Ch9. Insurance Law Fundamentals

The Insurance Contract

Insurance Contract (Policy):
A contract by which the insurer agrees, in exchange for a premium,
to pay the insured (or a named beneficiary) a sum of money
upon the occurrence of a specified loss event.

Parties:
Insurer:            the insurance company (bears the risk; pays claims)
Policyholder:       the person or entity that pays the premium
Insured:            the person or property covered by the policy
                    (may be the same as the policyholder)
Beneficiary:        the person entitled to receive the proceeds
                    (most common in life insurance)

Characteristics of an insurance contract:
① Aleatory (contingent): payment depends on an uncertain event
② Adhesion contract: insurer drafts the standard-form policy;
   ambiguities construed against the insurer (contra proferentem)
③ Utmost good faith (uberrimae fidei): both parties owe a duty
   of full and honest disclosure
④ Unilateral: only the insurer makes an enforceable promise
   once the premium is paid

Property & Casualty (P&C) Insurance

Property Insurance:
Covers physical loss or damage to property.

Common lines:
Homeowners · Commercial property · Fire · Marine · Auto

Indemnity Principle:
The insured may not recover more than the actual loss suffered.
→ Over-insurance: coverage above actual value → insurer pays
  no more than actual cash value (ACV) or replacement cost,
  not the face amount of excess coverage

Co-insurance (Concurrent Insurance):
Insured carries multiple policies on the same property.
→ Each insurer pays its pro-rata share of the loss;
  total recovery cannot exceed actual loss.

Subrogation:
After paying a claim, the insurer steps into the insured's shoes
and may pursue the responsible third party for reimbursement.
→ Prevents the insured from receiving a double recovery.

Salvage / Abandonment:
In a total-loss claim, the insurer may take title to the
damaged property (salvage) in exchange for paying the full
insured value.

Life Insurance

Life Insurance:
Coverage based on the life of a human being.

Common types:
Term life:     pays a death benefit if the insured dies within
               the policy term; no cash value
Whole life:    permanent coverage + cash value accumulation
Universal life: flexible premium; adjustable death benefit
Annuity:       insurer pays a stream of income, often for life

Fixed-Benefit Principle:
Life insurance pays the stated benefit regardless of actual
economic loss — the indemnity principle does not apply.

Insurable Interest:
The policyholder must have an insurable interest in the
insured's life at the time the policy is issued.
(Spouses, parents, key-person business interests, etc.)
→ Policy obtained without insurable interest = void as a wagering contract

Beneficiary Designation:
Policyholder names the beneficiary; may change the designation
unless the designation is irrevocable.
Proceeds paid directly to the named beneficiary, bypassing probate.

Duty of Disclosure (Uberrimae Fidei)

Duty to Disclose Material Facts:
Before the policy is issued, the applicant must disclose
all facts material to the insurer's underwriting decision
(health history, prior claims, property condition, etc.).

Material Fact:
Any fact that would affect a reasonable insurer's decision
to issue the policy or set the premium.

Consequences of Non-Disclosure or Misrepresentation:
Insurer may rescind the policy (void ab initio) or deny claims
if the applicant made a material misrepresentation or omission.

Contestability Period:
Most states require a contestability period of 2 years for
life insurance — after that period, the insurer generally
may not rescind the policy for misrepresentation (absent fraud).

Insurer’s Right to Disclaim Coverage

Common Grounds for Disclaimer:
① Intentional act by the insured (public policy bars coverage
   for the insured's own intentional torts / crimes)
② Gross negligence (varies by line and state)
③ Excluded perils (war, nuclear, flood — standard exclusions)

Suicide Clause:
Most life policies exclude suicide for a set period
(commonly 2 years from issue date).
After the contestability / suicide period, many policies
pay even if the cause of death is suicide.

DUI / Impaired Driving:
Auto policies typically exclude or limit coverage for
accidents while the insured was driving under the influence.

Notice of Loss:
The insured must give prompt written notice of a claim.
Failure to give timely notice may reduce or eliminate the
insurer's liability, depending on whether the insurer suffered prejudice.

Indemnity Principle (P&C Only) ★★★★★ : P&C insurance pays actual loss only — no profit for the insured. Life insurance pays a fixed benefit regardless of economic loss. Memory hook: P&C = indemnity; life = fixed benefit

Misrepresentation = Right to Rescind ★★★★★ : A material misrepresentation on the application allows the insurer to rescind or deny the claim. Contestability period is typically 2 years. Memory hook: misrepresent → rescind within contestability period

Insurable Interest Required ★★★★☆ : No insurable interest at inception = policy is void as a wagering contract. Required for both property and life insurance. Memory hook: insurable interest = valid policy; no interest = void

Practice Questions

Q. How does co-insurance work when two policies cover the same property loss?

Under the concurrent insurance (co-insurance) principle, each insurer contributes in proportion to its share of the total coverage. If Insurer A covers $200,000 and Insurer B covers$ 100,000, and the total loss is $60,000, Insurer A pays$ 40,000 and Insurer B pays $20,000. The insured cannot recover more than the actual loss.

Q. Until when can an insurer rescind a life insurance policy for the applicant’s misrepresentation?

Under most state laws, the insurer must contest the policy within the contestability period — usually 2 years from the date of issue (or reinstatement). After that period, the insurer generally cannot contest the policy for non-fraudulent misrepresentation. If the misrepresentation was fraudulent, many states allow contest at any time.