AFM 231 – Business Law
Thursday, February 28, 2013
Lecture 13: Insurance
Insurance contracts are unique and they are governed by statute law.
There are unique concepts to insurance law that are important you understand – these make insurance work.
It is useful for you to learn the different types of insurance contracts a business might routinely enter into (buy) – see Insurance
In Class 3 we discussed risk management.
Insurance was relevant in two respects:
a. It is part of the way a business will transfer risk to another entity.
b. Almost always, some of the risk is retained because the business will elect to have a deductible.
It is almost always possible to get insurance coverage. But sometimes it is simply not worth it; e.g.:
a. The cost exceeds any possible future pay out.
b. Or the risk is deemed too infinitesimal.
That is why entities sometimes ‘self insure’.
Insurance is a regulated industry
The insurance industry in Ontario (and any other province) is regulated by its own act: Insurance Act R.S.O. 1990, CHAPTER
The act licences insurance companies, brokers etc.
Establishes clear rules by which all participants can operate. Why? At its most basic, because if Insurance Co. X is taking my
money over perhaps 40 years, it is critical that when it comes time to pay out, that it has the money to do so.
In this respect, not dissimilar to the banking industry which also is regulated by its own Act (although that is federal)
Policy: the name for the contract
Insurer: the company giving coverage
Insured: the person/party covered
Premium: what you pay (consideration) for the coverage
The loss: is the event that is being insured or covered (eg fire, life, negligence, etc.)
Deductible: the amount of the loss the insured pays (e.g. the first $2000 on a car insurance policy).
The contract of “utmost good faith”
(This relates to the ‘duty to disclose’pp. 709-711)
What is the implication of the insurance contract being a contract of utmost good faith?
It means that you must respond honestly and fully to any question asked that relates to the risk.
What happens if you don’t? You may find you are not covered i.e. the insurer may deny paying out on your
subsequent claim as per the Lau case.
Why is this duty imposed?
Because you are being asked things often you only know (or it would be very cost-inefficient to expect the insurer to
The essence of the contract is the insurer’s ability to assess risk.
Note: this is an on-going obligation. What does this mean?
If something changes that is relevant to the risk, you must advise the insurer (or your broker) e.g. building is
occupied, or you take up smoking and this is a non-smoking policy.
Marche v. Halifax Insurance p. 710-11 (tricky case)
Further concepts: Insurable interest
I must benefit in some way from the item/event that is being insured (or be potentially harmed) e.g:
I am insuring against bad weather for a particular event I am running and subsequent losses.
I am insuring against an employee harming a customer in some manner.
With life insurance, the business is insuring e.g. against a director, officer, or shareholder dying.
Why is this a requirement? To discourage deliberate harm plus insurance is not equivalent to gambling (I am insuring against X
public figure dying).
Insurance is a contract of indemnity i.e. the insurer covers the loss but no more.
Why? Because the insured should not profit from the event. What is a co-insurance clause? See p.p. 711-12. Easiest to understand in terms of the problem it seeks to avoid: see next slide
Ie - Even though my factory is valued at $2 m. I know that it is very unlikely the loss from a fire will be 100 percent
of that sum.And it is much cheaper to pay for insurance for only $1 m. If the loss