Insurance Planning

Insurance- Risk of not achieving

the goal. Contract between
Insurer & Insured
Planning to manage the risk of
not achieving the goal
Insurance Contract is Indemnity
• Insurer agrees to pay no more than actual amount of loss
• Insured shouldn’t profit from loss
• Most P & C Contracts are contracts of Indemnity
• Does not mean that all covered loss needs to be paid
• Payment may be less than the actual loss also because of Deductibles, Limits on amounts paid and
any other contractual provisions
• Purpose
• Prevent the Insured from Profiting from a loss
• Reduce Moral Hazard
• Indemnity is based on the Actual Cash Value of the damaged property at the time of loss
• Replacement Cost Less Depreciation
• Fair Market Value
• Broad Evidence Rule
• Replacement Cost Less Depreciation
• Inflation & Depreciation of the Property over time are considered
• Current Cost of restoring the damaged property with new material of like kind and
quality
• Fair Value Market
• Price that would be paid by a willing buyer to a willing seller in a free market
• May be lesser then Replacement Cost-Depreciation
• Broad Evidence Rule
• Use all relevant factors that would be used by an expert to determine the value of
the property
• Present Value of the expected future cash flows from the property
• Comparision of similar properties
• Opinion of appraisers etc.
Exceptions to Principle of Indemnity
• Valued Policy
• Pay the face amount of amount of Insurance if a total loss occurs
• Antiques, Fine Arts, rare Paintings etc
• Value Policy Laws
• Payment of Face amount to the insured if a total loss to real property occirs from a peril specified
in law
• Fire, Lightening, Windstorm etc as specified in laws of some countries/States
• Protect insured from getting over insured by the agent
• Replacement cost insurance
• No deduction for Depreciation in determining the amount paid for a loss
• For homes, Buildings, Business & personal Property
• Life Insurance
• Valued Policy
• Pays a stated sum to the nominee upon the death of the insured
• Meaningless to determine Actual Cash Value of Human Life`
Insurable Interest
• Insured must be in a position to lose financially if a covered loss occurs
• Relationship between the person applying for the insurance and the subject
matter of the insurance
• Purpose
• Prevent Gambling
• Reduce Moral Hazard
• Measure the amount of Insured’s loss in Property Insurance
• Examples of Insurable Interest
• Property owned
• Potential Legal Liability like Ops loss
• Secured Creditors
• One’s own life
• Close family ties or marriage
• Pecuniary Interest(Key Employee)
Timing of Existence of Insurable Interest
• Property Insurance
• Must exist at the time of the loss
• Life Insurance
• Only at the inception of the Policy and not at death
• Even if a divorce occurs after the policy is in force, the divorcee will still get
the death proceeds
Subrogation
• Substituition of Insurer in place of the Insured for the purpose of claiming
indemnity from a third person for a loss covered by Insurance
• Insurer is entitled to recover from a negligent third party any loss payments
made to the insured
• Applies only when insurer makes a loss payment
• Insured gives the legal rights to the Insurer to collect from the negligent party to the
extent of payment received
• Purpose
• Prevents the Insured from collecting twice for the same loss
• Held negligent person responsible for the loss
• Hold down the Insurance rates
Points to remember under subrogation
• Insurer is entitled to recover only to the amount that it has paid
under the policy
• Insured cannot impair insurer’s subrogation rights
• Does not apply to lie Insurance and most of Health Insurance
contracts
• Insurer cannot subrogate against its own insureds
Utmost good faith
• High degree of Honesty is imposed on both the parties to the contract
• Legal Doctrines
• Representation
• Statements made by applicant to Insurance
• Insurance contract is voidable at the Insurer’s option if representation is material
• Material
• False
• Relied in by Insurer
• Concealment
• Warranty
• Concealment
• Intentional failure of the applicant to reveal a material fact to the Insurer
• Contract is voidable at the Insurer’s Option
• Insurer has to prove
• Concealed facts were known to Insured to be material
• Insured intended to defraud the Insurer

• Warranty
• Statement that becomes part of insurance contract and is guaranteed by the maker
to be true in all respects
• E.g Guard on premises all times, Automatic sprinklers system will be functional etc.
• Any breach allows the insurer to deny the claim
• Insurer cannot deny a claim unless breach of warranty increases the hazard
• Mitigation
• Wearling helmet while driving
• Drinking and Smoking after Health Insurance Policy
• Causa – Proxima
• Nearest Possible Cause
Types of Insurance Policies
• Life Insurance
• Whole Life Insurance
• Endowment Policy: Eventuality should happen during the course of Policy
• Joint life policy
• Annuity: Equal amounts given at equal intervals
• Term Insurance
• Children’s deferred Insurance: Parents invest and child gets n turning 18, 21 or
at marriage
• Policy with Profits- Unit linked Policy
• Policy without profit
• Group Insurance
• Janta Policy: Premium is very low. Protection of Minorities
Fire Insurance- Property
• Specific Policy: Specific assets esp on artifacts in museum
• Comprehensive Policy: Life too covered
• Floating Policy: Various properties across country
• Replacement Policy: Property is replaced. Unique properties are
excluded
• Valued Policy: Value at the time of taking the policy
• Unvalued Policy: Insurance based on present market value
• Loss of Profit policy: Possible profits are compensated
Marine Policy
• Voyage Policy: Nautical Miles ship needs to travel
• Time Policy: Days it takes to ship
• Mixed Policy
• Valued Policy
• Unvalued Policy
• Wagering Policy: Dummy Policy just for customs
• Floating Policy: Multiple Trips
• Block Policy: Valid from manufacture to shipment
Health Insurance & Riders
• Indemnity based
• Reimburse the incurred medical expense
• Claim till the insured amount is paid
• Individual Plans- Single person
• Waiting period for various diseases
• Family floater plans
• Age of eldest family member
• Group Insurance Plans: Employer to employee
• Protection Plans- Lumpsum claim on certain conditions
• Accident Plans
• Loss of Job
• Partial Disability etc