Question

• Week 7 (Legal Principles) What are the meanings of the four legal principles for Insurance contracts (principle of indemnity, principle of insurable Interest, principle of utmost good faith, and principle of subrogation)? Make sure you know their applications as well. What are the two purposes of the principle of indemnity? What the few exceptions to this principle discussed in class? (in other words, what is a valued policy? What is replacement cost? Why is life insurance a valued policy?) What is actual cash value? Make sure you know how to calculate actual cash value. When must insurable interest exist in life insurance? When must insurable interest exist in property insurance? What is representation? What is warranty? What is the consequence of making material misrepresentation and/or concealment? What is the consequence of violating warranty? What are the meanings of the four requirements of any legal contact (offer and acceptance, consideration, legal purpose, and competent parties)? What are the meanings of the five distinct legal characteristics of insurance contract (Aleatory contract, unilateral contract, conditional contract, personal contract and contract of adhesion)?

Answer 1

Q1.

Meanings of Legal terms:

1. Principle of indemnity: This principle compels the Insurance company to make good the losses caused to insured due to risks covered in the insurance policy document.

2. Principle of Insurable Interest: This principle refers to the existence of value in the insured property i.e. the property or life being insured must have some value attached to it. If on the date of taking Insurance cover anything happens to the property then the owner has to suffer loss due to the non-availability of property.

3. Principle of utmost good faith: Whatever information the insurer provides while taking insurance shall be true to the best of his knowledge and belief. Further, insurance claims shall be genuine i.e. claims shall be made against the occurrence of the risks being covered.

4. Principle of subrogation: the Insured person has to surrender his interest in the property which is insured in favor of the insurance company if he makes any insurance claim.

Q2.

Valued Policy means - the policy which defines the maximum amount payable in the event of the occurrence of loss.

Replacement cost means - the cost required to acquire a new asset in place of an existing asset i.e. the amount required to be invested to replace the existing asset with the new one.

Life insurance is a valued policy because the amount to be paid on the death of insured person to his nominees is already specified in the life insurance policy. Amount required to be paid is also called as sum assured.

Q3.

Actual cash value refers to the value which asset will fetch in as it is condition if it is sold in the market.

Q4. Insurable interest must exist at the inception of the policy period in the asset. Similarly, Insurable interest must exist at the inception of policy in life insurance cover also.