Insurance Law explained – Insurance Law Part 1
Hello, my name is Shane Irvine and welcome to my class on insurance law. I have a Juris Doctor degree from Southern California Institute of Law and I have been a licensed insurance representative in the past.
I feel that there is a need for curriculum on insurance law and I hope this course helps you to better understand how the insurance industry and underwriting works.
Every private entrepreneur should know this information so that they better understand how certain business risks can be covered. If you have a very small business insurance may not be that vital, at first, but once your business starts to grow, business insurance becomes more of a concern. Insurance law is not one of the primary breath requirement courses required to earn a Juris Doctor degree, but it should be.
Insurance law is a vital element of business law and learning about the laws associated with business insurance should be considered as important as learning how to write contracts.
Insurance involves pooling funds from many insured entities, known as exposures, to pay for the losses that may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent on the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics.
Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry. But, individual entities can also self insure through saving money for possible future losses. Insurance Law is the practice of laws surrounding insurance – including insurance policies and claims. It can be broadly broken into three categories.
Regulation of business of insurance, regulation of the content of insurance policies, especially with regard to consumer policies, and regulation of claim handling as a preliminary matter. Insurance companies are generally required to follow all of the same laws and regulations of any other type of business.
This would include zoning and land use, wage and hour laws, tax laws and securities regulations. There are also other regulations that insurers must also follow.
Regulation of insurance companies is generally applied at the state level and the degree of regulation varies markedly between states.
Regulation of the insurance industry began in the United States in the 1940s through several United States Supreme Court rulings. The first ruling on insurance had taken place in 1868. In the Paul vs. Virginia ruling with the Supreme Court ruling that insurance policy contracts were not
in themselves commercial contracts and that insurance was not subject to federal regulation. This judicial accident is as it is been called influence the development of state level insurance regulation.
This stance did not change until 1944 in the, United States versus Southern Eastern Underwriters Association ruling.
When the Supreme Court upheld a ruling stating that policies were commercial and thus were regulatable as other similar contracts were. In the United States each state typically has a statute concerning an administrative agency.
These state agencies are typically called the Department of Insurance or some similar name and the head official is the insurance commissioner or a similar title officer.
The agency then creates a group of administrative regulations to govern insurance companies that are domiciled in or do business in their state. In the United States regulation of insurance companies is almost exclusively conducted by the several states and their insurance departments.
The Federal Government has explicitly exempted insurance from federal regulation in most cases. In the case that an insurer declares bankruptcy, many countries operate independent services and regulations to ensure as little financial hardship is incurred as possible.
National Association of Insurance Commissioners operates such a service in the United States. In the United States and other relatively highly regulated jurisdictions, the scope of regulation extends beyond the prudential oversight of insurance companies and their capital adequacy and includes such matters as ensuring that the policyholder is protected against bad faith claims on the insurers part, that premiums are not unduly high or fixed, and that contracts and policies issued meet a minimum standard.
A bad faith action may constitute several possibilities; the insurer denies a claim that seems valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount of time, the insurer lays the burden of proof on the insured, often in the case where the claim is unprovable. Other issues of insurance law may arise when price-fixing occurs between insurers creating an unfair competitive environment for consumers.
A notable example of this is where Zurich Financial Services, along with several other insurers, inflated policy prices in an anti-competitive fashion. If an insurer is found to be guilty of fraud or deception they can be fined either by regulatory bodies or in a lawsuit by the insured or from a surrounding party. In more severe cases, or if the party has had a series of complaints or rulings, the insurers license may be revoked or suspended.
Bad faith actions are exceedingly rare outside the United States. Even within the United States, full rigour of the doctrine is limited to certain states, such as California. Risk which can be insured by private companies typically shares seven common characteristics.
By the way, I suggest you write down these seven characteristics.
(1) a large number of similar exposure units. Since insurance operates through pooling resourche majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses.
Exceptions include Lloyd’s of London which is famous for ensuring the life or health of actors sports figures and other famous individuals. However, all exposures will have particular differences which may lead to different premium rates.
(2) Definite loss, the loss takes place at a known time, in a known place, and fully known cause. The classic example is Death of an insured person on a life insurance policy, fire, automobile accidents, and workers injuries may all easily meet this criterion.
Other types of losses may only be definite. In theory occupational disease for instance may involve prolonged exposure to injurious conditions which wear no specific time, place, or cause is identifiable.
Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person with sufficient information could objectively verify all three elements.
Okay, (3) Accidental loss. The event that constitutes the trigger of a claim should be fortuitous, or, at least outside the control of the beneficiary of the insurance. The laws should be pure in the sense that it results from an event for which there is only the opportunity for cost.
Events that contain speculative elements, such as ordinary business risk or even purchasing a lottery ticket, are generally not considered insurable.
(4) Large loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses plus the cost of issuing and administering the policy adjusting losses and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of authors.
There is hardly any point in paying such costs to list the protection offered has real value to a buyer.
(5) Affordable premium. If the likelihood of an insured event is so high, or the cost of the events so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer.
Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer if there is no such chance of loss, then the transaction may have a form of insurance but not the substance.
And, for that you’d see the U.S. financial accounting standards broad pronouncement, Number 113 Accounting and Reporting, for reinsurance of short-duration and long-duration contracts.
(6) Calculable loss. There are two elements that must be at least estimatable, if not formally calculable: the probability of loss and the attendant cost. Probability of loss is generally an empirical exercise,. while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy, and a proof of the loss associated with the claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the Lost recoverable as a result of the claim.
(7) Limited risk of catastrophically large losses. Insurable last losses are ideally independent on non catastrophic meaning and losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer.
Insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers’ ability to sell earthquake insurance as well as wind insurance in hurricane zones.
The United States flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single proprietors whose total exposure value is well in excess of any individual insurers capital constraint.
Such proprietors are generally shared among several insurers and are insured by a single insurer who syndicates the risk into the reinsurance market.
When a company insures an individual entity there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include; indemnity – the insurance company
indemnifies, or compensates, the insured n the case of certain losses only up to the insureds’ interest. Benefit insurance, as it is stated in the study books of the Chartered Insurance Institute,
the insurance company does not have the right of recovery from the party who caused the injury and is to compensate the insured regardless of the fact that insured had already sued the negligent party for the damages (for example, personal accident insurance). Insurable interest – the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved.
The concept requires that the insured have a stake in the loss or damage to the life or property insured. What that stake is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons.