Chapter 9 - Fundamental Legal Principles Flashcards Preview

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Flashcards in Chapter 9 - Fundamental Legal Principles Deck (8)
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1

Principle of indemnity is when the insurer agrees to pay no more than the actual amount of the loss. What are the two reasons behind this?

to prevent the insured from profiting from a loss
to reduce moral hazard

2

In property insurance, indemnification is based on the actual cash value of the property at the time of loss. What are the three main methods to determine actual cash value?

-Replacement cost less depreciation
-Fair market value is the price a willing buyer would pay a willing seller in a free market
-Broad evidence rule means that the determination of ACV should include all relevant factors an expert would use to determine the value of the property

3

What are the four exceptions to the principle of indemnity?

-A valued policy pays the face amount of insurance if a total loss occurs
-Some states have a valued policy law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law
-Replacement cost insurance means there is no deduction for depreciation in determining the amount paid for a loss
-A life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured’s death

4

The principle of insurable interest states that the insured must be in a position to lose financially in a covered loss occurs. What is the purposes of this principle? (3)

To prevent gambling
to reduce moral hazard
to measure the amount of the insured's loss

5

What are four examples of insurable interest?

Ownership of property
potential legal liability
serving as a secured creditor
contractual rights

6

When must insurable interest exist? Property? Life insurance?

Property insurance: at the time of the loss
Life insurance: only at inception of the policy

7

Principle of Subrogation is the substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance. What is the purpose of this principle? (3)

-To prevent the insured from collecting twice for the same loss
-To hold the negligent person responsible for the loss
-To hold down insurance rates

8

What are the four characteristics of a principle of subrogation?

-The insurer is entitled only to the amount it has paid under the policy
-The insured cannot impair the insurer’s subrogation rights
-Subrogation does not apply to life insurance contracts
-The insurer cannot subrogate against its own insureds