MARINE INSURANCE SERVICES
PO BOX 224, MIDLAND, ONTARIO, L4R 4K8, (705) 526-9541, FAX (705) 526-1294
C11 PRINCIPLES AND PRACTICE OF INSURANCE
SUMMARY NOTES
2001
Risk: Implies some form of uncertainty about an outcome in a given situation. Risk is the chance or possibility of a loss; chance implies some doubt about the outcome of a situation. There are different levels of risk, depending on frequency of loss, severity of loss (values at risk), and cause of loss.
2 Types of Risk:
1 Speculative Risk: Chance of a loss or chance of a profit; an
established business could expand and make more profit or it could go bankrupt--buying
stock in this company is a speculative risk.
2 Pure Risk: Only a chance of a loss; driving an automobile involves
only the chance of an accident. This is the subject of insurance;
only pure risks are insurable.
Insurable Risks:
Methods of controlling the risk:
1 Reduce the risk by preventative effort: Leads to cost savings
over long time period. E.g., legislation & regulating mandatory
use of seatbelts to reduce traffic fatalities.
2 Assume or retain the risk (Self-Insurance): Necessary when
business operations scattered, risk difficult or impossible to insure,
insurance available only with very large deductibles, or otherwise if economically
suitable. Large companies sometimes self-insure by establishing a
captive (their own insurance company, offshore in a place like Bermuda)
for insurance purposes.
3 Transfer the Risk (Insurance): This transfers the specific
risk to an insurance company.
Peril: An event (e.g., fire, lightning, explosion) which may cause
a direct or indirect loss.
Hazard: A condition which may cause a peril to occur.
2 Categories of Hazard:
1 Physical: Pertain to the physical state of the property and
may lead to the occurrence of a peril. E.g., lack of fire sprinkler
system in a building.
2 Moral: Characteristics of an individual or firm which may increase
the probability or severity of a loss; relates to the human elements of
the risk. Difficult to determine prior to a loss; more difficult
to prevent a loss. Wholly undesirable. E.g., Insured with financial
troubles.
Spread of Risk: “Don’t put all your eggs in one basket.”
A balance of premiums to losses and expenses can be achieved with a good
spread of risk; achieved by 3 means:
1 Volume: A large number of risks insured.
2 Diversity of type of risk insured: Opportunity for underwriting
profit greater as a loss in 1 class of business offset by gains in other
classes.
3 Diversity of location: Opportunity for profit greater with
greater number of locations; important not to cover too many risks concentrated
in 1 area as a catastrophe (large fire, earthquake, tornado) could wipe
out an entire area.
Insurance: “The undertaking by 1 person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event.” Insurance is the method of sharing the losses of a few people among many. This allows a person to carry on business without the fear that some one catastrophe could both physically and financially ruin him. If a person is insured and suffers a loss, he will be indemnified or compensated. Insurance is peace of mind. Insurance allows the individual to substitute a small defined expenditure (the premium) for a large, but uncertain, future loss. Those insureds who escape a loss help compensate those affected by a loss.
Indemnity: Means to put back in the same financial position as just prior to the loss.
Premium: Each policyholder pays a set fee in order to be insured,
the premiums are used for:
1 Payment of losses suffered plus reserves for unearned premiums and
pending losses
2 Cost of producing the premiums (sales and advertising)
3 Cost of management of this fund
Unearned Premium: That portion of a premium that has not been earned on a given policy. Since the premium paid for a policy does not belong to an Insurer in its entirety until the last day of the policy period, funds must be kept available to refund any unearned premium should the policy be cancelled during its term.
Reserves: Funds, required by law, to be set aside to pay for losses reported but not yet paid or not yet reported and to cover unearned premiums.
History of Insurance
3 Categories of Insurance:
1 Social Insurance: Government operated; includes: old age security,
pension plans, hospitalization, medical plans; in some areas also includes
auto insurance and some property and crop insurance.
2 Life and Health Insurance: Includes life, accident, sickness
and disability insurance, and some pension and other financial services.
3 General Insurance: Composed of all insurance not covered in
the above categories; includes fire, auto, marine, casualty (aviation,
boiler and machinery, crime, liability, employer’s liability, fidelity
and surety, plate glass), inland marine (transportation risks and perils
of all kinds through personal, commercial & miscellaneous floaters),
multiperil (any combination of coverages other than life coverages).
6 Functions of Insurance:
1 Spread of Risk (this is the major function of insurance): Share
the losses of a few among the many.
2 Aid to Security: Removes uncertainty of a potential financial
loss; individuals & businesses are more free to expand without need
to set aside reserves for future losses.
3 Aid to Credit: Loans are not advanced unless item financed
is insured; insurance protects creditors’ investments.
4 Source of Employment: Over 110,000 Canadians are directly employed
in the insurance industry; many others are employed in related fields.
5 Source of Capital: Shareholders’ capital and premiums generated
by insureds are invested in the Canadian economy (stocks, bonds, other
securities, buildings, land); much of these investments are required to
meet government regulations of secure and liquid securities. Over
$7 billion is invested in Canada by this industry.
6 Loss Prevention: the industry contributes to the prevention
of losses (mostly through research, education, and improved regulations)
including fire prevention, safe driving, highway design, etc.
Ratemaking: The process of establishing rates for each class of
insurance (i.e., determining the cost of a specified unit of insurance
for a given period of time).
Actuaries: Person employed by Insurer or organization to establish
insurance or advisory rates.
Rate: The price of a unit of insurance (usually $100 or $1,000)
of a specific insurance for 1 year.
Premium: The total cost of an insurance policy (Rate X Amount
of Insurance).
Steps in Rate determination:
1. Classify Risks: The risk is classified on the basis of the objects
insured and the hazards of the exposure.
2. Gather statistics on past losses: Based on statistics; law
of averages and theory of probability. From past losses, the Insurer
can predict how many similar losses will occur in the future. Accuracy
greater as Sample Size greater. Statistics on the losses based on
the classification of risks are compiled. These statistics enable
the Insurer to determine the average loss and the frequency of loss.
3. Determine Pure Premium: From these figures the Pure Premium
(premium required to meet these losses) is calculated.
4. Determine Total Premium: The total premium is calculated by
adding loadings for trends in accidents and repair costs plus expenses
(overhead, production, profit).
5. Determine Rate: Finally, the rate or unit cost is calculated.
Exposure: The danger of loss, particularly fire, arising from
what happens to another risk close by (e.g., your coffee shop is next to
a factory that makes explosives; you have a serious exposure hazard).
Also, exposure is the sum total of values insured under a policy (total
amount for which Insurer is at risk).
Loading: Additional charge included in an insurance rate to reflect
a hazard not contemplated in the basic rate for the class.
Credit (Deduction): Opposite of loading; reduce the rate of insurance
for features that make a risk less hazardous than the average risk for
that class.
Underwriting: The selection of risks. Underwriters make
the decision on whether to accept a risk, reject it, or accept it subject
to some conditions--based on personal information on the applicant, details
of the risk, and special factors pertaining to the class of risk or type
of insurance.
Types of Insurers:
1. Government: Government department or crown corporation; e.g.,
Workers Compensation, Provincial Medical Plans, Unemployment Insurance,
Auto. Insurance in some provinces.
2. Private Industry: Many types:
3 Captive Insurance Companies: Owned by Insured (Self-Insurance).
Very large organizations may form their own insurance company--to reduce
their insurance costs or because insurance for certain risks is not available.
Set up offshore for tax purposes. Fronting Insurers may be necessary
to meet laws (Fronting Insurer issues a policy to another Insurer with
the latter carrying the whole or part of the risk and the former paid a
fee for the use of its name).
4 Co-operative Organizations: Owned by members. Originally
set up to offer low price insurance with no desire to make a profit.
5 Mutual Company: Owned by policyholders. Policyholders
also have voting rights and share in financial successes and failures of
company.
5a Assessment Mutual: Assessment (Premium Note) Plan--policyholders
sign a premium note, the face value is reduced by the cash premium payment.
The balance is a reserve used to pay losses. Very rare now.
5b Stock Mutual: Company started as Assessment Mutual but has
changed to insurance company writing participating policies; company owned
by shareholders.
5c Co-operative Stock Mutual: Member shareholders are also policyholders;
non-assessable; surplus profits are distributed among Insureds.
5d Factory Mutual: Property & Boiler & Machinery coverages
and risk prevention for industrial, commercial & institutional risks.
6 Reciprocal Insurance Exchanges: Owned by a group of Insureds.
Contractually-based risk-sharing arrangement. Members (Subscribers)
of an exchange agree to share in the profits and payment of losses.
7 Stock Companies: Owned by Stockholders: Limited liability
organizations incorporated by acts of parliament, letters patent, or certificates
of incorporation. Capital invested by shareholders used for business
of insurance to make profit for shareholders.
Sources of Revenue: Underwriting Gain (excess of premiums collected over loss payments and expenses) and investment income.
Board of Directors: Non-involved overseers of the corporation
representing the shareholders. Responsibilities: Ensure company
run according to laws, set broad policy, appoint CEO.
Chief Executive Officer: Responsible for overall operations &
management of company. Develops policies & presents to Board
for approval, and implements approved policies.
Insurance Pools: For poor risks, Insurers join together to form pools; joint underwriters appointed, policies issued by the pool. Each Insurer agrees to pay a fixed proportion of any loss. E.g, Nuclear Insurance Association of Canada, Pollution Liability Association.
Insurance Company Organization:
| DEPARTMENT | HEAD OFFICE FUNCTIONS | BRANCH OFFICE FUNCTIONS |
| Administration |
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| Finance, Accounting & Investment |
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| Actuarial |
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| Marketing, Agency or Production |
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| Underwriting |
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| Claims |
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Government Regulation of Insurance Companies: Nature of Insurance makes stringent supervision necessary. Insurers must be in a sound financial position to meet obligations:
Federal Control:
Office of the Superintendent of Financial Institutions (OSFI), Ottawa,
responsible for supervision and enforcement of safeguards regarding federally
chartered & foreign insurance company’s finances (and provisions for
provincially-chartered companies to become federally-chartered).
Insurance Companies Act (Federal, Dec. 1991) dictates Canadian & foreign
Insurer’s incorporation and regulation:
Establishment of an Insurance Company:
Incorporation under Federal authority--requirements of directors, powers
of directors, capitalization (at least $10 M), shares & shareholders,
meetings, corporate powers, procedures. Once all requirements are
met, Minister will issue letters patent. Incorporating federally
is desirable if Insurer wishes to contact business across Canada.
Licences are then granted by each individual province.
Prerequisites to Operation:
Incorporating documents, proof of necessary capitalization, other required
information submitted to Superintendent of Financial Institutions.
Once approved, Superintendent authorizes company to carry on business (within
specified classes and with any conditions or limitations stated) by Order
of Commencement.
Company must publish notice of the making of the Order of Commencement
in the required newspapers. Superintendent will publish notice of
the making of the Order in the Canada Gazette.
Supervision During Operation:
Superintendent maintains a register for each Insurer for public inspection.
Insurer must maintain assets as prescribed by the Act. Reserves
must be maintained for unearned premiums & claims.
Insurers are restricted in the types of investments they make--must
be stable with reasonable return.
Insurer must submit annual return to superintendent at end of financial
year.
Assets of Insurer determined as prescribed in the Act for purposes
of annual return.
Liabilities of Insurer determined as prescribed in the Act for purposes
of annual return.
The actuary of the Insurer must file with the annual return a report
on the reserves.
The auditor of the Insurer must file with the annual return a report
of his opinion whether the return presents fairly the financial position
of the Insurer.
The Superintendent may request in confidence any additional information
about the Insurer.
Inspections at the Insurer’s offices are carried out by representatives
of the Superintendent as often as necessary (usually 1 per year).
The Superintendent can direct the Insurer to refrain from actions contravening
the Act or from pursuing unsound business practices.
Failure to comply with the above directives may result in the Superintendent
taking control of the company assets and liquidating it.
Supervision of Foreign Insurance Companies: In addition to the
above regulations for Canadian Insurers:
Order from the Superintendent must be obtained approving the types
of risks written with the requirements:
Assets of prescribed value set in trust.
Actuary appointed.
Place of head office determined.
Reciprocal agreement with head office in home jurisdiction.
Assets approved & vested in trust in Canada.
Power of attorney must be maintained.
Assets in Canada may be released only with approval of Superintendent.
Provincial Control: Provincial regulation is much the same; the same regulations regarding incorporation and licensing are required by provincial regulators for insurers operating in that province.
Lloyd’s Insurance Market:
HISTORY OF LLOYD’S
Process of Insuring a Risk at Lloyd’s:
The Room: Most business is transacted in the underwriting room;
trading is done by underwriters at ‘boxes’ who negotiate with brokers who
bring business into the market.
Lloyd’s Brokers: 220 worldwide of variable size; can also write
business with other companies. Act in interest of customer, paid
commission by insurer. Brokers approach underwriters and describe
the risks and insurance requirements, and try to obtain the best possible
price. The broker must be able to find coverage of the whole risk
by signing up syndicates at the original agreed price. Brokers also
advise clients on loss prevention.
Syndicates of Members of Lloyd’s: Individual or incorporated;
range in size from 100-several thousand members; each syndicate represented
by an underwriter.
Unlimited Liability: Every individual member of Lloyd’s (now
18,000 members) has proved wealth of at least £250,000 and trades
individually with unlimited liability. In 1994, Members’ Agents Pooling
Arrangements (MAPA, 30+ syndicates, each with up to 7.5% total capacity)
introduced--pool of syndicate participants in which a member can take a
share.
Limited Liability: Corporate members were introduced in 1994
and have at least £1.5M capital. Liability in event of claim
restricted to share capital.
Managing Agents: Administer syndicates, employ the underwriter
and his staff, ensure that business is conducted according to laws.
Members Agents: Introduce new members to the market, provide
advice and other services.
The Slip: Drawn up by the broker; contains details of the risk.
A Line: Signed by the underwriter; comprised of his signature,
syndicate reference number, and proportion of risk accepted.
Management of Lloyd’s Market: Three tier system:
Council of Lloyd’s: Established by Lloyd’s Act (1982); members
elected by Llyod’s & approved by Governor of Bank of England; elected
members have no business connections with Lloyd’s market. Council
elects Chairman and Deputy Chairman from their members.
The Market Board: Develops business of Lloyd’s market, sets standards,
ensures good practices of risk placing & claims handling.
The Central Fund: Billions of pounds of additional security to
protect policyholders if any members be unable to meet their liabilities.
In Canada, Lloyd’s Canadian Trust Fund $822M plus $272M in assets in excess
of liabilities.
Intermediary (Agents & Brokers): Physical link between Insurers and consumers. Intermediaries help in identifying insurance needs, matching those needs with products available and facilitating insurance contracts to the satisfaction of all parties.
Broker: Independent business person who may place business with
any number of Insurers; they usually have a contract or agreement with
the Insurers represented. Broker seeks out clients and matches client’s
insurance needs with the best insurance coverage available.
Agent: Like a broker but represents 1 Insurer only.
General Agent (Provincial Agency, Provincial Manager): One who
has authority from Insurer to manage all business within his territory,
to appoint agents, and settle claims.
Independent Agency (Brokerage System): Insurer markets policies
through independent brokers & agents. Insurer appoints brokers
& agents to be their sales force and bring clients to them. Insurer
pays commission for each policy issued. Commission usually higher
for new business to encourage production. Client list belongs to
broker/agent.
Exclusive Agency Companies: Insurer markets policies through
exclusive agents (not employees of the Insurer) who represent only the
1 Insurer. Insurer pays commission for each policy issued.
Client list usually belongs to the Insurer. E.g., State Farm.
Direct Writing Companies: Insurer deals directly with public.
Insurer has own force of producers to sell. Producers are employees
of Insurer and are paid by salary plus commission. Commission usually
higher for new business. E.g., Co-operators.
Principal and Agent Relationship (Mandator and Mandatary in Quebéc): Agent is a person authorized by another to act on his behalf, all parties to contract have obligations.
Regulation of Intermediaries: Insurance agency subject to all laws of business, including laws of incorporation, consumer protection, and employment. In addition, an insurance agency is regulated by the Insurance Act of each province for qualification, licensing, operating requirements, and renewal of license. Self regulation and government regulation are used in different provinces. Agents must pass a licensing examination based on knowledge of the insurance business and government regulations of intermediaries. Agents must be licensed to conduct business in the desired lines.
Agency/Brokerage Agreement: Sets out terms and conditions for
an agent/broker to bring business to the Insurer. greater # of agreements,
greater variety of products broker can offer customers. No standard
form of agreement; basic items covered:
1 Parties to the agreement
2 Classes of business
3 Authority of Agent/Broker, express or implied.
4 Binding Authority, by class
5 Premium collection & credit terms
6 Remuneration (commissions schedule)
7 Termination procedures addendum
8 Other addenda (direct billing, contingent profit commission, incentives)
Binding Authority: The authority given to an intermediary (Agent or Broker) by an Insurer to bind certain insurance coverages without first submitting an application to the Insurer. If intermediary does not have binding authority, Insurer may regard any non-disclosure by him as a failure to disclose by the Insured and void the contract. If the Insured has informed the intermediary about the particular facts in question, the Insured may have the right of action against the Agent/Broker. With binding authority, the knowledge of the Agent/Broker is considered the knowledge of the Insurer. In this case, the Insurer may have the right of action against the Agent/Broker for non-disclosures.
Obligations of Insurer: Insurer must pay broker agreed fee for business placed. Some Insurers also assist in payment of certain expenses (advertising, signs, stationery)
Obligations of Broker: The broker must:
1 Act within the terms of the contract
2 Write authorized classes of business only and not exceed authorized
limits of coverage
3 Collect certain premiums and hold them in trust for the Insurer
4 Remit premiums within specified time limit
5 Advise Insurer of business written or submit applications promptly
6 Advise Insurer promptly of all claims notified
7 Exercise reasonable care and skill and not act negligently
8 Not delegate authority given.
Trust Account: Bank account for brokers to deposit premiums collected
and pays Insurer for policies issued.
Operating Account: Bank account for the general business for
the broker.
Commission: Share of premium allowed to broker/agent for producing
the business; stated as a % of the premium in agency agreement; rates vary
between different classes of risks and different companies.
Profit Commission: Extra commission (bonus) paid annually to
broker/agent for business that produced a certain level of profitability
for Insurer.
