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Chapter 50

Insurance

Learning Objectives

Describe an insurance contract and define insurable interest

List and describe the various types of life, health, and disability insurance

Identify the risks covered by a standard fire insurance policy and a homeowners’ policy

Describe automobile insurance and explain no-fault insurance

List and describe special forms of business insurance

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Insurance

A means for persons and businesses to protect A means for persons and businesses to protect themselves against risk of lossthemselves against risk of loss Insured: Party who pays a premium to insurance

company for insurance coverage Insurer: Insurance company that underwrites

insurance coverage Policy: Insurance contract Premium: Money paid to insurance company

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Insurable Interest

Requirement that a person who purchases insurance have a personal interest in the insured item or person

Person who has close family relationship or economic benefit from the continued life of another has insurable interest

Person can insure own life and name a beneficiary

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Insurance Policy

Governed by law of contracts Prepared on standardized forms Some state statutes mandate specific language Statutes concern coverage for certain losses Modification is done by executing an insurance

endorsement Insurance policy can be cancelled at any time

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Duties of Insured and Insurer

Duties of insured Pay premiums stipulated by policy Notify insurer after occurrence of insured event Cooperate with insurer in investigating claims

Duties of insurer Duty to defend insured against lawsuits Duty to pay legitimate claims up to policy limits

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Deductible Clause and Exclusions from Coverage Clause

Deductible clause Provides that insurance proceeds are payable only

after the insured has paid a certain amount of the damage or loss

Exclusions from coverage clause Stipulates the risks that are not covered by the

insurance policy

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Case 50.1: Exclusion from Insurance Coverage

Case Iroquois on the Beach, Inc. v. General Star

Indemnity Company 550 F.3d 585, Web 2008 U.S. App. Lexis 25864 (2008) United States Court of Appeals for the Sixth Circuit

Issue Did the exclusion from coverage apply?

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Coinsurance and Incontestability Clause

Coinsurance clause Requires the insured to pay a percentage of an

insured loss Incontestability clause

Prevents insurers from contesting statements made by insureds in applications for insurance after the passage of a stipulated number of years

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Life Insurance

A form of insurance where the insurer is obligated to A form of insurance where the insurer is obligated to pay a specific sum of money upon the death of the pay a specific sum of money upon the death of the insuredinsured

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Exhibit 50.1 - Life Insurance

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Types of Life Insurance

Life Insurance Description

Whole life Provides coverage during the entire life of the insured. Premiums paid during the life of the insured or until a certain age. Element of savings.

Limited-Payment

Premiums paid for a fixed number of years. Coverage is provided during the entire life of the insured.

Term Insurance is issued for a limited period of time. Premiums are payable and coverage effective during this term.

Universal life Combines features of both term and whole life insurance.

Endorsement and Annuity Contracts

Forms of retirement and life insurance contracts.

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Suicide Clause

Provides that if an insured commits suicide before a stipulated date, the insurance company does not have to pay the life insurance proceeds

If the insured commits suicide after the specified date, the insurance company must pay the life insurance proceeds to beneficiary

Suicide clause is valid is two years

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Health and Disability Insurance

Type Description

Health Insurance that covers the cost of medical treatment, surgery, and hospital care

Dental Insurance that covers the costs of dental care

Disability Insurance that provides monthly income to an insured who is disabled and cannot work (Benefits are based on the degree of disability)

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Fire and Homeowners’ Insurance

Type Description

Standard fire insurance policy

Protects personal property against losses resulting from fire, lightning, smoke, water damage, etc.

Homeowners’ policy Coverage for risks covered by standard fire insurance policy and personal liability insurance

Personal liability coverage

Insurance for insured and members of his or her family

Personal articles floater

Coverage of specific valuable items, usually excluded from standard fire and homeowners’ policies

Renters’ insurance Covers loss and damage to renters’ possessions and provides personal liability coverage

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Title Insurance

Ensures that owners of real property have clear title to the property

Protects against defects in titles and liens or encumbrances that are undisclosed on title insurance policy

New owner or mortgagee must purchase new title insurance policy

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Automobile, Vehicle, and Vessel Insurance

Type Description

Collision insurance Covers the insured’s vehicle against risk of loss or damage when struck by another vehicle

Comprehensive insurance

Covers the insured’s vehicle against risk of loss or damage from causes other than collision, such as fire, theft, etc.

Automobile liability insurance

Covers damage and loss that insured causes to third parties. It includes bodily injury and property damage

Medical payment coverage

Covers medical expenses incurred by owner and passengers who are injured in automobile accident

Uninsured motorist coverage

Coverage to drivers and passengers of a vehicle who are injured by an uninsured motorist

No-fault insurance Driver’s insurance company pays for any injuries or death the driver suffers in an accident 17

Marine Insurance

Insures against loss or damage to the vessel and its cargo caused by perils on water

Covers property damage to vessel or its cargo and liability insurance

Covers risk of loss of goods during shipment Inland marine insurance Ocean marine insurance

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Business Insurance

Type Description

Business interruption insurance

Reimburses business owners for loss of income caused when fire or other peril interrupts their business

Workers’ compensation insurance

Compensation to employees injured on the job

Key-person life insurance

Covers the lives of owners and other important persons who work for the business

Directors’ and officers’ liability insurance

Protects directors and officers from liability for decisions and actions taken on behalf of the corporation

Professional malpractice insurance

Purchased by professionals–such as attorneys, physicians–to cover injuries resulting from negligence

Product liability insurance

Manufacturers and sellers of products can insure against liability caused by sale of defective products

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Umbrella Insurance

Provides coverage in excess of basic policy limits of other insurance policies

Pays only if basic policy limits on other insurance policies have been exceeded

Issued only if minimum amount of basic coverage on other policies has been purchased by insured

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