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4.

INSURANCE CONTRACT
SUMMARY:

1. General
definition
2. Legal
Characteristics
3. Legal
Requirements
4. Fundamental
Legal Principles
“The education of those engaged in 5. Basic parts of
the important functions of the an insurance
insurance business calls for an contract
understanding of the essentials of
insurance law”
(Edwin W. Patterson)
AGENDA FOR TODAY:

1. General Definition
2. Distinct Legal Characteristics of Insurance Contracts
3. Legal Requirements of an Insurance Contract
4. Fundamental Legal Principles
5. Basic Parts of an Insurance Contract
1. GENERAL DEFINITION

• Complex legal documents that reflects the “general rules


of law”

• Legal act between Insurer & Insured

• Insurer is offering protection and is covering the perils (risks),


paying indemnity/certain amount of money

• Insured is transferring the perils (risks) and is paying the


premiums
2. DISTINCT LEGAL CHARACTERISTICS
OF INSURANCE CONTRACTS
• To show how insurance contract differ from other
contracts

• Characteristics
a. Aleatory
b. Unilateral
c. Conditional
d. Personal
e. Of adhesion
f. Consensual
g. With obligations for all parts
h. Unique
i. With successive execution
j. Pecuniary
A. ALEATORY CONTRACT
• The essence of an aleatory contract is CHANCE, or the
occurrence of some fortuitous event

• Rather aleatory than commutative

• ALEATORY – the values exchanged are not equal, one party


may receive value out of all proportion to the value that is
given

• COMMUTATIVE – the values exchanged by both parties are


theoretically even
B. UNILATERAL CONTRACT

• Only one party makes a legally enforceable promise


• Insurer -> to pay a claim or provide other services to the
insured
• In contrast, most of the commercial contracts are
bilateral in nature
C. CONDITIONAL CONTRACT

• The insurer’s obligation to pay a claim depends on whether


or not the insured or the beneficiary has complied with all
policy conditions

• CONDITIONS – provisions inserted in the policy that


enumerate the rights and duties of both parties

• The insurer is not obligated to pay a claim if the policy


conditions are not met
D. PERSONAL CONTRACT
• The contract is between the insurer and the insured

• E.g. – a property insurance contract does not insure


property, but the owner of property against loss

• The owner of the property is indemnified if the property is


damaged/destroyed
E. CONTRACT OF ADHESION

• The insured must accept the entire contract, with all of its
terms and conditions

• There is no bargaining over terms -> normally possible under


most commercial contracts

• The courts have ruled that any ambiguities or uncertainties in


the contract are construed against the insurer (Common Law
System)
F. CONSENSUAL
• A term derived from the civil law, denoting a contract
founded upon and completed by the mere consent of the
contracting parties, without any external formality or
symbolic act to fix the obligation.

g. With obligations for all parts


h. Unique
i. With successive execution
j. Pecuniary
3. LEGAL REQUIREMENTS OF AN INSURANCE CONTRACT

a. Offer and acceptance


b. Consideration
c. Competent parties (capacity of contracting)
d. Legal purpose
A. OFFER AND ACCEPTANCE

• Must be an offer and an acceptance of its terms – first requirement of a


binding insurance contract

• General rule – the applicant for insurance makes the offer, and the
company accepts or rejects the offer
B. CONSIDERATION
• Refers to the value that each party gives to the other

• The insured’s consideration: payment of the first premium / or a


promise to pay the first premium & an agreement to abide by
the conditions specified in the policy

• The insurer’s consideration – promise to do certain things as


specified in the contract:
• Paying for a loss from an insured peril
• Providing certain services (e.g. loss prevention, safety services,
defending the insured in a liability lawsuit)
C. COMPETENT PARTIES
• Each part must be legally competent

• The parties must have legal capacity to enter into a binding


contract

• Most adults are legally competent to enter into insurance


contracts, but there are some exceptions: insane persons,
intoxicated persons, corporations that act outside the scope
of their authorized authority, minors etc.
D. LEGAL PURPOSE
• The insurance contract that encourages or promotes
something illegal or immoral is contrary to the public interest
and cannot be enforced
4. FUNDAMENTAL LEGAL PRINCIPLES