3 Forms of Agent/Broker Organization:
| TYPE | ADVANTAGES | DISADVANTAGES |
| Sole Proprietorship |
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| Partnership |
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| Corporation |
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Production, Dependent on 5 Factors:
1 Product Knowledge: Acquired through continuing education.
2 Production Target: Setting goals to motivate individuals, realistic
targets
3 Prospecting & Selling: Look for & attract new business.
4 Time Control: Producer needs to allocate time to perform all
functions.
5 Curiosity: Interest in other people’s business, promotes research.
THE LAW:
Law: Expressed will of society governing relationships among
members of that society.
2 Categories of Law:
1. Substantive Law: Rights & duties that each person has
in society (to vote, own property, obey laws, refrain from injuring others,
etc.)
i Public Law: Concerned with conduct of government & its
relations with private persons; several categories:
ii Constitutional Law: Deals with issues relating to the Constitution.
iii Criminal Law: Law regulating the government and its relations
with private persons, corporations, unions and associations. Includes
any action to which the government is party, such as a criminal offence
that is punished by the imposition of a fine, imprisonment or probation.
iv Administrative Law: Deals with the law itself; change existing
laws, etc.
v Private Law (Civil Law): Law applying to relations between
persons & legal entities. In a civil law action, an injured party
sues the party who allegedly caused the suffering; the court attempts to
right the wrong by having the tortfeasor compensate the victim.
2. Procedural Law: Means of protecting and enforcing these rights
& duties.
2 Systems of Law:
1 Civil Code: This is the system of law in Quebéc; articles
regarding the responsibilities of every citizen are codified. This
system is based on the Code of Justinian and the Code Napoleon of France,
with customized changes from the Quebéc National Assembly.
When a court settles a dispute under the Civil Code, the appropriate article
is ascertained and a decision is made. While the court is not obliged
to follow the decisions of past similar cases, in practice it does look
to previous cases for interpretations of the articles.
2 Common Law: This is the system of law in the rest of the provinces.
This system is derived from the legal system in England. Based on
the Rule of Precedent (Case Law), it is a system of well defined rules
and principles developed from decisions made in similar court cases; a
court is bound to follow the decisions of courts of equal or higher authority
when deciding similar cases.
Statute Law: Applies to all of Canada; statutes or acts overrides
Common Law and Civil Code. 3 Functions of Statute Law:
1 Provide government control on citizens’ activities where this would
be in the public’s interest.
2 Clarify existing common law, rather than change it.
3 Change existing law which no longer serves the community adequately,
e.g., repeal irrelevant legislation.
2 Levels of Government: The Constitution Act (1867) assigns 2
levels of jurisdiction:
1 Federal Government: Has jurisdiction over foreign policy, military
and naval services, immigration, taxation, incorporation of businesses
with national objects. The provincial court system is composed of
the Supreme Court of Canada and the Federal Court. The Federal Court
has 2 divisions, Trial Division and Appeal Division. The Supreme
Court of Canada is the final court of appeal from the Appeal divisions
of the Provincial Supreme Courts and the Federal Court of Appeal; its purpose
is to lend uniformity to the law across Canada.
2 Provincial Government: Has jurisdiction over property and civil
rights within the province, education, consumer affairs, incorporation
of businesses with provincial objects, insurance. Supreme or Superior
Courts (usually divided into a Trial Division and an Appeal Division),
County or District Courts, and other Provincial Courts (including Small
Claims Court) and Boards each hear cases--the court assigned will depend
on the monetary amount claimed. In some provinces the County or District
Courts have merged with the Supreme or Superior Courts.
Tort: Civil wrong, other than a breach of contract, for which
the court will provide a remedy in the form of an action for damages.
Judge-Made Law: Judge will make a ruling on a case where no precedent
ruling is available; decision will set a precedent.
Contract: A deliberate engagement (oral or written) between competent
parties upon a legal consideration to do or abstain from doing some act.
Five elements of a legally binding contract (Common Law):
1. Agreement: There must be a definite offer (not merely an advertisement
or a listed price, which are merely invitations to transact business) which
must be accepted; the offer must be communicated; the person making the
offer must be ready to undertake his obligations under the agreement once
the offer is accepted. Acceptance must be definite and communicated.
Lack of action is not consent. If a new term is introduced, it becomes
a counter-offer which invalidates the original offer. Lapse and revocation
of offer possible when:
i Offer not accepted within specified time
ii Offer not accepted after reasonable time if time limit not specified
iii Offer not accepted before either party dies or becomes insane
iv Offer may be revoked at any time before acceptance but revocation
must be communicated before it is effective
2. Consideration: Something of value (usually money) which one
party gives or promises to give in exchange for the act or promise of the
other party. Consideration is not required if contract is written
and carries the seals of all parties.
3. Genuine Intention: The parties must have intended to create
a legally binding contract.
4. Capacity of Parties: Some types of people are limited in some
respects in the capacity to enter into contracts that are binding on them:
i Infants & Minors: People aged < 18 may repudiate certain
contracts. Liability is imposed on minors for contracts for necessaries
of life (food, lodging, clothing) or when the contract is for his benefit.
Other contracts are voidable at the option of the minor.
ii Mentally Impaired & Intoxicated Persons: Contracts are
voidable at the option of the mentally impaired or intoxicated person with
early repudiation and return of all benefits.
iii Native Peoples on Reservations: Capacity of Indians on reservations
(only) limited by Indian Act.
iv Corporations: Legal entities have the same capacity to contract
as people. Companies not incorporated have no legal status.
5. Legality of Object: If the object of a contract is to commit
an act that violates Common Law or Statute Law (i.e., to commit a crime,
a tort or a fraud on a third party, obstruct justice, or prejudice public
safety) the contract is void.
Void Contract: Treated as if it never existed; cannot confer fights
on anyone and has no legal effect.
Voidable Contract: Can be affirmed or rejected at the option
of the aggrieved party.
Mistake: When a mistake is made on a contract, the contract will
be considered void or voidable depending on the circumstances. 3
kinds of mistakes:
1 Common Mistake: Subject matter of contract is different from
what the parties thought it was, making contract void or voidable.
2 Mutual Mistake: Parties have construed different meanings of
the subject matter; court will decide the most reasonable meaning of the
contract.
3 Unilateral Mistake: One party makes a mistake and the other
party has knowledge of the mistake but fails to correct it, making contract
void or voidable.
Material Fact: A fact that is so basic and important to the contract
that withholding this fact could alter the terms of the contract or even
cause it not to be made.
