UGA RMIN 4000 Brown Test 3 (2024)
Exam Q’s and A’s
Legal principles of insurance - -Principle of indemnity
Principle of insurable interest
Principle of subrogation
Principle of utmost good faith
- Principle of indemnity - -The insurer agrees to pay no more than the actual
amount of the loss
Purpose is to prevent the insured from profiting from the loss
Why is this important?
Prevents moral hazard
- Replacement cost - -The cost to replace property with an item of like kind
and quality (similar workmanship and materials)
Not the same as historical cost
- Actual cash value (ACV) - -Replacement cost less depreciation
In property insurance, indemnification is usually based on the actual cash
value of the property at the time of loss
ACV = RC - depreciation
Depreciation = age/useful life
- ex: Samsung TV
Cost $750 when purchased in 2016
Useful life is 10 years
Current model (like kind/quality) is $450
calculate deprecation % and ACV - -70%
$135
- ex: warehouse building
Cost $2,500,000 when build in 2016
Useful life of 20 years
,Fire completely destroys building in 2023
Current reconstruction cost is $3,000,000
calculate deprecation % and ACV - -35%
$1,950,000
- Other types of indemnity - -market value
value policy
valued policy law (in some states)
- market value - -Price a buyer would be willing to pay in a free market
- Value policy - -A policy that pays the face amount of insurance if a total
loss occurs (life insurance)
- Valued policy law (in some states) - -Requires payment of the face amount
of insurance if a total loss to real property occurs from a peril specified in law
- Principle of insurable interest - -The insured/beneficiary must be in a
position to lose financially if a covered loss occurs
Ex: can't buy insurance for someone else or other persons house
Why?
Prevents gambling on losses
Reduces moral hazard
- Examples of insurable interest - -Ownership of property (house, car)
Potential legal liability (business owner)
Secured creditors (mortgage company, auto lender)
Contractual right (goods in transit)
- When must an insurable interest exist? - -Property insurance
-At time of loss
-Can't collect on an insurance policy after you sell your home
Life insurance
-At inception of policy
-Ex spouse can still collect on life insurance if listed as policy beneficiary
, - Principle of subrogation - -Substitution of the insurer in place of the
insured for the purpose of claiming indemnity from a third party loss covered
b y insurance
Example:
Someones else hits your car
Your insurance company pays you for the damages to your vehicle
Your Insurance company sues the other driver for reimbursement
- Reasons for subrogation - -Prevents insured from collecting twice (once
from insurer, once from responsible party)
Holds the negligent party responsible for the loss
Reduces insurance claims costs (and therefore, rates)
- Principle of utmost good faith - -A higher degree of honesty is imposed on
both parties to insurance contracts than is imposed on parties to other
contracts
Going out of way to make sure insurer gets correct information
Supported by three legal doctrines:
-Representations
-Concealment
-Warranty
- Representations - -Statements made by the applicant for insurance
What if the statements are false (misrepresentations)?
Contract is voidable if the misrepresentation is:
Material, False, and
Relied on by the insurer
Many don't void and just subtract what premium would have been if had true
facts
- A smoker lies on their life insurance application and later dies in an auto
accident
Is the contract voidable - -Yes, voidable
- Insureds birthday on a application is listed as august 1 when its august 11
is the contract voidable - -In general no, not material fact
- Concealment - -Intentional failure of the applicant for insurance to reveal a
material fact to the insurer
Exam Q’s and A’s
Legal principles of insurance - -Principle of indemnity
Principle of insurable interest
Principle of subrogation
Principle of utmost good faith
- Principle of indemnity - -The insurer agrees to pay no more than the actual
amount of the loss
Purpose is to prevent the insured from profiting from the loss
Why is this important?
Prevents moral hazard
- Replacement cost - -The cost to replace property with an item of like kind
and quality (similar workmanship and materials)
Not the same as historical cost
- Actual cash value (ACV) - -Replacement cost less depreciation
In property insurance, indemnification is usually based on the actual cash
value of the property at the time of loss
ACV = RC - depreciation
Depreciation = age/useful life
- ex: Samsung TV
Cost $750 when purchased in 2016
Useful life is 10 years
Current model (like kind/quality) is $450
calculate deprecation % and ACV - -70%
$135
- ex: warehouse building
Cost $2,500,000 when build in 2016
Useful life of 20 years
,Fire completely destroys building in 2023
Current reconstruction cost is $3,000,000
calculate deprecation % and ACV - -35%
$1,950,000
- Other types of indemnity - -market value
value policy
valued policy law (in some states)
- market value - -Price a buyer would be willing to pay in a free market
- Value policy - -A policy that pays the face amount of insurance if a total
loss occurs (life insurance)
- Valued policy law (in some states) - -Requires payment of the face amount
of insurance if a total loss to real property occurs from a peril specified in law
- Principle of insurable interest - -The insured/beneficiary must be in a
position to lose financially if a covered loss occurs
Ex: can't buy insurance for someone else or other persons house
Why?
Prevents gambling on losses
Reduces moral hazard
- Examples of insurable interest - -Ownership of property (house, car)
Potential legal liability (business owner)
Secured creditors (mortgage company, auto lender)
Contractual right (goods in transit)
- When must an insurable interest exist? - -Property insurance
-At time of loss
-Can't collect on an insurance policy after you sell your home
Life insurance
-At inception of policy
-Ex spouse can still collect on life insurance if listed as policy beneficiary
, - Principle of subrogation - -Substitution of the insurer in place of the
insured for the purpose of claiming indemnity from a third party loss covered
b y insurance
Example:
Someones else hits your car
Your insurance company pays you for the damages to your vehicle
Your Insurance company sues the other driver for reimbursement
- Reasons for subrogation - -Prevents insured from collecting twice (once
from insurer, once from responsible party)
Holds the negligent party responsible for the loss
Reduces insurance claims costs (and therefore, rates)
- Principle of utmost good faith - -A higher degree of honesty is imposed on
both parties to insurance contracts than is imposed on parties to other
contracts
Going out of way to make sure insurer gets correct information
Supported by three legal doctrines:
-Representations
-Concealment
-Warranty
- Representations - -Statements made by the applicant for insurance
What if the statements are false (misrepresentations)?
Contract is voidable if the misrepresentation is:
Material, False, and
Relied on by the insurer
Many don't void and just subtract what premium would have been if had true
facts
- A smoker lies on their life insurance application and later dies in an auto
accident
Is the contract voidable - -Yes, voidable
- Insureds birthday on a application is listed as august 1 when its august 11
is the contract voidable - -In general no, not material fact
- Concealment - -Intentional failure of the applicant for insurance to reveal a
material fact to the insurer