A. Principle of Indemnity
B. Principle of Insurable Interest
C.Principle of Subrogation
D. Principle of Utmost Good Faith
E. Causa proxima – Proximate causa
A. PRINCIPLE OF INDEMNITY
• The insured should not profit from a loss but should be restored
to approximately the same position after the loss as existed
before the loss
• Standard method of indemnifying the insured in property
insurance – based on actual cash value
• Actual cash value = Replacement cost – Depreciation
• Exceptions: valued policies, replacement cost insurance and
life insurance
B. PRINCIPLE OF INSURABLE INTEREST
• The insured must stand to lose financially if a loss occurs, or
must incur some other kind of harm if the loss take place
• All insurance contracts must be supported by an insurable
interest to be legally enforceable
• 3 purposes of the insurable risk requirement:
• To prevent gambling
• To reduce moral hazard
• To measure the amount of loss
C. PRINCIPLE OF SUBROGATION
• Strongly supports the principle of indemnity
• Substitution of insurer in place of the insured for the purpose of claiming
indemnity from a third person for the loss covered by insurance;
• The insurer is entitled to recover from a negligent third party any loss
payments made to the insured;
PURPOSES OF SUBROGATION

• To prevent the insured from collecting twice for the same loss

• To hold the negligent person responsible for the loss


IMPORTANCE OF SUBROGATION
• The insurer can retain any amounts recovered through subrogation only
after the insured is fully indemnified;

• The insured cannot impair the insurer’s subrogation rights;

• The insurer can waive its subrogation rights in the contract;

• Subrogation does not apply to life insurance and to most individual health
insurance contracts;

• The insurer cannot subrogate against its own insurers.


D. 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;

• The principle is supported by three important legal doctrines:


a. Representations;
b. Concealment;
c. Warranty
A. REPRESENTATIONS
• Statements made by the applicant for insurance;

• The insurer can avoid the policy if the representation is both (1) material
and (2) false
material – if the insurer knew the true facts, the policy would not have been issued,
or would have been issued on different terms

• If the applicant for insurance states an opinion of belief that later turns
out to be wrong -> the insurer must prove that the applicant spoke
fraudulently and intended to deceive the company before it can avoid
the policy (e.g. case of Mc-Dowell vs. Fraser in 1779)
B. CONCEALMENT

• Failure of the applicant for insurance to reveal a material fact to the


insurer;

• Nondisclosure – the applicant for insurance is silent & deliberately


withholds material information from the insurer;

• The legal effect – the contract is avoidable at the insurer’s opinion;

• The applicant for insurance is required to disclose material information


to the insurer even though the disclosure may result in denial of the
insurance, or require the payment of higher premiums
C. WARRANTY

• The clause in an insurance contract that prescribes, as a


condition of the insurer’s liability, the existence of a fact affecting
the risk (e.g. the existence of an operational alarm system);

• The clause describing the warranty becomes part of the contract

• Any breach of the warranty, even minor or not material, allows


the insurer to avoid the policy;

• The harsh common law doctrine of warranty has been modified


and softened by court decisions and statues.
LAW AND THE INSURANCE AGENT

• An insurance contract normally is sold by an agent


who represents the principal

• There are three general rules of agency that govern


the actions of agents and their relationship to insured:
• There is no presumption of an agency relationship
• An agent must have the authority to bind the principal
• A principal is responsible for the actions of the agents

• An agent can bind the principal based on expressed


powers or implied powers
E. CAUSA PROXIMA – PROXIMATE CAUSE

• Active and effective cause determining a loss without the


intervention of another independent force, determined by
a new source
• it is not the 1st or the last, but the dominant, effective and
active
• Direct link – cause & effect
F. CONTRIBUTION
• Co-participation of many insurers to the same loss
• If the insured is coved more than once for the same risk
5. BASIC PARTS OF AN INSURANCE CONTRACT

• 5.1 Main clauses


• 5.2 Contractual parts
• 5.3 Specific compulsory elements
• 5.4 Phases of contracting
• 5.5 Effects of the contract
• 5.5 The end of the contract
5.1 MAIN CLAUSES (I)
• Insurance contracts generally can be divided into the
following parts:
• Declarations
• Definitions
• Insuring agreement
• Exclusions
• Miscellaneous provisions
5.1 MAIN CLAUSES (II)

• Declarations are statements concerning the property


or activity to be insured

• The definitions page or section defines the key words


or phrases so that the coverage under the policy can
be determined more easily;

