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412
“The underwriter knows nothing and the man who comes to him to ask him to
insure knows everything.”
L. J. Scrutton
I. Teacher to Teacher Dialogue
spending some time on the regulation of insurance is of interest to students. Recent referendums
in the state of California on auto insurance rate caps were of particular interest. Perhaps, as young
drivers, they feel particularly impacted by this issue. Look for a local “hot button” issue as a good
way to stimulate student dialogue on this subject. Some suggestions include insurance companies
world are not in one way or another involved with insurance. Contracts of insurance may concern
us from the moment of our birth to the moment of our death and most everything in between.
Insurance is more important than ever because it appears that new risks never even fathomed by
our forefathers emerge every day. One very real and unfortunate truth of conducting one’s
of affairs?
One large element in this picture is found in the results of having a legal system that is
willing to attach responsibility for many heretofore unforeseen situations. Modern technology has
raised expectations to the point where every product must be perfect, every operation a success,
and every accident avoidable; 20/20 hindsight is a particularly costly form of myopia to the
insurance industry.
INSURANCE
50
Insurance
arising out of ailments such as AIDS. Expensive experimental treatments have also severely
tested insurance companies’ willingness to pay. Large-scale disasters like Hurricane Andrew in
1992 have led to many examples of insurance company flights from high-risk areas.
In spite of all these problems, the role of insurance is more vital than ever. Witness the recent
it.
II. Chapter Objectives
1. Describe an insurance contract and define insurable interest.
2. List and describe the various types of life, health, and disability insurance.
3. Identify the risks covered by a standard fire insurance policy and a homeowners’ policy.
4. Describe automobile insurance and explain no-fault insurance.
5. List and describe special forms of business insurance.
III. Key Question Checklist
What are the key elements of an insurance contract?
What are the key elements of life insurance, health and/or disability insurance, fire and/or
homeowners’ insurance, and automobile insurance?
Are there other types of insurance?
What are the basic duties of each party to an insurance contract?
IV. Text Materials
Introduction to Insurance
Insurance is a means for persons and businesses to protect themselves against the risk of loss.
Principles of Insurance
Insurance is a contract whereby one party (the insurer or underwriter) indemnifies another (the
insured) against the loss, damage, or liability that may arise from some event, distributing the risk
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Insurable Interest – Any person who purchases insurance must have a personal insurable
interest in the insured item or person. Ownership creates an insurable interest, as does holding a
mortgage, lien, or rental interest in property. In the case of life insurance, a person must have a
Insurance Policy – Insurance contracts are governed by contract law. Most are prepared on
standardized forms that may include language promulgated by state law. If both the insurer and
the insured agree, an insurance policy may be modified to add coverage, add an additional
Duties of Insured and Insurer – The insured owes a duty to pay the premiums, notify the
insurer after the occurrence of an insured event within a reasonable time period or that is stated in
Deductible Clause – A deductible clause provides that insurance proceeds are payable only after
Exclusion from Coverage – Most insurance policies include certain exclusions from coverage.
Incontestability Clause – An incontestability clause prevents insurers from contesting statements
Life Insurance
Life insurance is really death insurance since the insurer doesn’t actually pay until the insured is
deceased.
Types of Life Insurance – There are a number of types of life insurance including whole life,
also called ordinary or straight life, which provides coverage during the entire life of the insured
and payments paid throughout the life of the insurer; limited-payment life insurance where
Parties to a Life Insurance Contract – There are four parties to every life insurance contract:
the insurance company, the insurer who pays the premium, the insured, and the beneficiary. The
latter three may be the same person.
Insurance
proceeds to the named beneficiary. The usual time period for which a suicide clause is valid is
two years.
District of New Jersey
Facts: A gentleman, Mr. Riggs, had a life insurance policy with a two-year suicide clause. He
shot himself and died. The death was deemed to be a suicide. MetLife denied coverage under the
policy.
Issue: Does the two-year suicide clause prevent Ms. Riggs from recovering life insurance
benefits?
Health and Disability Insurance
Health Insurance – Health insurance usually covers only a portion of the medical costs incurred
by an insured.
sick or injured.
Fire and Homeowners’ Insurance
Two major forms of insurance are available for residences: a standard fire insurance policy and a
Standard Fire Insurance Policy – Standard fire insurance policies protect both real and personal
property from damage from fires. Riders are often added to cover damage caused by hail,
personal property.
Personal Liability Coverage – Personal liability coverage provides comprehensive personal
liability insurance for the insured and members of his or her family. The insurer pays for property
damage, personal injuries, and medical expenses for people injured on the insured property.
Case 50.2 Insurance Fraud: People v. Abraham
of New York
Chapter 50
involved in a criminal act – both in setting the fire and in committing insurance fraud.
