Legal Aspects of Insurance & Risk Management

1. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Principal of indemnity • Indemnify means to make whole or to reimburse • Ideally, after a loss an insured should not be in a worse position or a better position prior to the loss • Insurable interest • A party must have an insurable interest in property in order to enter into an insurance contract or policy • An insured must have a legitimate financial interest in the property • Does not have rise to the level of ownership • Its loss must cause the insured money

2. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Other insurance contract characteristics • Doctrine of Utmost Good Faith • it is in the interest to the general public good to hold insurers to higher standards of good faith and fair dealing than other types if private contracts • Aleatory Contract • Insurance contracts are aleatory because the dollar amount exchanged is unequal • Small premium for a large death benefit • Contract of Adhesion • Policy is written and drawn by the insurer • Offered to the applicant on a “take it or leave it” basis • Courts find ambiguity in the contracts in favor of the insured

3. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Insurance regulations and contract requirements • 1945 McCarran-Ferguson Act • Allowed individual states to regulate insurance and insurance companies within their borders • 1887 Fire property policy • Created by New York legislature • The beginning of insurance policy regulation • Updated in 1918 and again in 1943 • The 1943 New York Standard Fire Policy • adopted by nearly all states • 1976 Simplified language homeowners policy and the simplified commercial policies of the 1980’s

4. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Insurance policy characteristics • Property & Casualty Policies • Declarations page • Contains basic information about the insured, policy period, limits of liability, etc. • Insuring agreement • The coverage pledge • Exclusions page • What is not covered by the policy

5. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Insurance policy characteristics (cont'd) • Property & Casualty Policies (cont'd) • Reasons for exclusions • Loss is not insurable • Flood or war • Loss is more appropriately covered in another type of policy • Automobile, aircraft • Loss is wholly or partially in control of the insured • Exclusion of marring and scratched damage • Loss is more appropriately covered by an endorsement • Jewelry • Small predictable losses

6. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Insurance policy characteristics (cont'd) • Conditions Sections • How to file a claim • How and when each party may cancel the contract • What each party must do after a loss • How disagreements between parties are handled

7. Legal Aspects of Insurance & Risk Management Chapter 2 Risk Management For Financial Planners • Insurance policy analysis (property & casualty) • Questions to ask • Who is the insured? • What property or activity is insured? • What locations are insured? • What is the time period of the coverage? • What are the perils insured against? • What is not covered under the policy (exclusions)? • Are direct losses, indirect losses or both types insured? • What are the coverage limits? • Are there any miscellaneous clauses?