• The insured agreement summarizes the promises of the


insurer. There are two basic types of insuring
agreements:
• Named-perils coverage
• “All-risks coverage”
5.1 MAIN CLAUSES (III)
• All policies contain one or more exclusions. There are three
major types of exclusions:
• Excluded perils
• Excluded losses
• Excluded property

• Exclusions are necessary for several reasons:


• The peril may be considered uninsurable by private insurers;
• Extraordinary hazards may be present;
• Coverage is provided by other contracts;
• Moral hazard is present to a high degree;
• The coverage is not needed by the typical insured
5.1 MAIN CLAUSES (IV)

• Conditions are provisions that qualify or place limitations on


the insurer’s promise to perform. The conditions section
imposes certain duties on the insured if he or she wishes to
collect for a loss

• Miscellaneous provisions in property and liability insurance


include cancellation, subrogation, requirements if a loss
occurs, assignment of the policy, and other insurance
provisions.
5.2 CONTRACTUAL PARTS
• Insurer and insured

Within contract, may be interested:


• Contracted of the insurance – when the contract is done
for a 3rd party)
• Insured
• Beneficiary
• The person mentioned within contract (the case of the
3rd part liability contracts)
5.3 SPECIFIC COMPULSORY
ELEMENTS

A. Risk
B. Sum Insured
C. Premium
A. RISK
• Uncertain, possible and future event
• Goods, patrimony, life, helth and phisical integrit of a
person may be exposed to the risks
• Insured risk – conditions:
• Possibility to be produced
• To be aleatory
• The event must be produced independently of the wish of
insured or insurance beneficiary
• To be moral (some risks can’t be insured because they are
incompatible with & society)
B. SUM INSURED
• Maxim amount of claims paid by insurer, following the
producing of risk

• Contribute to the calculation of premiums

• Differences Non life vs. Life:


• For non life insurance the good is evaluated
• For life insurance is settled
C. PREMIUM
• Received by insurer
• Paid by insured, transferring risks, in exchange of protection promised in
the case of loss (if the agreed risks are produced)
• There are many factors that may influence the level of the premium

• Gross Premium = Net Premium + Additional Premium (to cover costs,


expected profit, etc)

• Types of premium:
• Effective (current)
• Fixed
• Premium tariffs
• Premium discounts
WHAT IS INSURANCE?

POOL

£ £
The insurers
benefit
from the law of
large numbers

Equitable Premiums Claims

The contributions of the many to meet the losses of the few


CALCULATION OF PREMIUMS

Premium = Sum Insured X Rate

£
Value of
Property
at risk
Reflects the
Degree of
Hazard
%
% or 0/00
CALCULATION OF PREMIUM

The rate per cent is set by the leading underwriter,


based on the likelihood of having to pay a claim.

The greater the risk (chance of loss) the higher the


rate charged
Per mille, pounds
per £ thousand
insured
E.g. A rate of 1.5% means
that £1.50 is charged
for every £100 of risk
insured.
PREMIUM CALCULATIONS

Losses (actual claims made)


X100 = Rate%
Values at risk (total possible claims)

E.g. £450m worth of property insured gives rise to £9m claims:

9,000,000 9
X 100 = = 2%
450,000,000 450
PREMIUM CALCULATIONS

• The premium must be, at the very least,


sufficient to meet all expected claims…!

Prem. Claims

… and the premium must


also cover
expenses and overheads!
THE INSURANCE CYCLE AND FINANCIAL PERFORMANCE

higher profits

Higher prices higher capacity for that class

Capacity withdrawn lower prices

Lower profits
5.4 PHASES OF CONTRACTING

• Request (declaration) of insurance


• Request (declaration) of insurance analysis
• Insurer -> obliges contracting risks
• The moment when contract is signed
• The implementation of contract -> time
5.5 EFFECTS OF THE CONTRACT

• The rights and obligations of insured


• till the insured risk is produced
• after the insured risk is produced

• The rights and obligations of insurer


• till the insured risk is produced
• after the insured risk is produced
5.5 THE END OF THE CONTRACT

• Usual ways:
• To get to the end
• The insured risk is produced
• Unusual ways:
• Denunciation, resolution and annulations of the contract
LEGISLATION

• Cod Civil
• Cod Comercial
• Law concerning insurance and reinsurance in Romania, no. 136 / 29.12.1995
• Law 32/2000 on the activity and supervision of insurance and reinsurance
intermediaries
THANK YOU!