Chapter 4 Notes

Study 4 Insurance as a contract: The insurance policy Requirements of Contracts Common Law » Two things must both be present in an agreement if that agreement is to be considered an actual contract.  There has to be agreement to do something  That something has to be enforceable at law (i.e. enforceable in a court of law) » In other words, if there is no formal agreement, or the agreement is for something illegal, then it’s not a contract. » The following conditions must exist for a contract to be legally binding:  A greement  C onsideration  C apacity to legally contract  G enuine intention  L egality of purpose » Remember the phrase… A Cool Cat Gets Lucky Requirements of Contracts Agreement » A greement is the “meeting of the minds” between the contracting parties.

» There must be an offer communicated by one party and accepted by the second party.  Acceptance can be done in a variety of ways: • Formal written agreement signed by both parties • By letter, verbal discussion, by conduct or a combination of these Requirements of Contracts C onsideration » C onsideration is the evidence that parties intended to be bound by the agreement. » Consideration must contemplate:  Price  Have some value  Be in the present or future » Exception: sealed documents imply consideration Requirements of Contracts Legal C apacity » C apacity to contract must be present. Persons with limited ability to contract legally:  Infants/minors  Insane/mentally incompetent or intoxicated persons » Businesses: contracts must be with the owner, partners, or corporation.  Trade name or DBA name are not legal entities

 Minors under the age of majority  Persons of legal age but with diminished capacity as declared by the court to be incapable of contracting due to: • Illness • Accident • Age Québec Contract Requirements C apacity to Contract » C apacity is the ability to act judiciously and is implied except for those specifically declared incapable under the law. Those include:  Minors under the age of majority  Persons of legal age but with diminished capacity as declared by the court to be incapable of contracting due to: • Illness • Accident • Age Québec Contract Requirements C ause of Contract » C ause of contract equals consideration – why a person undertakes to fulfill an obligation or purpose of the contract. » A contract without consideration or unlawful consideration has no effect. » Contract is still valid even if consideration is not expressed or incorrectly expressed. » Consideration must be lawful: not prohibited by law or contrary to good morals or public order. Québec Contract Requirements O bject of Contract » O bject of contract is something a party is obligated to do, give, or not do. Must be an object of commerce and follow set criteria:  Be able to determine their kind. Quantity can be uncertain but ascertainable.  May be future things.  Must be possible and not forbidden by law or good morals.

Comparison of Common Law Contract Provisions to Civil Code Causes of Nullity in Contracts Civil Code » There are several causes that can nullify a contract. They can be remembered via the acronym ELF-V  E rror  L esion  F raud  V iolence or fear » E rror: occurs in the nature of the contract or substance of the object of the contract. Must be an error in a detail that is vital to the purpose and intent of the contract. » L esion: minors or interdicted persons who act without their legal guardian (tutor). » F raud: A party conceals or misrepresents vital information. » V iolence or fear: Fear must be reasonable and present; fear of serious injury. Requirements of Insurance Contracts » Two parties to insurance contract:  Insured = 1 st party | Insurer = 2 nd party » Insurer agrees to indemnify the policyholder in exchange for a premium. » Insurance contracts require these additional elements :

Requirements of Insurance Contracts Indemnity – Salvage » Property not totally destroyed or lost may still have monetary value. » Insured is reimbursed as if the property was totally destroyed or lost with the remaining property being retained by the insurer. » Insured may want to keep the salvaged property. In this case the salvage value is deducted from the loss payment to the insured. Requirements of Insurance Contracts Indemnity – Subrogation Requirements of Insurance Contracts Indemnity – Contribution

