEN insurer becomes insolvent Property and Casualty Insurance Compensation Corporation (PACICC) is formed ○ In cases of bankruptcy, and claims can’t be paid, PACICC pays all valid claims ○ Participating insurance companies are charged an assessment to cover TOTAL claims amount that is determined by the total direct premiums written by it AMOUNTS CLAIMED UNDER THIS PLAN ○ Max $250,000: all claims from a single occurrence ○ Refund: up to 70% of unearned premiums subject to max of $700/policy  INSURANCE FIDUCIARY IN NATURE DEFINITION FIDUCIARY One who handles other people’s money WHO IS A FIDUCIARY ○ Insurers and brokers Consumers expect: When consumers pay premiums, they are forwarded by broker to the insurance company Insurers keep a part of all premiums collected to pay claims  INSURANCE FIDUCIARY IN NATURE 1. Fiduciary Responsibility of Insurers Premiums paid to insurers AREN’T fully earned until EXPIRY of insurance policy ○ Unearned premiums → held in trust to refund insureds if the policy is cancelled before expiry ○ On a 12 month policy, if only one month has expired then the insurer has only earned 1/12 of the TOTAL POLICY PREMIUM Premium is used to pay for salaries, operating costs, and claims 2. Fiduciary Responsibility of Insurance Brokers Commissions → not fully earned until expiry of policy ○ Unearned commissions → held in trust to refund insureds if policy is cancelled before expiry Standard → brokers deduct total commission from amount paid to insurer ○ Broker can’t get commissions that haven’t been earned yet  Ontario Requirements The Registered Insurance Broker’s Act in Ontario (not all provinces) require brokers to establish a separate trust fund Premiums must be deposited into a separate trust account(s) without delay and will not be later than three banking days after the day the money was received Firms must keep detailed books and records which can be inspected at any moment Brokerages have 30 days after request to give authorities the current audited financial statements Agreement with insurer gives broker approx 30-60 days to remit premiums to insurer  2) REGULATION OF INSURANCE CONTRACTS The province controls licensing and operating of insurers → differences in contracts The Insurance Act - Legislating Industry/Policy Standards ○ Contains → legal rules governing the insurance industry’s operation ○ 7 RULES 1. Contents of Insurance Policies Legislated - details that must be on every policy of insurance ○ i) Parties to the Contract Required: Name of insurer and insured Insured: first party to contract Insurer: second party to contract Third party IS NOT PARTY to the contract  2) REGULATION OF INSURANCE CONTRACTS 1. Contents of Insurance Policies Legislated - details that must be on every policy of insurance ii) Policy Period Start and expiry dates must be on the policy Policy takes effect at 12:01 local time, at address of the Named Insured ○ Will expire at same time ○ Most contracts are one year ○ Above states STANDARD TIME, but some provinces change this to LOCAL TIME (Ex. the Ontario auto Policy, Ontario’s Homeowner’s policy) IF BROKER HAS BINDING AUTHORITY → coverage starts when insurance is bound  2) REGULATION OF INSURANCE CONTRACTS 1. Contents of Insurance Policies Legislated - details that must be on every policy of insurance iii) Loss Payable or Payee, If Any ○ Policy must ID all parties that insurance monies are payable if there is a loss eg: Jane borrows money from RBC to pay for her home. The insurable interest of RBC must be on the policy iv) Types of Insurance Coverages AND Amounts for Which Insurer May be Liable ○ Policy identifies the insurance coverages applicable and amounts for each  2) REGULATION OF INSURANCE CONTRACTS v) Rate and Premium Charged Policy must indicate the cost of insurance Insurer has to identify the amount of premiums charged AND method/rate used ○ NOTE: Some insurers show both rate and premium, but others show only premium vi) Subject Matter of Insurance Describe subject matter of insurance AND IDENTIFY: ○ Items insured ○ Locations of insured items NOTE: The Declarations Page, or Coverage Summary indicates all above information  2) REGULATION OF INSURANCE CONTRACTS 2. Removal Coverage Legislated “If insured property is NECESSARILY moved from location specified herein to prevent loss, destruction, damage OR further loss, destruction, or damage, THEN the part of insurance that exceeds the amount of insurer’s liability for ANY loss ALREADY incurred WILL (7 days only OR for unexpired term of policy - whichever is less) INSURE THE PROPERTY moved AND any property remaining in specified locations IN THE PROPORTIONAL VALUE of value in each location. ○ Most insurance policies restrict coverage to the location specified on the property and if property isn’t at that location at time of loss, there’s no location  2) REGULATION OF INSURANCE CONTRACTS 2. Removal Coverage Legislated EXCEPTION - The Insurance Act → every policy that insures against fire will extend to cover insured property when it’s moved to another location not on the policy. REASON → removing property from a fire site to eliminate or reduce loss is in the interest of society  2) REGULATION OF INSURANCE CONTRACTS 2. Removal Coverage Legislated cont... Conditions Applying to Removal Clause a) Insurer MUST extend policy to locations not insured by policy WHEN insured property is NECESSARILY removed to prevent loss, destruction, damage, OR further loss, damage, destruction ○ MUST BE SHOWN that property was moved to the location because there was a DANGER FROM INSURED PERIL (by the policy)  2) REGULATION OF INSURANCE CONTRACTS b) Insurance amount available for ANY loss to property at unnamed location will be REDUCED by amount paid for loss at the NAMED location: For example, Insurance at named location $100,000 Loss at named location $90,000 Remaining amount to pay for items at unnamed location $10,000 c) Onus is on insurer to extend coverage to property at unnamed location for a LIMITED TIME and ends after 7 days OR upon expiry of policy (whichever is sooner)  2) REGULATION OF INSURANCE CONTRACTS 3. Limitation of Liability Clauses - Usage Legislated ○ Clauses in policies operate in a way to provide LESS THAN COMPLETE indemnity if there is a loss ○ The Insurance Act requires → when an insurance contract has a clause that allows the insurer to pay an amount LESS than what the insured has purchased, IT WILL SAY: This Policy contains a clause(s) that may limit the amount payable. Deductible and Co-Insurance are two common limiting clauses  2) REGULATION OF INSURANCE CONTRACTS 4. Right of Subrogation Legislated Law provides → after paying the claim, insurer has the same rights of recovery against the responsible party as the insured had/has SUBROGATION → put yourself into another’s shoes ○ The insured has the right to recover the amount of loss from the responsible party ○ Any action against the responsible party is taken in the INSURED’s name  2) REGULATION OF INSURANCE CONTRACTS 5. Waiver of Term or Condition THE INSURANCE ACT ○ “No term OR condition of an insurance contract will be considered WAIVED by insurer UNLESS the waiver is provided in writing and signed by an authorized person by the insurer Interim changes → made under the signature of a person who is authorized (for that purpose) and can be whoever the insurer wants (usually an officer of the insurance company) ○ ALL CHANGES MUST BE IN WRITING if they are to be binding 6. Effect of Delivery of Policy THE INSURANCE ACT ○ When the policy is delivered BUT NOT PAID FOR, it will be binding on the INSURER AS IF the premium HAD BEEN PAID  Term and Definition Students have two minutes to create a “flashcard” and write it in the chat window. Write the term and the definition. It can also be a concept. No concept is too simple! Remember the Forgetting Curve! IF  2) REGULATION OF INSURANCE CONTRACTS 7. Policies Insuring Fire Peril i) Basic Coverages Legislated - fire policies must include these three items I. Fire ○ For fire to occur → must have actual ignition or burning ○ TWO SOURCES OF FIRE that can destroy property Friendly Fire - a fire contained in a proper receptacle Steaks burning on the bbq, wood burned in a fireplace Hostile Fire - fire that escapes its receptacle or starts outside a receptacle Loss to carpeting due to a spark from the fireplace INSURANCE POLICIES COVER LOSSES FROM HOSTILE FIRES ONLY Ii. Lightning Iii. Explosion of Natural, Coal, or Manufactured Gas ○ If a policy is sold that insures against fire, it is interpreted to have met MINIMUM established coverage requirements  2) REGULATION OF INSURANCE CONTRACTS 7. Policies Insuring Fire Peril ii) Standard Exclusions Legislated If losses are due to the following, the insurer DOES NOT HAVE TO COVER ○ Application of heat - heat DIRECTLY APPLIED to property like an iron used on clothes that then catch fire Resultant damage from a fire to other property covered by the policy is insured ○ Lightning damage to electrical devices or appliances - loss or damage directly due to lightning is EXCLUDED EXAMPLE: TV sets, kitchen ranges, freezers Damage from resultant fire IS COVERED  2) REGULATION OF INSURANCE CONTRACTS Electrical currents (other) - sudden surges or reductions in power supply causes damage to electrical wiring ○ NO COVERAGE for losses due to artificially generated sources of electricity ○ Damage from resultant fire IS COVERED Contamination by radioactive material ○ When insured perils on the policy cause radioactive materials to escape, resultant damage from contamination IS NOT INSURED  2) REGULATION OF INSURANCE CONTRACTS 7. Policies Insuring Fire Peril iii) Statutory Conditions The Insurance Act REQUIRES the rights and responsibilities of all parties to a contract of fire insurance is a part of EVERY SUCH CONTRACT ○ Rules are binding to all parties to the insurance contract - there is NO VARIATION or omission OR addition to any Statutory Condition Statutory Conditions - imposed by provincial legislation and clearly outline rights and responsibilities of all parties to the contract  Statutory Conditions Statutory Condition 1. Misrepresentation THE ACT: “If persons applying for insurance falsely describe property to the insurer OR misrepresented OR fraudulently omits any circumstance that is material TO BE MADE KNOWN to the insurer to enable it to judge the risk to be undertaken, THEN contract is void to any property in relation to which the misrepresentation or omission is material”  Statutory Conditions Statutory Condition 1. Misrepresentation THREE FORMS OF MISREPRESENTATION: i) A false description of the property to prejudice of insurer ○ Either accidentally or deliberately to avoid paying higher premiums ii) Misrepresentation of a material fact, such as claims, cancellations, refusals to insure or property protection systems which: ○ If misrepresented, may cause the insurer to decline risk altogether, OR charge a higher premium before accepting, iii) Fraudulent omission of a material fact ○ Insureds may fraudulently, knowingly, or deliberately, WITH intent to deceive, omit a material fact TO: get insurance OR get a lower insurance rate  Statutory Conditions Effect of Misrepresentation on Contract of Insurance Allegations of misrepresentations against insureds usually happen when a claim is being made Onus to prove misrepresentations is on the insurer Insurer can void the contract ONLY IF it can show that misrepresentation was DIRECTLY CONNECTED to the loss  Statutory Conditions Statutory Condition 2. Property of Others THE ACT: “Unless otherwise stated in the contract, insurer IS NOT LIABLE for loss or damage to property owned by any person OTHER THAN insured UNLESS interest of insured is stated in the contract Payment will be made to cover insured’s insurable interest in property when it is stated in the contract EXAMPLE: Betty has an upholstery shop with customers’ furnishings, so Betty may wish to extend coverage to customers’ property  Statutory Conditions Statutory Condition 3. Change of Interest THE ACT - insurer is liable for loss OR damage after an authorized assignment under Bankruptcy Act OR change of title by succession by operation of law OR by death - Usually ONLY parties to the contract are entitled to benefit from them EXCEPTIONS: ○ 1. Authorized Assignment Under Bankruptcy Act ○ 2. Change of Title by Succession Operation of law Death  Statutory Conditions Statutory Condition 3. Change of Interest EXCEPTIONS: ○ 3. Change of title by operation of law If insureds deemed mentally unfit to handle their affairs, court may order their rights of ownership/control to be transferred to others If previous owner’s insurance policy is in force, it must respond to subsequent claims made by new owners ○ 4. Change of title by death When title to property is willed to new owners, they will have the same rights as the previous insured  Statutory Conditions Statutory Condition 4. Material Change THE ACT: “Any change material to the risk AND is in control and knowledge of insured AVOIDS the contract as the part affected UNLESS the insurer is notified in writing (or local agent) AND the insurer when notified may return the unearned portion (if any) of premium paid AND CANCEL the contract OR MAY NOTIFY insured (in writing) if he wants the contract to continue, he must (within 15 days after receiving the notice) pay the insurer an additional premium AND default the payment the contract isn’t in force and insurer will return the unearned portion (if any) of premium paid.  Statutory Conditions MATERIAL CHANGE - any change in the control and knowledge of the insured THAT Arises after policy is issued Serves to increase chance of loss - changes in occupancy or processes used on premises may occur during the policy period are changes that increase the chance of loss, for example, changing the insured’s dwelling into one for business purposes CHANGE MUST BE substantial and continuing, for example, All you can eat BBQ as a marketing tool for a furniture store. The change is not substantial OR continuing Effect on Policy Coverages If there is an unreported material change, insurer is allowed to void contract “as to the part affected.” Losses connected to the upreported material change WON’T BE PAID  Statutory Conditions Onus on Insured to Notify Insurer of Material Change Insurer MUST BE ADVISED of any changes that increase potential for loss When a MATERIAL CHANGE IS REPORTED, insurer MAY ○ Return unearned premium and cancel the policy ○ Retain the risk and advise insureds (in writing) of the additional premium - IF NOT PAID within 15 days, then the insurer can cancel the policy and return the unearned portion  Statutory Conditions Statutory Condition 5. Termination THE ACT 1) Contract can be terminated… ○ a) by insurer giving insured 15 days notice by registered mail OR 5 days written notice personally delivered ○ b) By insured - ANY TIME on request 2) Where contract is terminated (by insurer) ○ a) Insurer refunds excess premium paid by insured over PRO- RATA premium for the expired time BUT IN NO EVENT shall pro rata premium for expired time be deemed LESS than any MIN retained premium specified ○ b) Refund accompanies notice UNLESS premium is subject to adjustment OR determination of amount IN WHICH CASE refund is made as soon as practicable  Statutory Conditions Statutory Condition 5. Termination cont... 3) If contract is terminated by insured, insurer will refund as soon as practicable the EXCESS of premium paid by insured over the short rate premium FOR expired time BUT SHALL IN NO EVENT will the short rate premium for expired time be deemed LESS THAN any MIN retained premium specified 4) Refund MAY BE MADE by money, postal, OR express company money order OR cheque (payable at par) 5) The 15 days from clause (a) of sub condition (1) starts on the day after the receipt of the registered letter at the post office that the letter is addressed Termination by Insurer ○ Every contract must show basis for termination  Statutory Conditions Statutory Condition 6. Requirements After Loss THE ACT 1) Upon occurrence of loss or damage to insured property, INSURED WILL (if loss or damage is covered) in addition to requirements of 9, 10, 11: Give notice in writing to insurer Deliver (as soon as practicable) to insured proof of loss verified by statutory declaration ○ Complete inventory of destroyed/damaged property SHOWING details, quantities, costs, ACV, particulars on loss amount claimed ○ State when/how loss occurred, IF caused by fire OR explosion from ignition, HOW fire or explosion originated (within the insured’s knowledge) ○ Stating that loss didn’t happen through wilful act OR neglect OR procurement, means OR connivance of insured  Statutory Conditions Statutory Condition 6. Requirements After Loss 1) b) Deliver (as soon as practicable) to insured proof of loss verified by statutory declaration iv) Showing amount of other insurances AND names of other insurers v) Show interest of insured AND others, in the property with particulars of all liens, encumbrances AND other charges on the property vi) Showing changes in title, use, occupation, location, possession OR exposures of property SINCE issue of contract vii) Showing the location (place) where property insured was at time of loss  Statutory Conditions Statutory Condition 6. Requirements After Loss 1) c) IF REQUIRED - provide complete inventory of undamaged property, quantity, cost, ACV 1) d) IF REQUIRED AND PRACTICABLE, produce books of account, warehouse receipts, stock lists, invoices, other vouchers verified by statutory declaration AND furnish a copy of written portion of any other contract 2) EVIDENCE furnished under clauses (c) and (d) of subparagraph (1) of condition WILL NOT BE CONSIDERED proofs of loss within meaning of Conditions 12 and 13 ○ THIS PUTS A REQUIREMENT on insured to provide proper documentation  Statutory Conditions Statutory Condition 7. Fraud THE ACT: “Any fraud OR wilfully false statement in a statutory declaration connected to any above particulars vitiates the claim of the person making the declaration FRAUD - deliberate attempt to deceive to secure profit ○ Insurer doesn’t have to pay fraudulent insurance claims ○ IF INSURER CAN PROVE FRAUD - can deny the ENTIRE claim, not just the part that is fraudulent HONEST MISTAKE - is not fraud, and if insured suspects fraud, it has to prove that the insured is deliberately attempting to deceive so as to profit from loss  Statutory Conditions Statutory Condition 8. Who May Give Notice and Proof THE ACT - Notice of loss AND proof of loss made by agent of insured named in the contract (absence, inability to give notice or make proof, absence, inability being satisfactorily accounted for, or insured refuses) by person(s) that any part of insurance money is payable to If insureds are away/unable to provide notice of proof of loss, insurer ENTITLED TO KNOW WHY If the reason is acceptable, the agent of insured can fulfil the functions ACCEPTABLE - extended hospitalization, prolonged absence from country AGENTS - lawyer. Friends, relatives SOMETIMES insureds refuse to make a claim - example maybe the claim is fraudulent  Statutory Conditions Statutory Condition 9. Salvage THE ACT 1) THE INSURED, if there is loss or damage to any insured property, will take all REASONABLE steps to prevent further damage; ○ measures such as removal of property to prevent further damage 2) Insurer will contribute pro rata to any reasonable AND proper expenses in connection with steps taken by insured AND required under subparagraph (1) of condition (according to the interests of the parties) ○ Law requires that insureds take all reasonable steps to reduce OR prevent loss or damage, including moving the property to another location ○ If insureds don’t make an effort to salvage the insured property when there is a clear peril, the insurer can deny coverage  Statutory Conditions Statutory Condition 10. Entry, Control, Abandonment THE ACT “After loss/damage to insured property, insurer has IMMEDIATE RIGHT of access/entry from accredited agents to survey and examine the property and make an estimate of loss or damage AND after insured has secured the property; FURTHER RIGHT to access/entry to make an appraisement/estimate of the loss or damage BUT INSURED IS NOT ENTITLED TO control or possession of insured property AND WITHOUT INSURER’S CONSENT, there can’t be abandonment to it of insured property”  Statutory Conditions Statutory Condition 11. Appraisal THE ACT If there is a disagreement on the value of the insured property, THE property saved OR amount of loss, questions will be determined by appraisal (as under the Insurance Act) BEFORE there is recovery under the contract WHETHER THE RIGHT TO RECOVER is disputed or not, AND independently of other questions NO RIGHT to appraisal until a demand is made in writing AND AFTER proof of loss is delivered ○ Most claims are settled with very little/no disagreement ○ This condition wishes to settle disputes on valuation be settled by appraisal ○ The appraisal process DOESN’T HAVE ANYTHING TO DO WITH determining if there is coverage  Statutory Conditions Statutory Condition 12. When Loss is Payable THE ACT Loss is payable within 60 days after completion of proof of loss UNLESS contract indicates a shorter period Statutory Condition 13. Replacement THE ACT 1) Insurer can choose to repair, rebuild, OR replace property damaged or lost GIVING WRITTEN NOTICE of intention within 30 days after receiving proofs of loss 2) If the insurer starts to repair, rebuild, or replace the property WITHIN 45 DAYS after receipt of proof of loss, and will proceed with due diligence to the completion  Statutory Conditions Statutory Condition 14. Action THE ACT Every action OR proceeding against insurer for recovery of a claim under OR is absolutely barred unless commenced WITHIN 1 YEAR NEXT after loss/damage occurs UNLESS legislation indicates otherwise Statutory Condition 15. Notice THE ACT ANY written notice to insurer may be delivered at OR sent via registered mail to the CHIEF AGENCY (head office) of insurer in the Province Written notice can be given to insured in the contract by letter personally delivered OR registered mail addressed to him at the last noted office address to the insurer THIS CONDITION: Registered means - registered in OR outside Canada  Three Big Things Students have three minutes to write down three of the biggest or most important concepts we have gone over so far in class, in the chat window. Remember the Forgetting Curve!  Textbook References TEXTBOOK REFERENCES 3-24 Property Insurance Policy - DECLARATIONS PAGE 3-26 Statutory Conditions that appear in all policies