Misrepresentation: This is an incorrect statement which may convince
a party to enter into a contract. 2 types of misrepresentations:
1 Innocent Misrepresentation: False statement made innocently
concerning a material fact which influences the other party to enter the
contract. Contract voidable; court may rescind contract or award
damages.
2 Fraudulent Misrepresentation: False statement made deliberately
or knowingly or with reckless disregard for the truth or as an intentional
half truth. Contract is voidable; court will rescind contract and
award damages.
Undue Influence: One party to contract can demonstrate that he
signed the contract because of the overpowering influence of another person
(e.g., nurse/patient); contract is voidable.
Duress: One party is induced into entering into a contract by
the use or threat of violence, injury, imprisonment, criminal prosecution
or civil action; contract is voidable.
Discharge of a Contract: There are 5 ways in which a contract
may terminate:
1. Performance: Parties have fulfilled all obligations in the
contract.
2. Agreement: Parties to the contract agree to terminate it.
3. Frustration: Impossible for 1 party to fulfill his obligations
under the contract (e.g., subject matter destroyed, 1 party dies); if cause
is not the fault of either party, court will declare contract discharged.
4. Operation of Law: Change in law makes contract illegal, contract
is void.
5. Breach: One party fails to perform his obligations or states
that he does not intend to carry out his obligations under the contract.
If aggrieved party has benefited from contract he cannot repudiate all
liability. 2 types:
i Partial: Some obligations have been met.
ii Total: No obligations have been met.
Articles of Civil Code:
1378 Definition of Contract: Agreement of wills by which 1 of
several persons obligate themselves to 1 or several other persons to perform
a prestation.
1379 Definition of Contract of Adhesion: Essential stipulations
drawn up by 1 party and not negotiable. Other contracts are Contracts
by Mutual Agreement.
1385 Necessary elements of contracts: Consent, Capacity to Contract,
Cause of Contract, Object of Contract.
1386 Offer: Exchange of consents accomplished by express or tacit
manifestation of the will of a person to accept an offer to contract made
to him by another person.
1387 Acceptance: Contract formed when acceptance received by
offeror, regardless of method of communication used, and even though parties
agree to reserve agreement as to secondary terms.
1388-90 Offer to contract is proposal which contains all necessary
elements of contract, and offeror willing to be bound. Offer can
be revoked before acceptance received.
1391 If offer revoked, offer lapses, even if time limit is attached.
1392 Offer lapses if no acceptance received before specified time limit
(or reasonable time if no limit stated)
1394 Silence is not acceptance.
1395 Offer of reward to anyone who performs a task is deemed binding
on offeror.
1396 Offer to contract made to determinate person is a promise to enter
into contract from moment offeree clearly indicates to offeror he intends
to consider offer and reply within stated or reasonable time.
1397 Contract made in violation of promise to contract voidable.
1398 Consent may be given only by a person who at that time is capable
of binding himself.
1399 Consent must be freely given. Contract voidable in cases
of Error, Fear and Lesion.
1400-01 Error relating to essential condition of contract makes contract
voidable. Error (relating to essential condition of contract) by
fraud by 1 party makes contract voidable.
1402-04 Fear (serious injury to person or property, induced by violence
or threat) makes contract voidable. Fear induced by abusive exercise
or threat of right or power makes contract voidable.
1405-06 Lesion makes contract voidable only in cases of minors and
persons under protective supervision, except in special cases stated by
law. Lesion results from exploitation of 1 party.
1407-08 In case of Error, Fear or Lesion, court may annul or maintain
contract and may also award damages.
1409 Capacity to contract: Follow rules set out in Book on Persons.
1410 Cause of contract is reason each party enters into contract--need
not be expressed.
1411 Contract whose cause prohibited by law or contrary to public good
is void.
1412-13 Object of contract includes the obligations of the parties,
envisaged when contract formed. All parties must have some obligation
& object musy be legal and not contrary to public order or contract
void.
1416 Contract that does not meet all necessary conditions of formation
is voidable.
1417-18 Contract void (absolute nullity) where necessary for public
good. This can be declared by any person with interest & may
be confirmed.
1419-20 Contract void (relative nullity) where necessary for individual
interest. Declared by any person directly involved in contract &
may be confirmed.
1422 Contract that is void (null) deemed never to have existed.
Each party must restore conditions as before contract.
1425-32 Interpretation of Contracts: Common intention of parties,
not literal meaning of words, sought in interpreting contract. Take
into account: nature of contract, circumstances in which it was formed,
interpretation by parties, usage. Each clause of contract interpreted
in light of the others. Clause intended to eliminate doubt does not
restrict scope of contract in general terms. Clauses, however general,
only include what parties intended. In case of doubt, contract interpreted
in favour of person who contracted the obligation and against the person
who stipulated it.
1433 A contract creates obligations and, in certain cases modifies
or extinguishes them. In some cases, it also has the effect of constituting,
transferring, modifying or extinguishing real rights.
1671-95 Obligations extinguished by: Payment, expiry of an extinctive
term, novation, prescription, compensation, confusion, release, impossibility
of performance, discharge of a debtor.
Articles of Book on Persons:
153 Age of Majority (Full Age) = 18 years.
154 Capacity of person of Full Age shall not be limited except by provision
of law or by protective supervision.
155 Minor exercises civil rights only to extent of law.
156 Minor 14+ years deemed Full Age with respect to acts of employment.
157 Minor can contract for ordinary needs.
158 Except where he may act alone, minor is represented by tutor for
exercise of his civil rights.
161 Act performed by minor or his representative not allowed by law
is void.
165 If minor misrepresents his age, this alone does not deprive him
of voidable acts.
166 On attaining Full Age, person may confirm earlier contract making
it legally binding.
170-6 Emancipation (minors or their tutors can apply for emancipation
once aged 16) releases minor from obligation to be represented by tutor.
Emancipated minor can establish his own home and is no longer under authority
of parents. Minor can enter into contracts for leases (up to 3 years),
give away property (within limits), take loans (court authorized).
Full emancipation obtained by marriage--then person has same rights as
Full Age.
258 Person of Full Age has limited capacity where he is incapable of
caring for himself or his property by reason of illness, impaired mental
faculties, or physical inability to express his will.
303-9 Corporations are legal persons and have full civil rights.
