Explain The Principle Of Indemnity. How Is Actual Cash Value ✓ Solved

Explain The Principle Of Indemnity. How Is Actual Cash Valu

Please answer the following questions:

· Explain the principle of indemnity.

· How is actual cash value calculated?

· How does the concept of actual cash value support the principle of indemnity?

· Explain the meaning of an insurable interest.

· Why is an insurable interest required in every insurance contract?

· Explain the principle of subrogation.

· Why is subrogation used?

· Explain the following legal doctrines: Misrepresentation, Concealment, Warranty.

· List the four requirements that must be met to form a valid insurance contract.

· Explain the following legal characteristics of insurance contracts: Aleatory contract, Unilateral contract, Conditional contract, Personal contract, Contract of adhesion.

· Explain the general rules of agency that govern the actions of agents and their relationship to insureds.

· Identify the basic parts of an insurance contract.

· What is the meaning of “named insured"?

· What is an endorsement or rider?

· Describe the following types of deductibles: straight deductible, calendar-year deductible, aggregate deductible.

· Explain how a coinsurance clause in property insurance works.

· What is the fundamental purpose of a coinsurance clause?

· Explain how a coinsurance clause functions in an individual or group medical expense insurance policy.

Paper For Above Instructions

The principle of indemnity is a fundamental concept in insurance that ensures policyholders are compensated for their losses without profiting from the insurance coverage. The primary aim is to restore the insured to the same financial position they were in before the loss occurred, neither more nor less. By adhering to this principle, insurance companies maintain fairness and prevent moral hazards, where individuals might intentionally incur losses to gain financially from insurance payouts (Rejda & McNamara, 2017).

Actual cash value (ACV) is typically calculated as the replacement cost of the damaged or lost item minus depreciation. This method considers not only the cost to replace the item but also takes into account its age and wear and tear, thus reflecting the true value of the item at the time of loss (Vaughan & Vaughan, 2016). For instance, if a five-year-old television is destroyed, the actual cash value would be the cost of a comparable model minus depreciation for those five years.

The concept of actual cash value supports the principle of indemnity by ensuring that the insured receives compensation that accurately reflects the current value of their property, thereby preventing any profit from the insurance payout. As noted by insurance experts, this connection between ACV and indemnity is crucial in motivating policyholders to maintain their property while avoiding fraudulent claims (Trieschmann, Gustavson, & Riegel, 2015).

Insurable interest refers to the requirement that the insured party must have a legitimate interest in the insured item or person. This interest must exist at the time the insurance policy is taken and when a claim is made. Without such an interest, the contract would lack validity (Miller & Roth, 2015). Furthermore, insurable interest is crucial as it prevents insurance from becoming a gambling mechanism, ensuring that policyholders have a genuine stake in the preservation of the insured interest.

Insurable interest protects the integrity of insurance contracts by ensuring that individuals or entities only insure what they have a vested interest in. This reduces the likelihood of moral hazard, where a party might intentionally damage the insured item for financial gain (Dorfman, 2013).

The principle of subrogation is the right of an insurer to pursue a third party that caused an insurance loss to the insured. This principle allows the insurance company to recover the amount paid to the insured from the party responsible for the loss. Subrogation not only helps insurers recoup their payouts, but it also reduces insurance costs for policyholders in the long run (Rejda & McNamara, 2017).

Subrogation is used primarily to avoid double compensation for the insured. If the insured receives payment from their insurer for a loss, they cannot then pursue that same loss from the third party responsible. This process ultimately keeps the cost of insurance premiums down by allowing insurers to redirect claims costs back to accountable parties (Baker, 2014).

Legal doctrines in the insurance context include misrepresentation, which is a false statement of fact that can void the insurance policy if it is determined to be significant to the risk assumed. Concealment involves the failure to disclose relevant information that the insurer needs to evaluate the risk of insuring the applicant. Warranty refers to a promise made by the insured regarding the condition and use of the property in question (Vaughan & Vaughan, 2016).

To form a valid insurance contract, four requirements must be met: offer, acceptance, consideration, and a legal purpose. These elements ensure that all parties enter into the contract willingly and with a mutual understanding of the terms (Miller & Roth, 2015).

Insurance contracts are characterized by several legal characteristics, including:

• Aleatory contract: A contract where the outcomes depend on an uncertain event.
• Unilateral contract: A contract in which only one party is obligated to fulfill its promise.
• Conditional contract: A contract that requires certain conditions to be met before obligations are enforced.
• Personal contract: This means the contract is tailored to an individual or entity and typically cannot be transferred without consent.
• Contract of adhesion: A contract where most terms are set by one party, often the insurer, and the other party has little opportunity to negotiate (Trieschmann, Gustavson, & Riegel, 2015).

The general rules of agency governing actions of agents regarding their relationship to insureds include the requirement that agents act in the best interest of their clients and disclose any potential conflicts of interest. These rules ensure that agents maintain a fiduciary responsibility towards the insured (Rejda & McNamara, 2017).

The basic parts of an insurance contract include the declarations page, which outlines the named insured, coverage types, and the policy limits; the insuring agreement, which details what is covered and under what circumstances; and the exclusions section, which specifies what is not covered (Dorfman, 2013).

The term “named insured” refers to the specific individual or entity whose name appears on the insurance policy and is entitled to benefits under the policy (Vaughan & Vaughan, 2016).

An endorsement or rider is an addition to an insurance policy that modifies its coverage, terms, or conditions, providing necessary adjustments to the initial agreement (Baker, 2014).

Deductibles are provisioned to share risk between the insurer and the insured. Key types of deductibles include:

• Straight deductible: A set amount that the insured must pay out of pocket before benefits kick in.
• Calendar-year deductible: A total amount that the insured must pay within a calendar year before the policy starts paying benefits.
• Aggregate deductible: A cumulative deductible that must be met over a specified period, often for multi-claim situations (Trieschmann, Gustavson, & Riegel, 2015).

The coinsurance clause in property insurance is designed to encourage policyholders to insure their property adequately. It requires the insured to maintain insurance coverage at a certain percentage of the property’s value to avoid penalties in the event of a claim (Miller & Roth, 2015). Its fundamental purpose is to reduce overinsurance and to ensure that property owners participate in the risk-sharing process, which ultimately keeps premiums at a reasonable level.

In individual or group medical expense insurance policies, coinsurance functions in a way that after the deductible has been met, the insurer and the insured share costs at a predetermined ratio. For example, an 80/20 coinsurance clause means the insurer will pay 80% of covered medical expenses while the insured will pay the remaining 20%(Rejda & McNamara, 2017).

References

• Baker, K. (2014). Principles of Risk Management and Insurance. Pearson.
• Dorfman, M. S. (2013). Introduction to Risk Management and Insurance. Pearson.
• Miller, R., & Roth, D. (2015). Risk Management and Insurance. Cengage Learning.
• Rejda, G. E., & McNamara, M. J. (2017). Principles of Risk Management and Insurance. Pearson.
• Trieschmann, J. S., Gustavson, S. M., & Riegel, G. H. (2015). Risk Management and Insurance. Cengage Learning.
• Vaughan, E. J., & Vaughan, T. (2016). Fundamentals of Risk and Insurance. Wiley.
• Vaughan, E. J., & Vaughan, T. (2016). Risk Management and Insurance. Wiley.
• Trieschmann, J. S., Gustavson, S. M., & Riegel, G. H. (2015). Insurance Principles and Practices. Cengage Learning.
• Siegel, S. (2018). Fundamentals of Risk Management. Cambridge University Press.
• Williams, C. A., & Heins, R. M. (2014). Risk Management and Insurance. South-Western Cengage Learning.