Requirements of Insurance Contracts Indemnity - Excess Insurance » Instead of a contribution provision, contract may contain a provision that it is excess insurance.  Doesn’t participate until all other similar insurance on same subject is exhausted, or until loss exceeds previously agreed-upon amount. » Other policy pays first, and then if not enough coverage under the other policy, this policy pays the “excess”. » Courts have upheld each insurer is responsible for a rate-able contribution of the loss, thus negating this “excess” provision. Requirements of Insurance Contracts Utmost Good Faith » A standard of honesty greater than usually required in ordinary contracts. » This standard is required of both the insurer and the insured. » Applicants know all about the risk they are insuring and must disclose all material facts or risk voiding policy. » Utmost good faith is supported by:  Materiality | Misrepresentation | Non-disclosure or concealment Requirements of Insurance Contracts Utmost Good Faith – Materiality » A fact if known which affects the mind of a reasonable and prudent insurer in the decision to:  Accept the risk  Amount of premium to charge  Conditions applicable to acceptance of risk » Whether a fact is material is decided by the individual circumstances and may need to be settled in court. » If nature of risk changes during the policy, the insured must also notify the insurer. Requirements of Insurance Contracts Utmost Good Faith – Misrepresentation » An incorrect statement made about a material fact, or an omission of certain facts.

» Statute provisions provide details as to what circumstances affect the validity of contracts. Insurable Interest » Insurable interest is a legal relationship to an item where you are financially benefited by its continued existence and would suffer financially from its loss/damage. » Life/Accident/Sickness – insurable interest exists when there is a personal relationship between the party contracting for insurance and the insured person  Spouse | Child | Employee » Property – insurable interest exists for owner and lienholder  The owner of the automobile as well as the finance company who provided the loan for the vehicle have insurable interest. » Liability – insurable interest in your legal obligation for causing injury or damage to another person or another’s property  Manufacturer has an insurable interest in the products they create which may cause harm to the person who uses the product. The Principle of Indemnity » Indemnity is to put the insured back to their pre-loss financial position; no more | no less » Policy limits and deductibles may apply » There are several valuation methods used to calculate indemnity » Principle of Indemnity Valuation Methods » Actual cash value (ACV) and replacement value (cost) are typical valuation methods used to calculate indemnity  ACV is determined in one of three ways: cost to repair/replace less depreciation; fair market value; or consideration of evidence of value  Replacement value: current market value to replace  Guaranteed replacement cost: pays replacement cost without depreciation and can exceed amount of insurance on dwelling Principle of Indemnity Guaranteed Replace Cost » Insurer pays the cost of replacing the building without a reduction for depreciate under these conditions:  Amount of insurance at policy inception and renewal must be equal to 100% of the building’s replacement cost

 Amount of insurance cannot be reduced at any time below the building’s replacement cost  Insured must notify insurer within 90 days of starting work on any improvements to the building The Principle of Indemnity Value Contracts » Alternative calculation method where a predetermined amount is agreed upon by insurer and insured at time contract made » Usually used when insuring items where it is difficult to determine true value after a loss » Claims settlements are easier as less opportunity to disagree on value The Principle of Indemnity » Indemnity is a negotiation process between the insured and insurer by way of contract conditions, deductibles, and valuation methods as previously discussed. » There are also other conditions in a contract » that may affect the amount paid » Indemnity is reinforced by three associated principles  Salvage  Subrogation  Contribution Policies of Compensation » Policies of compensation are not contracts of indemnity » A stated amount is paid on the occurrence of the insured event » Not directly dependent on the monetary value of insured’s loss

b. Binding authority c. Material fact d. Insurable interest 3. Silence where there is an obligation to speak is the definition of which of the following terms? a. Utmost good faith b. Non-disclosure c. Discrimination d. Material fact 4. What are the four requirements for forming a binding contract under the Civil Code of Québec ? a. Consent, capacity to contract, cause of contract, and object of contract b. Consent, consideration, cause of contract, and legality of object c. Offer and acceptance, capacity to contract, intention, and cause of contract d. Consideration, consent, cause of contract, and capacity to contract 5. What does it mean to provide indemnity for a loss? a. To salvage all possible items and offer a cash settlement for 50 percent of the value of any lost articles b. To repair all damage and include a 30 percent increase to compensate for inflation c. To put the party that suffered the loss back in the same financial position as before the loss d. To replace all lost or damaged articles with better quality products 6. When an insured property is not totally destroyed or lost, and the property that remains has some value, what is this property known as? a. Subrogation b. Salvage c. Contractual provisions d. Contribution 7. Which are the five elements of a contract under common law? a. Capacity to contract, genuine intent, ability to complete, legality of object, and termination b. Capacity to contract, consideration, intent, written approval, and completion c. Offer and acceptance, consideration, legality of object, written approval, and completion d. Offer and acceptance, capacity to contract, consideration, genuine intent, and legality of object