Personal Articles Floater – An insured may wish to obtain insurance for specific valuable items.
This is accomplished by adding a personal articles floater, or personal effects floater, to a
covered through these floaters.
Renters’ Insurance – Renters may purchase insurance to cover loss or damage to their
possessions. Renters’ insurance covers a renter’s possessions against the same perils as a
homeowners’ broad-form policy and provides personal liability coverage.
Automobile, Vehicle, and Vessel Insurance
Collision Insurance – Collision insurance insures automobiles against risk of loss or damage.
vandalism, and rioting.
Automobile Liability Insurance – Automobile liability insurance covers damages that the
insured causes to third parties, including both bodily injury and property damage. The limits of
liability insurance are usually stated in three numbers, such as 100/300/25. This limits the
drives other vehicles.
Medical Payment Coverage – An owner can obtain a medical payment coverage policy that
covers medical expenses incurred by himself or herself, other authorized drivers of the car, and
passengers in the car who are injured in an automobile accident.
Contemporary Environment: No-Fault Automobile Liability Insurance
Under this system, a driver’s insurance company pays for any injuries or death he or she suffered
Insurance
loss to goods during shipment.
Business Insurance
Business Interruption Insurance – This insurance policy reimburses a business for any losses
Workers’ Compensation Insurance – Workers’ compensation insurance covers individuals
injured while working on the job. Employers can purchase workers’ compensation insurance to
cover this risk. Many states require companies to purchase this form of insurance.
Directors’ and Officers’ Insurance – Most large and medium corporations carry directors’ and
officers’ liability insurance (D&O insurance) to protect directors and officers from liability for
the actions they take on behalf of the corporation.
Product Liability Insurance – Manufacturers and sellers of products can be held liable for
by cyber attacks.
Umbrella Insurance
Insureds who want to increase their liability coverage beyond the original coverage can purchase
policies have been exceeded.
V. Key Terms and Concepts
insurance.
Automobile liability insurance—Automobile insurance that covers damages that the
insured causes to third parties.
Beneficiary—The person who is to receive the life insurance proceeds when the insured
dies.
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peril.
Coinsurance clause—Clauses that permit recovery of the face value of the property if the
insured has insurance covering a certain (usually high) percentage of the value.
Collision insurance—Insurance that a car owner purchases to insure his or her car against
risk of loss or damage.
D.O.C. (drive-other coverage)—Protects the insured while driving other automobiles e.g.,
rental cars.
Disability insurance—Insurance that provides a monthly income to an insured who is
disabled and cannot work.
limits.
Endorsement—An addition to an insurance policy that modifies it.
Exclusions from coverage—A clause in an insurance policy that expressly stipulates the
risks that are not covered by the insurance policy.
Grace period—A period of time after the actual expiration date of a payment but during
hospital care.
Homeowners’ policy—A comprehensive insurance policy that includes coverage for the
risks covered by a fire insurance policy as well as personal liability insurance.
Incontestability clause—A clause that prevents insurers from contesting statements made
by insureds in applications for insurance after the passage of a stipulated number of
years.
the insured item or person.
Insurance—A means for persons and businesses to protect themselves against the risk of
loss.
Insurance agent—An insurance agent usually works exclusively for one insurance
company and is an agent of that company.
number of insurance companies.
Insurance policy—An insurance contract.
Insured—The party who pays a premium to a particular insurance company for insurance
coverage.
Insurer—The insurance company that underwrites the insurance coverage.
Insurance
owner, or partner.
Liability insurance—Automobile insurance that covers damages that the insured causes
to third parties.
Life insurance—A form of insurance where the insurer is obligated to pay a specific sum
of money upon the death of the insured.
automobile accident.
No-fault automobile insurance—Under this system, a driver’s insurance company pays
for any injuries or death he or she suffered in an accident, no matter who caused the
accident.
Omnibus clause—Protects the owner when someone else drives the car with his or her
permission.
valuable items.
Personal liability coverage—Insurance coverage that provides comprehensive personal
liability insurance for the insured and members of his or her family.
Policy—The insurance contract.
Premium—The money paid to the insurance company.
injuries caused by defective products.
Replacement cost insurance—Insurance that pays the cost to replace the damaged or
destroyed property up to the policy limits.
to their possessions.
Standard fire insurance policy—Standard fire insurance policies protect both real and
personal property from damage from fires.
Uninsured motorists—Insurance that covers automobile, driver, and passengers if they
are involved in a collision where the person at fault has no insurance.
Umbrella insurance policy—This liability coverage increases standard coverage, usually
to at least $1 million.
contract.
Workers’ compensation insurance—Insurance that covers individuals injured while
working on the job.
