• Principle of Indemnity The insurer agrees to pay no more than the actual amount of the loss • Purpose: – To prevent

the insured from profiting from a loss – To reduce moral hazard In property insurance, indemnification is based on the actual cash value of the property at the time of loss There are 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 – road evidence rule means that the determination of !"# should include all relevant factors an e$pert would use to determine the value of the property There are some e$ceptions to the principle of indemnity: – ! valued policy pays the face amount of insurance if a total loss occurs – %ome states have a valued policy law that re&uires 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 – ! life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured's death

• •

• Principle of Insurable Interest The insured must stand to lose financially if a loss occurs • Purpose: – To prevent gambling – To reduce moral hazard – To measure the amount of loss (hen must insurable interest e$ist) – Property insurance: at the time of the loss – *ife insurance: only at inception of the policy

• Principle of Subrogation Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss covered by insurance. • Purpose: – 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 The insurer is entitled only to the amount it has paid under the policy

• • • The insured cannot impair the insurer's subrogation rights %ubrogation does not apply to life insurance and to most individual health insurance contracts The insurer cannot subrogate against its own insureds • Principle of Utmost Good Faith A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts • %upported by three legal doctrines: – Representations are statements made by the applicant for insurance • ! contract is voidable if the representation is material. the values that each party e$change • *egally competent parties. makes the contract voidable – ! concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer – ! warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects • %tatements made by applicants are considered representations. an insurance contract must meet four re&uirements: • +ffer and acceptance of the terms of the contract • "onsideration .s consent "ontract of adhesion: since the insured must accept the entire contract as it is written. if relied on by the insurer. with legal capacity to enter into a binding contract • The contract must e$ist for a legal purpose Distinct Legal Characteristics of Insurance Contracts !leatory: values e$changed are not e&ual -nilateral: only the insurer makes a legally enforceable promise "onditional: policyowner must comply with all policy provisions to collect for a covered loss Personal: property insurance policy cannot be validly assigned to another party without the insurer. any ambiguities are construed against the insurer La and the Insurance !gent !n agent is someone who has the authority to act on behalf of a principal /the insurer0 • • • • • • • • • • . false. not warranties Requirements of an Insurance Contract To be legally enforceable. and relied on by the insurer • !n innocent misrepresentation of a material fact.

whether re&uested or not3  4on5disclosure of any fact may be unintentional on the part of the insured3  2ven so such a contract is rendered voidable at the insurer's option and it can refuse any compensation3  !ny concealment of material facts is considered intentional3  Principle of Indemnity 6 +n the happening of insured event for which insurance policy is taken up insured should be replenished the amount of loss 6 Insured should not derive any unwarranted benefit from a loss 6 $ade in follo ing ays  "ash payment  Repair  Replacement  Reinstatement  Principle of Subrogation 6 Restitution of rights of an assured in favour of Insurer against third party for any damages caused by him in place of assured after Insurer has indemnified him for the loss 6 %b&ecti'es of the principle: i3 Prevents insured from profiting from damage3 ii3 2nforces rule of law that guilty is brought to book and made to pay for the loss3 iii3 7elps Insurer to partially or fully recover amount paid for loss3 iv3 7elps to lower insurance rates3  Principle of Contribution .• • • %everal laws govern the actions of agents and their relationship to insureds – There is no presumption of an agency relationship – !n agent must be authorized to represent the principal • !uthority is either e$press. all facts material to the risk being proposed. implied. or apparent – 1nowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship (aiver is defined as the voluntary relin&uishment of a known legal right 2stoppel occurs when a representation of fact made by one person to another person is reasonably relied on by that person to such an e$tent that it would be ine&uitable to allow the first person to deny the truth of the representation  Principle of Uberrimae Fides (Utmost Good Faith" #  ! positive duty voluntarily to disclose. accurately and fully.

6 . which resulted in the loss. 6 (hile determining :pro$imate cause' se&uence of events according to their time of occurrence is irrelevant. which is insured with several insurers has to be shared pro rata 6 "orollary of doctrine of Indemnity and hence is applicable in case of 8I3 6 Requisites  Insured asset9Person /in case of hospitalization insurance0 must be common to all policies  Risk insured against must be common to all policies  !ll policies must be in force during the occurrence of loss  Principle of Pro(imate Cause 6 *iterally means nearest cause or direct cause3 Immediate cause of mishap.any court <udgments act as precedents in arriving at decisions while making settlements3 6 The insurance company is liable to indemnify only against the insured perils3 .6 It means indemnity provided for loss occurring on asset.