8. Which of the following best defines non-disclosure or concealment? a. An applicant for insurance makes an incorrect statement about a material fact. b. An applicant for insurance withholds information pertinent to a risk. c. An applicant for insurance carelessly makes a statement without regard to whether it is true or false. d. An applicant for insurance states an outright lie intended to mislead or hide information from the insurer. 9. Which of the following concepts upholds the principle of indemnity? a. Utmost good faith b. Materiality c. Subrogation d. Disclosure 10. Which of the following statements best defines actual cash value (ACV)? a. Replacement value of the property less any accumulated depreciation b. Market value of the property at the time of loss c. Purchase price of the property when it was originally bought d. Replacement cost of the property at the time of loss 1 . What are the four requirements for forming a binding contract under the Civil Code of Québec? A . Consent, capacity to contract, cause of contract, and object of contract B. Consent, consideration, cause of contract, and legality of object C. Offer and acceptance, capacity to contract, intention, and cause of contract D. Consideration, consent, cause of contract, and capacity to contract Rationale: In Quebec, the four requirements for a valid contract to be made are consent, capacity to contract, cause of contract, and object of contract. 2 . Which are the five elements of a contract under common law? A. Capacity to contract, genuine intent, ability to complete, legality of object, and termination B. Capacity to contract, consideration, intent, written approval, and completion C. Offer and acceptance, consideration, legality of object, written approval, and completion D. Offer and acceptance, capacity to contract, consideration, genuine intent, and legality of object

D. Replacement cost of the property at the time of loss Rationale: ACV is the fair market value of property, taking into account factors (such as depreciation) that might augment or reduce the value of the property in question. 7. Which of the following concepts upholds the principle of indemnity? A. Utmost good faith B. Materiality C. Subrogation D. Disclosure Rationale: Indemnity is supported by the concepts of salvage, subrogation, and contribution. 8. Nico has three minor traffic tickets, which could influence whether an insurer accepts or rejects the risk. What is this an example of? A. Indemnity B. Binding authority C. Material fact D. Insurable interest Rationale: Material facts are facts that would affect a contract of insurance enough to influence an insurer’s decision regarding whether to accept or reject the risk or the premium to be set. 9. Which of the following best defines non-disclosure or concealment? A. An applicant for insurance makes an incorrect statement about a material fact. B. An applicant for insurance withholds information pertinent to a risk. C. An applicant for insurance carelessly makes a statement without regard to whether it is true or false. D. An applicant for insurance states an outright lie intended to mislead or hide information from the insurer. Rationale: An applicant for insurance is required to disclose to the company all material facts that are necessary to underwrite a policy. If the applicant does not disclose all these facts, the applicant is guilty of non-disclosure and may risk having coverage voided from inception. Copyright © The Insurance Institute of Canada 2 10. Silence where there is an obligation to speak is the definition of which of the following terms? A. Utmost good faith B. Non-disclosure

C. Discrimination D. Material fact Rationale: Non-disclosure or concealment is the withholding of information pertinent to a risk. It is silence when there exists an obligation to speak 1. Offer and acceptance forms which element of a legal contract under common law? a. Legality of purpose b. Consent c. Genuine intent d. Agreement 2. For a contract to show evidence the parties wish to be bound by it, consideration must contemplate? a. Must be monetary b. May be in the past c. Must always be in the future d. Must have some value

7. Utmost good faith is supported by? a. Indemnity b. Subrogation c. Endorsements d. Materiality 8. Bill decides to add a garage at the back of his property where he will conduct a custom auto detailing business. Bill has a fire when a worker smokes to close to some spilled oil and it damages the garage bay doors. His insurer denies the claim due to? a. Misrepresentation b. Material fact c. Non-disclosure d. Concealment 9. The Insurance Acts state people have an insurable interest in? a. Their employees b. A sibling of the person requesting coverage c. A friend’s business d. A grandparent 10. A 15-year old roof is damaged when a tree falls on it in a storm. Under which principle of indemnity will the damage be compensated at? a. Guaranteed replacement cost b. Valued contract c. Actual cash value d. Replacement cost