Corporation has no incapacities except as provided by law. Corporation
are assigned a legal name. Contracts with corporations do not bind
the individual members of the corporation.
Insurance Policy: Contract between the Insured and the Insurer.
The 5 requirements for a legal contract are fulfilled. Additional
3 requirements of a legally binding Insurance Contract:
1. Insurable Interest: The Insured must have financial interest
in the object of insurance. A person has insurable interest in property
when he will be financially prejudiced by its loss or damage and when he
will financially benefit from its continued existence. A person also
has insurable interest in his potential responsibility (legal liability)
to pay damages to others for injuries he causes to them or damage he does
to their property. For life insurance, there must be a legitimate
insurable interest in the continuance of the life insured (regulated by
the Insurance Acts; a person has insurable interest in their own lives,
those of their children, grandchildren, spouses, any persons on whom they
are fully or partially dependent for support or education, their employees
and any persons in the duration of whose lives they have a pecuniary interest.
2. Indemnity: If a loss occurs, the Insured will be put back
into the same financial position as just prior to the loss. The Insured
must not profit from the loss. Most policies are on an actual cash
value (ACV) basis (the value of an equivalent piece of property of the
same age and condition and subject to the same wear and tear as the property
that was lost or destroyed). Exceptions:
i Contracts of Compensation: A stated amount is payable on the
occurrence of the event insured against (e.g., life insurance). This
amount is not dependent on ACV, though insurable interest is required.
ii Valued Contracts: Insures property for an amount which is
agreed to by the Insurer and the Insured at the time the contract is made;
in the event of a total loss a definite amount will be paid. Valued
policies are used for insuring items that are difficult to valuate after
a loss.
iii Replacement Cost Contracts: The property damaged will be
assessed on the basis of the cost at the time of the loss destruction or
damage, of repairing or replacing (whichever is less) with like kind and
quality, without any deduction for depreciation. Extra premium is
charged for this type of insurance.
3. Utmost Good Faith (Uberrima Fides): Required from both parties.
Insurer must deal with all claims fairly and expeditiously and be able
to pay for potential claims. Only Insured knows all the facts; he
is required to give full information of every material fact in respect
to the risk; policy voidable if Insured has not given full and correct
information, by:
i Nondisclosure: Failure to inform the Insurer of a material
fact. Includes failure on the Insured’s part to find out all material
facts of the risk.
ii Misrepresentation: Incorrect statement about a material fact.
Application: Request for insurance. Declaration by applicant
describing characteristics of risk, amount of insurance required and other
details essential to proper assessment and evaluation of the risk.
Can be either written or oral; oral applications are given to the broker
who writes down the information to give to the Insurer. Some insurance
requires a written application only--Accident & Sickness insurance,
final copy of application for Auto insurance. Written application
is preferable:
1 If application to become part of policy
2 To avoid honest misunderstandings
3 To help prevent fraud
Temporary Insurance (Interim Cover): Insurer agrees to insure
risk but does not have enough information to issue policy; written or oral;
is legally binding coverage. 2 types of interim cover:
1 Binder: Agreement to insure with policy pending; issued by
Insurer; effective cover from date of issue.
2 Cover Note: Letter to Insured confirming that insurance has
been effected; issued by broker.
Problems with temporary coverages, especially oral binders:
1 Was contract actually made?
2 Does intermediary have authority?
3 What are provisions of contract?
Content of Binder, must include:
1 Name & address of Insured
2 Address of risk
3 Policy period (time & date of commencement & expiry)
4 Description of property insured
5 Amount of insurance (classes & items)
6 Name of Insurer
7 Type & form of contract
8 Special terms (deductibles, etc.)
Cancelling temporary insurance: Should be terminated exactly the same as the policy.
Policy: Instrument evidencing a contract; states exact terms &
provisions (agreement between Insurer and Insured). 5 Parts of Policy:
1. Declarations:
i Identifies Insurer & Insured
ii Policy period (time & date of commencement & expiry)
iii Premium: amount insured
iv Other interests in policy (mortgages, etc.)
v Subject matter of insurance
2. Insuring Agreements: Doctrine of Contra Proferentum:
“Against the offeror”; onus is on Insurer to avoid ambiguity in the policy;
court will interpret policy in way most favourable to Insured.
i Subject matter & describes property insured
ii Perils insured
iii Exclusions
iv Circumstances under which Insured may receive proceeds of insurance
3. Statutory Conditions (General Conditions in Quebéc):
i Statutory Conditions (Common Law): Legislated by provinces;
must form part of every policy covering certain classes of risks.
Conditions deemed to apply even if not mentioned in policy. Establishes
rights of Insurer & Insured. Policies for certain classes (Auto,
Accident & Sickness, Fire) must have Statutory Conditions clearly printed
on them. Policy Conditions may be added.
ii General Conditions (Quebéc): Statutory in nature, content
(but not exact wording) legislated by province, establishes rights of Insured
& Insurer; mandatory in Liability policies. Additional Conditions
may be added.
4. Policy Conditions (Additional Conditions in Quebéc):
Clauses which affect actions of Insurer or Insured under contract in certain
circumstances. If condition breached by Insured, policy may be void
or voidable. Warranty: Promise by Insured as part of contract
that a specified state of affairs will continue to exist for duration of
policy; breach of warranty makes policy voidable from time of breach.
Representation: Statement of existing fact at time it was made.
5. Signature Clause: Policy signed by Insurer (usually preprinted
signature of CEO of company & countersignature of agent or other company
employee) only.
Assignment of Insurance Policies: Insurance is a personal contract
and cannot be assigned to another person without Insurer’s consent.
Exceptions where transfer automatic without consent:
1 Assignment under Bankruptcy Act; bankrupt persons transfer assets
to trustees for benefit of creditors.
2 Transfer of assets of those who have died to executors or administrators
of their estate.
Cancelling Insurance Contracts:
1 Insured may cancel policy at any time on request; Insurer will refund
unearned premium based on Short Rate (Short Date) Premium which is a penalty
for the expired time (only a percentage of the unearned premium is returned).
2 Insurer may cancel policy at any time with specified period of notice
delivered in specified manner (generally 2 weeks notice by registered mail),
and with pro rata return of premium (no short rate penalty).
3 Insurer and Insured may cancel policy by mutual agreement (rare).
Reinstatement of Policy: Coverage can be reinstated by endorsement.
Forms of Policies: Standardized policies for each class of insurance
are preferred, influenced by 3 factors:
1 Legislation: May specify entire policy wording or set guidelines
for contents. E.g., Auto. Policy: Exact policy and endorsements
wordings provincially legislated.
2 General Usage: Where standard policy not legislated, familiar
policies are more cost-effective and expedient.
3 Court Decisions: Established meanings of phrases in policies.
Individual Policies: Standard preprinted or computerized form,
used by Insurer for particular risk; may be wording particular to 1 Insurer
or IBC (or other) form used by many Insurers.
Manuscript Policies: Policy specially designed for a particular
risk; does not contain preprinted wordings, must contain all elements of
policy.
Subscription Policies: A policy to which more than one Insurer
subscribes; for hazardous or very large risks. Lead company issues
policy, and other insurers participate in insuring the risk, each taking
a percentage. All companies named must sign policy.
Certificates of Insurance: Modified form of policy, issued as a convenience to a party who has interest, certifying the existence of coverage; Insurer agrees to notify holder of changes in coverage.
Endorsements: Allow changes, additions, and deletions to be made to a policy; usually by means of an attachment. Endorsements overrule any wording in policy. Endorsements must be signed by Insurer. Endorsements that reduce coverage must be signed by Insured as well. Standard and non-standard endorsements exist.
4 Responsibilities of Adjusters: NIRD (remember, all adjusters all NIRD's):
NEGOTIATE
INVESTIGATE
REPORT
DETERMINE THE LOSS
Some basic duties of Adjusters: Contact Insured, confirm coverage, gather details on policy & loss, assign appraiser/contractor, investigate loss, interview witnesses, determine the cause of loss, determine fair value (Quanta) for damages to all parties & Insurer’s participation, empathize with Insured and injured parties, take measures to minimize the loss, negotiate a settlement, set appropriate reserves, provide necessary forms, report to Insurer all details at various stages of investigation, document the claim, etc.
Two types of losses:
1 First Party (Own Damage, Direct Damage): Damage to property
insured by policy; involve Insurer and Insured (including mortgagees, assignees)
only. Settlement based on policy wording.
2 Third Party: Damage or injury to others; claims arise from
Insured’s responsibilities to others (third party = person who is neither
a party to the contract nor mentioned in the policy) by law.
Types of Adjusters:
1 Telephone Adjusters: Salaried employees of Insurer; process
large volume of minor claims that do not seem to require face-to-face interview
with Insured. Fast, efficient, economical. Contact Insured,
obtain details by phone, reassure Insured, confirm coverage, call expert
to appraise damages, settle final $ amount with Insured.
2 Staff Adjusters: Salaried employees of Insurer who handle claims;
settle claims within adjuster’s stated $ authority. Do not require
licence except Quebéc & New Brunswick.
3 Independent Adjusters: Operate as independent business people;
accept assignments of claims from as many Insurers as choose to use their
services. Require licence in province of operation. Compensation
based on time spent on claims + disbursements. Report findings to
Insurer and handle claims & settle based on Insurer’s instructions.
4 Public Adjusters (rare, mostly in Quebéc): Operate as
independent business people; accept assignments of claims from Insured
& represent Insured’s interests, usually to help insure a fair settlement
in large property claims. Compensation based on percentage of sum
recovered. They are not permitted to operate in all provinces &
must be licensed.
Adjuster’s Licensing Requirements: Regulated by provincial Insurance Acts; vary by province.
Proof of Loss Form: Document completed & signed by Insureds making claim against their own Insurer. Contains details of policy & the loss, how much is claimed, and how it should be paid. It releases Insurer from further obligations relating to that loss & transfers title of salvage to Insurer.
Claims Manager (Claims Superintendent): Head of the claims department of an Insurer; responsible for smooth functioning of department.Claims Examiner: Person with much claims handling experience, who will direct handling of claim for Insurer--investigation of loss, scrutinize adjuster’s reports, research Insurer’s position, etc.
Estoppel: Legal bar which would prevent the Insurer from imposing a fact or condition which it had previously denied to exist, either by word or implication. If the Insurer in some way overlooks a breach, it cannot later rely on that condition to deny a claim.
Prescription: In Law, time after which a cause of action ceases. In insurance, time after which a claim may not be brought.
Statute of Limitations: Statute that sets out time periods within which specific legal actions must be taken.
Statement of Claim: Written statement by plaintiff detailing facts which support the claim against the defendant and the relief sought.
Plaintiff: Party that brings legal action against the other party, called the defendant.
Waiver: Voluntary relinquishment of a known right.
2 Forms of Letters Sent to Protect Interests of Insurer: Sent
to Insureds when Insurer has any suspicions or reservations about a loss:
1 Non-Waiver Agreement: Agreement between 2 parties recognizing
that there is a possible right (such as to deny liability) but in the interests
of both parties, a note will be made of it and the matter will be allowed
to proceed without prejudice to either party.
2 Reservation of Rights Letter: States that the Insurer is investigating
the loss without prejudicing its position.
Burden of Proof (Onus Probandi): Responsibility of proof; it
is the Insured’s responsibility to prove he has an insurance claim; in
a legal action, the burden of proof is generally first on the plaintiff
to show that he has a case, and then this onus switches to the defendant
to prove he was not at fault.
Proximate Cause: Immediate and effective Cause of Loss.
Not necessarily the last event before the loss. Coverage exists only
if the proximate cause is an insured peril. Scott v. Shepherd (1771),
squib case, definition of proximate cause.
Remote Cause: A cause other than the Proximate Cause.
Immediate Cause: Last event before the loss.
Limit of Loss: Loss limited by policy, many types: May be
valued policy or contract of compensation (for total loss, agreed value
paid regardless of actual cash value of property). May be replacement
cost coverage (no deduction for depreciation). Most policies limit
the amount of the Insurer’s liability to the least of:
1 Amount stated in policy
2 Insured’s interest in the property
3 Actual Cash Value of property
Release: Document in which 1 party, who has suffered damages or injuries, releases another party, who allegedly caused damages or injuries or is responsible for them, from all further claims arising out of the incident in return for a sum of $.
Salvage: Once the claim for a total loss for damaged property is made, the damaged property becomes the property of the Insurer who can sell it to reduce the total cost of the claim.
