Duplessis.SG.Chapter 28.doc

CHAPTE28:INSURANCE C HAPTER 28 I NSURANCE Objectives After studying this chapter, you should have an understanding of: • the role of insurance in risk management • the nature of an insurance contract, including the rights and obligations of the insurer and the insured • the various kinds of insurance Learning Outcomes • Understand the importance of insurance to a business (page 707) • Recognize the three broad categories of insurance (page 708) • Understand the ramifications of a contract of utmost good faith (pages 709 – 712) • Recognize the various types of insurance (pages 714- 723) • Recognize the types of risks that a particular business faces (pages 714 - 715) • Understand the amount and type of coverage needed in a business to address each risk (pages 714 – 723) • Understand the rights, obligations, and remedies of the insured, the insurer, the insurance agent, the insurance broker, and the insurance adjuster (pages 723 - 724) Chapter Summary Insurance is one of the simplest and most cost-effective ways of managing risk in a business environment. It permits the business to shift such risks as fire, automobile accidents, and liability for defective products onto an insurance company in exchange for the payment of premiums by the business. An insurance contract is a contact of utmost good faith. This means that the insured must make full disclosure at the time of applying for insurance, as well as during the life of the policy. Failure to so may permit the insurer to deny coverage when a loss has occurred. The insured must have an insurable interest in the item insured to prevent moral hazards. The test for insurable interest is whether the insured benefits from the existence of the thing insured and would be prejudiced from its destruction. Insurance contracts are not intended to improve the position of the insured should the loss occur. Rather, they are contracts of indemnity and are intended to compensate the insured only up to the amount of the loss suffered. When the insurer pays out under an insurance policy, it has the right of subrogation. The right permits the insurer to sue the wrongdoer as if it were the party that had been directly injured or otherwise sustained the loss. A business needs to communicate effectively with its insurance broker, as well as its insurance company, in order to assess the kinds of risks its operation faces and the types of insurance coverage that can be purchased to address those risks. Though insurance policies can take a variety of forms, there are three basic kinds: life and disability insurance, property insurance, and liability 201 PART9:TRANSFERENCE OF RISK insurance. More specific insurance policies are simply a variation on one of these types. Insurance policies are technically worded and often contain exclusion clauses. These clauses identify circumstances or events for which coverage is denied. They may also identify people for whom coverage is denied. If the insured ends up with insurance of the wrong type or in an inadequate amount, it may have an action against its broker of breach of contract and/or negligence. If the insurance company wrongly refuses to honour the policy, the insured may have to sue the insurer to obtain compensation for its losses. Study Outline Use this outline to prepare a complete set of notes for this chapter. Introduction - 707 Insurance policy_____________________________________________________ Insurer _____________________________________________________________ Insured______________________________________________________________ Premium ____________________________________________________________ The Insurance Contract – page 709 _______________________________________________________________________ _______________________________________________________________________ Duty to disclose_______________________________________________________ _______________________________________________________________________ Insurable interest______________________________________________________ Indemnity ___________________________________________________________ Subrogation__________________________________________________________ The Policy - 712 Riders and endorsements__________________________________________________ _______________________________________________________________________ Insurance Products – page 714 _______________________________________________________________________ _______________________________________________________________________ Auto insurance___________________________________________________________ _______________________________________________________________________ Occupiers’ liability insurance_______________________________________________ _______________________________________________________________________ Comprehensive general liability insurance_____________________________________ _______________________________________________________________________ Errors and omissions insurance______________________________________________ _______________________________________________________________________ Property insurance________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE28:INSURANCE _______________________________________________________________________ Business interruption loss insurance__________________________________________ _______________________________________________________________________ Environmental impairment insurance_________________________________________ _______________________________________________________________________ Key person life insurance___________________________________________________ Remedies of the Insured – page 723 _______________________________________________________________________ _______________________________________________________________________ Against the broker________________________________________________________ _______________________________________________________________________ Against the insurance company______________________________________________ _______________________________________________________________________ SELF-ASSESSMENT Key Terms Briefly define each term in the space provided. Insurance policy – page 707 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Premium – page 707 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insurer – page 707 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insured – page 707 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Deductible – page 708 _______________________________________________________________________ _______________________________________________________________________ 203 PART9:TRANSFERENCE OF RISK _______________________________________________________________________ Duty to disclose – page 709 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insurable interest – page 711 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Indemnity – page 711 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Subrogation – page 712 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Endorsement – page 712 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Forfeiture rule – page 712 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Rider – page 712 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insurance broker – page 723 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Insurance agent – page 723 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE28:INSURANCE Insurance adjuster – page 723 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Matching Match the correct letter of the most appropriate term in the space provided before each sentence. Please note that you will use only 10 of the terms so you must choose the best term available to match with its description. A Comprehensive general liability insurance B Deductible C Duty to disclose D Errors and omissions insurance E Indemnity F Insurable interest G Insurance adjuster H Insurance agent I Insurance broker J Insurance policy K Insured L Insurer M Occupier’s liability insurance N Premium O Riders and endorsements P Subrogation 1. ____ Insurance coverage that compensates the victim injured on a business premises due to failure to ensure the premises are safe. 2. ____ The price paid for insurance coverage. 3. ____ The insured is responsible for the first part of the loss. 4. ____ Insurance coverage that provides protection for any liabilities incurred by a business during the course of their activities. 5. ____ Insurance coverage that provides protection arising from substandard performance of professional services. 6. ____ The obligation of the insured to provide to the insurer all information that relates to the risk. 7. ____ A financial stake in what is being insured. 8. ____ Amount paid so that the insured is merely compensated and does not profit from the happening of the insured–against event. 9. ____ The right of an insurer to sue a third party who caused the loss and to recover from that third party what it has already paid out to the insured. 205 PART9:TRANSFERENCE OF RISK 10. ____ Changes in standard policy terms. Questions Write a short, point-form answer for each question in the space provided. To assist you in understanding the chapter, it is recommended that you also use additional paper to write a full and complete essay answer for each question. 1. What role does insurance play in managing risk? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 2. Outline the three basic kinds of insurance. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 3. An insurance contract is one of utmost good faith. What are the consequences of this type of contract? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 4. What purpose does insurance legislation serve? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 5. What is the main goal of insurance legislation? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE28:INSURANCE 6. What role does a deductible play in relation to an insurance policy? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 7. Outline three steps a business can take to avoid insurance coverage problems. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 8. Is the duty to disclose a one time situation? Explain. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 9. What is an insurable interest? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 10. What is the difference between indemnity and subrogation? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 11. What is the effect of a rider? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 12. List two common exclusions in insurance contracts. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 207 PART9:TRANSFERENCE OF RISK _______________________________________________________________________ 13. What is the risk to a homeowner renting a home if a grow-op is operated in it? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 14. What is the common aim of mandatory automobile owner insurance in most jurisdictions? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 15. Why should a car owner purchase more than the minimum liability insurance required by law? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 16. Summarize how a no-fault insurance system works. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 17. When is an injured person entitled to compensation under workers’ compensation legislation? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE28:INSURANCE 18. What risks are covered under comprehensive general liability insurance? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 19. What does occupier’s liability insurance address? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 20. Why is errors and omissions insurance necessary? _______________________________________________________________________ _______________________________________________________________________ __________________________________