DEFINITION OF THE “INSURED”

An insurance contract must indicate the persons or persons from whom the protection is provided

– Some policies insure only one person, e.g., most life insurance policies

– The named insured is the person or persons named in the declarations section of the policy

– A policy may cover other parties even though they are not specifically named

• e.g., the homeowners policy covers resident relatives under age 24 who are full-time students away from home

Endorsements and Riders

• In property and liability insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contract

– e.g., an earthquake endorsement to a homeowners policy

• In life and health insurance, a rider is a provision that amends or changes the original policy

– e.g., a waiver-of-premium rider on a life insurance policy

Deductibles

• A deductible is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable

• The purpose of a deductible is to:

– Eliminate small claims that are expensive to handle and process

– Reduce premiums paid by the insured

• Under the large loss principle, insurance should pay for high severity losses; small losses can be budgeted out of the person’s income

– Reduce moral and morale hazard

• With a straight deductible, the insured must pay a certain amount before the insurer makes a loss payment

– e.g., an auto insurance deductible

• An aggregate deductible means that all losses that occur during a specified time period are accumulated to satisfy the deductible amount

Deductibles in Health Insurance

• A calendar-year deductible is a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts

• A corridor deductible is a deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense plan

• An elimination (waiting) period is a stated period of time at the beginning of a loss during which no insurance benefits are paid

Coinsurance

• A coinsurance clause in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value

– If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer

• The purpose of coinsurance is to achieve equity in rating

– A property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial losses

– If the coinsurance requirement is met, the insured receives a rate discount, and the policy-owner who is underinsured is penalized through application of the coinsurance formula

Coinsurance in Health Insurance

• Health insurance policies frequently contain a percentage participation clause

– The clause requires the insured to pay a certain percentage of covered medical expenses in excess of the deductible

– The purpose is to reduce premiums and prevent over-utilization of policy benefits

Other-insurance Provisions

• The purpose of other-insurance provisions is to prevent profiting from insurance and violation of the principle of indemnity

– Under a pro rata liability provision, each insurer’s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property

– Under contribution by equal shares, each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid

– Under a primary and excess insurance provision, the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted

– The coordination of benefits provision in group health insurance is designed to prevent over-insurance and the duplication of benefits if one person is covered under more than one group health insurance plan

• e.g., two employed spouses are insured as dependents under each other’s group health insurance plan

Social Insurance

• Social insurance programs are necessary for several reasons:

– To help solve complex social problems

– To provide coverage for perils that are difficult to insure privately

– To provide a base of economic security to the population

Basic Characteristics of Social Insurance

• Social insurance programs have certain characteristics that distinguish them from other government insurance programs:

– Most programs are compulsory

• This makes it easier to provide a floor of income to the population
• It also reduces adverse selection

– Programs are designed to provide a floor of income

– Programs pay benefits based largely on social adequacy rather than individual equity

• The benefits are heavily weighted in favor of certain groups, such as low-income persons, large families, and retirees

– Benefits are loosely related to the workers’ earnings

– Programs, benefits, and benefit formulas are prescribed by law

– A formal means test is not required

• A means test involves disclosing income and assets

– Full funding of benefits is unnecessary

• For example, it is not necessary to fully fund Social Security because workers will always enter the program and support it

– Programs are designed to be financially self-supporting

• Programs should be almost completely financed from the earmarked contributions of covered employees

The Liability Risk

Basis of Legal Liability

• A legal wrong is a violation of a person’s legal rights, or a failure to perform a legal duty owed to a certain person or to society as a whole
• Legal wrongs include:

– Crime

– Breach of contract

– Tort

• A tort is a legal wrong for which the court allows a remedy in the form of money damages
• The person who is injured (plaintiff) by the action of another (tortfeasor) can sue for damages
• Torts fall into three categories:

– Intentional, e.g., fraud, assault

– Strict liability: liability is imposed regardless of negligence or fault

– Negligence

Law of Negligence

• Negligence is the failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm

– The standard of care is not the same for each wrongful act. It is based on the care required of a reasonably prudent person

• Elements Negligence

– Existence of a legal duty to use reasonable care

– Failure to perform that duty

– Damage or injury to the claimant

– Proximate cause relationship between the negligent act and the infliction of damages

• A proximate cause relationship requires an unbroken chain of events

• The law allows for the following types of damages:

– Compensatory damages compensate the victim for losses actually incurred. They include:

• Special damages, e.g., medical expenses
• General damages, e.g., pain and suffering

– Punitive damages are designed to punish people and organizations so that others are deterred from committing the same wrongful act

• The ability to collect damages for negligence depends on state law
• Under a contributory negligence law, the injured person cannot collect damages if his or her care falls below the standard of care required for his or her protection

– Under strict application of common law, the injured cannot collect damages if his or her conduct contributed in any way to the injury

• Under a comparative negligence law, the financial burden of the injury is shared by both parties according to their respective degrees of fault

– Under the pure rule, you can collect damages even if you are negligent, but your reward is reduced in proportion to your fault

– Under the 49 percent rule, you can collect damages only if your negligence is less than the negligence of the other party

– Under the 50 percent rule, you can recover reduced damages only if your negligence is not greater than the negligence of the other party

• Some legal defenses can defeat a claim for damages:

– The last clear chance rule states that a plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so.

– Under the assumption of risk doctrine, a person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury