Chapter 19 - Insurance
1. Insurance involves contracts made by agents to help people protect their lives, their
health, their income, their savings, and their property against negligence, intentional
torts, and criminal activity.
2. All insurance agreements are binding contracts, requiring the application of contract
B. Risks and Perils: A Double-Sided Mirror
1. Insurance is built upon two conflicting sets of risks and perils.
2. Risks are threats to those items (life, health, property, income, savings, investments,
reputations, and so on) that a party wants to protect.
3. Perils are the dangers that a party might pose to others and against which that party
must shield itself.
4. Insurance is the transfer of the risk of economic loss, for a fee, from the insured to the
C. The Insurance Contract: Parties, Elements, Interest
1. An insurance policy is a contract that follows the standard rules of regular contract
2. There are supplemental issues of contract law that are peculiar to insurance contracts.
3. Insurance policies, like other contracts, require the four elements of a contract: mutual
assent, capacity, consideration, and legality.
4. The court will interpret any ambiguous terms in the insurance contract strictly against
5. The insurer accepts the risk of loss in return for a premium (the consideration paid for
a policy) and agrees to indemnify, or compensate, the insured against the loss
specified in the contract.
6. A third party, to whom payment of compensation is sometimes provided by the
contract, is called the beneficiary.
D. Insurable Interest and the Duties of the Parties
1. A person applying for insurance must have an insurable interest in the subject matter
of the policy to be insured.
2. An insurable interest is the financial interest that a policyholder has in the person or
property that is insured.
3. For life insurance, the insurable interest must exist at the time the insurance is
4. For property insurance, the insurable interest must exist at the time of loss.
5. The insured has an initial duty to inform the insured of everything the insurer asks so that the
insurer can enter the policy agreement with full knowledge of the insured’s situation.
6. The insured has the duty to
a. (1) pay the premiums on time and in the fashion prescribed by the insurer;
b. (2) tell the insurance company about any claims in a timely and judicious manner;
c. (3) work together with the insurer when the time comes for an inquiry.
7. The insurer has a duty to investigate the claim, to pay as agreed, and to defend the
client in a case disputed by a third party.
8. Insurance companies have the right to step into the shoes of the party they
compensate and sue any party whom the compensated party could have sued.
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