Subrogation: The right of an Insurer, after paying a loss, to assume the rights of the Insured to recover this loss from the responsible party.
Reinsurance: Another method of spreading the risk; to insure again
by transferring to another insurance company all or part of the liability
assumed; insurance for insurance companies.
Cession: The amount of insurance ceded, or transferred, to a
reinsurer.
Retention: The amount of insurance retained by the original Insurer.
Reinsurer: Reinsurance company or insurance company that assumes
business from the original Insurer.
Retrocession: Process of transferring all or part of the liability
assumed from 1 reinsurer to another reinsurer.
Retrocessionaire: Reinsurance company that assumes business from
the original reinsurer.
Purposes of reinsurance:
1 Increase writer’s capacity to write business: Insurer can write
higher level of risk & accept larger amounts than it could do on its
own.
2 Maintain proper reserve/liability balance: By law, Insurers
must maintain set amounts of reserves, which ties up $. By reinsuring
greater proportion of new business, it can reduce reserve requirements.
3 Reduce effect of catastrophic loss.
4 Provide stability in fluctuating market.
5 Enable Insurer to cease operations: Allows Insurer to withdraw
from a market quickly.
2 Methods of Reinsurance:
1 Proportional: Percentage of risk transferred to reinsurer and
reinsurer receives same percentage of original premium and is responsible
for same percentage of each loss.
2 Non-Proportional: Percentage of risk transferred to reinsurer;
Insurer pays all of a loss up to agreed amount called the priority; reinsurer
pays all or part of the loss which exceeds the priority up to an agreed
limit. Reinsurance premium is negotiated.
2 Types of Reinsurance:
1 Treaty: Agreement between Insurer & reinsurer which provides
automatic reinsurance for a whole class of insurance without the Insurer
having to submit each risk to the reinsurer. Less costly, less time-consuming,
less flexible.
2 Facultative: Reinsurance placed on an individual basis.
Both Insurer & reinsurer have choice of accepting reinsurance agreement
for each individual case. More costly, more-time consuming, more
flexible.
INDUSTRY ORGANIZATIONS:
Insurer’s Advisory Organization (1989) Inc. (IAO)
The IAO is in the risk information business. It was formed for
benefit of members and supported by members by an assessment fee basis.
In 1990, the IAO became a share capital profit company working on a fee
for service basis. The company administers the Nuclear Insurance
Association of Canada (NIAC), Pollution Liability Association (PLA), and
provides technical expertise to Fire Underwriters Survey (FUS). IAO
provides underwriting technical services and rating for auto liability,
casualty, and home insurance classes. 3 Divisions:
1 IAO Commercial and Residential Risk Services: Loss control,
engineering, inspection, research, and education (School of Loss Control
Technology) for fire prevention, safety, security, liability, crime, etc.
2 IAO Actuarial Consulting Services: Provides rating analysis
on various classes of business and other customer services.
3 IAO Automated Information Services Inc.: Provides on-line underwriting
& risk information & claims tracking.
Insurance Bureau of Canada: The national trade association of
the private property and casualty insurance industry. Main function
is to strengthen the business environment for the property and casualty
insurance industry. Researches insurance topics, engages in public
affairs, promotes high ethics, represents insurance interests in legal
matters. IBC strives to promote image of insurance in Canada.
3 Ad Hoc Committees: Natural Disasters, Environmental Liability,
Industry Competition.
Insurance Crime Prevention Bureau (ICPB): Purpose is to reduce
insurance fraud (10-20% of all claims are fraudulent, $1-2 billion per
year). ICPB funded by property/casualty companies. ICPB detects
& prevents insurance crime by assisting public authorities. ICPB
investigates all cases of arson/suspected arson. 3 Branches:
1 Fire Underwriters’ Investigation Bureau (FUIB): Crime relating
to fire & other property losses. Adjusters must submit copy of
reports to FUIB for all losses over $3,000.
2 Canadian Automobile Theft Bureau (CATB): For private auto insurance;
investigates auto theft, identifies stolen vehicles. All vehicle
thefts not recovered after 48 hours and all vehicle salvage sales reported
to CATB.
3 Casualty Claims Index Bureau: Reports names of persons presenting
claims for BI, auto accident benefits where disability > 4 weeks.
Centre for Study of Insurance Operations (CSIO): Non-profit venture between Insurance Brokers’ Associations, independent broker companies & system (computer) venders. Objective is to provide central forum for free discussion, collection & pooling of information and recommendation of methods & systems designed to enhance broker & Insurer operation, enhancing profits & consumer effectiveness.
The Facility (Facility Association): Provides auto insurance to high risk drivers; so that all licensed drivers are ensured coverage. All auto Insurers pay into ‘pool’, and high risk drivers obtain insurance from this common pool, profits & losses are shared by all participating Insurers.
Canadian Independent Adjusters’ Association (CIAA): Composed of member independent adjusting firms; objectives are to educate its members, promote interests of independent adjusters, improve public relations, advise members of legislative changes, and provide fellowship.
Canadian Insurance Claims Managers’ Association (CICMA): Composed of member claims managers. Promotes high ethics, administers Canadian Inter-Company Arbitration Agreement.
Insurance Brokers Association of Canada (1921, IBAC): Nonprofit trade organization composed of member brokers and broker companies. Goals: Elevate status of independent insurance intermediaries, professional development, improved standards of qualification & ethics to safeguard public interests, licensing courses.
Provincial Brokers Associations: Local associations exist in many areas to further their interests, represent their members views to govt. & Insurers, improve ethics & standards.
The Surety Association of Canada (SAC): Established as the “voice of the surety industry.” Composed of member bonding companies, surety reinsurers, brokers & related businesses. Devises better bond & contract wordings, promotes improved public relations & education.
Underwriters’ Laboratories of Canada (ULC): Not-for-profit organization which operates labs. & certification service for examination, testing & certification of devices, construction materials & services.
The Vehicle Information Centre of Canada (VICC): Non-profit research organization supported by private & govt. insurers. Established to analyze cost of insuring different models of cars. VICC works with manufacturers to demonstrate how various design features affect the cost of repair & insurance. VICC develops the Canadian Loss Experience Automobile Rating (CLEAR) system for physical damage coverages. CICC Advisory Committee researches factors that contribute to auto accidents.
EXAM TIME--GOOD LUCK!!!