CHAPTER 9

FUNDAMENTAL LEGAL PRINCIPLES

CONTENT

this chapter will discuss the following:

1. The fundamental legal principles on which

insurance contracts are based
2. Requirements of Insurance contract
3. Distinct legal characteristics of insurance
contracts
4. Law and Insurance agents
FUNDAMENTAL LEGAL PRINCIPLES OF
INSURANCE CONTRACTS

Legal
Principles

Insurable Subrogatio Utmost

Indemnity
Interest n Good Faith
FUNDAMENTAL LEGAL PRINCIPLES OF
INSURANCE CONTRACTS

Legal
Principles

Insurable Subrogatio Utmost

Indemnity
Interest n Good Faith
PRINCIPLE OF INDEMNITY

• It states that:

“the insurer agrees to pay no more than the

actual amount of the loss. In other words,
the insured should not profit from a loss”

Copyright © 2008 Pearson Addison-Wesley. All

rights reserved. 5-5
PRINCIPLE OF INDEMNITY
• A contract of indemnity does not mean that all
covered losses are always paid in full.
• The amount might be less because of:
deductibles, dollar limit amounts, and other
contractual provisions.
• The principle of indemnity has two purposes:
1. To prevent the insured from profiting from a loss
2. To reduce moral hazard.
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
- Property insurance: compensation is based on the
actual value of the damaged property at the time
of loss.
- But how would you now the actual cash value?
- Three methods are proposed:
1. Replacement cost less depreciation
2. Fair market value
3. Broad evidence rule
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
1. Replacement cost less depreciation
Under this method:
Actual cash value = Replacement cost -
Depreciation

 It takes both inflation and depreciation into

consideration
 Replacement cost: the current cost of
resorting damaged property with new material
of the same kind
 Depreciation: the deduction for physical wear
and tear, age and economic obsolescence
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
1. Replacement cost less depreciation
For example:
Sarah has a favorite couch that burns in a fire.
Assure she bought the couch five years ago, the
couch is 50 percent depreciated, and a similar
couch today would cost $1000. How much would
Sarah collect?
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
1. Replacement cost less depreciation
Example: Cont’d
Under this method, Sarah will collect:
Replacement cost = $1000
- (50% depreciation)= $500
Actual cash value = $500
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
2. Fair Market Value

- Some courts have ruled that fair market value should be

used to determine the actual cash value:
- Fair market value is : “ The price a willing buyer would pay
a willing seller in a free market”
- It might be different than the actual cash value in the pervious
method because of: poor location, deteriorating neighborhood,
or economic obsolescence of the building.
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
3. Broad Evidence Rule
“ The determination of the actual cash value should
include all relevant factors an expert would use to
determine the value of the property”

- These factors include: replacement cost less depreciation, fair

market value, present value of expected from the property,
comparison sales of similar property, opinions of appraisers,
etc.
PRINCIPLE OF INDEMNITY
• Actual cash value concept:
Determining the actual cash value in insurance
policies other than property:
- Liability insurance: the insurer pays up to the
policy limit.
- Business income insurance: amount is based on
the loss of profits plus continuing expenses when
the business is shut down.
- Life Insurance: Amount paid is the face value of
the policy
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
1. Valued policy
2. Valued policy laws
3. Replacement cost insurance
4. Life insurance
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
1. Valued policy : “ a policy that pays the face amount of
insurance if a total loss occurs”

• Used to insure: antiques, fine arts, rare paintings, and family

heirlooms.
• Because: of the difficulty in determining the actual value of
the property at the time of loss.
• Insure and insurer agree on the value when the policy first
issued.
• The principle of indemnity is violated because the amount
paid is more than the actual cash value
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
2. Valued Policy Laws: “ is a law that exists in some states
that requires payment of the face amount of insurance to
the insured in total loss to the real property occurs from a
peril specified in the law”
- examples of perils: fire, lighting, windstorm, and tornados.
- Law apply for real property only and in the case of total
loss
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
2. Valued Policy Laws
Example: building insured for $200,000, actual
cash value $175,000. in the case of loss, insurer is
going to pay $200,000
- Purpose: to protect insured if agent deliberately
over insured property
- However it increases moral hazard.
- Underinsurance is now a greater issue. It result
in inadequate premiums and inadequate
protection.
- The principle of indemnity is violated because
the amount paid is more than the actual cash
value.
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
3. Replacement Cost Insurance

“ There is no deduction for physical depreciation in

determining the amount of loss”
- Purpose: Paying the actual cash value might still result in
loss to the insured, because not many people budget for
deprecation.
- Used to insure: homes, buildings, business and personal
property.
PRINCIPLE OF INDEMNITY
• Exceptions to the Principle of Indemnity:
4. Life Insurance

“ the contract of life insurance is not a contract of

indemnity, but it is a valued policy that pays a stated sum”
- Using replacement cost in life insurance policy is
meaningless
- The need to provide a specific amount monthly for
example, a certain amount of life insurance must be
purchased before death.
FUNDAMENTAL LEGAL PRINCIPLES OF
INSURANCE CONTRACTS

Legal
Principles

Insurable Subrogatio Utmost

Indemnity
Interest n Good Faith
PRINCIPLE OF INSURABLE INTEREST

“The insured must be in a position to lose

financially if the covered loss occurs”
- For example:
- You have an insurable interest in your car because you
may lose financially if the car is damaged or stolen.
Why is it needed?
PRINCIPLE OF INSURABLE INTEREST

• Purposes of an insurable interest

1. To prevent gambling
2. To reduce moral hazard
3. To measure the amount of the insured’s loss in
property insurance
PRINCIPLE OF INSURABLE INTEREST

Purposes of an insurable interest

1. To prevent gambling

- If insurable interest was not required, the

contract would be a gambling contract and
against the public interest.
- For example: you could insure the property of
someone else and hope for the loss to happen.
PRINCIPLE OF INSURABLE INTEREST

Purposes of an insurable interest

2. To reduce moral hazard

- For example: a dishonest person could

purchase a property insurance contract on
someone else’s property and then deliberately
causes a loss to receive the proceeds.
PRINCIPLE OF INSURABLE INTEREST

Purposes of an insurable interest

3. To measure the amount of the insured’s
loss in property insurance
- Because most insurance contracts are contracts of indemnity, if
the loss payment cannot exceed the amount of one’s insurable
interest, the principle of indemnity is supported
PRINCIPLE OF INSURABLE INTEREST

• Examples of an Insurable Interest

- It is important to distinguish between insurable
interest in property and casualty insurance and
life insurance.
PRINCIPLE OF INSURABLE INTEREST

1. Property and Casualty Insurance:

a. Ownership of property and casualty: owners of
property will lose financially if the property is
damaged or destroyed.
b. Potential legal liability: dry-cleaning property
example
c. Secured creditors: a commercial bank that lend
money to buy the house has an insurable interest.
The property serves as a collateral for the loan
d. A contractual right: a business firm that has bought
merchandise from abroad and waiting for delivery.
PRINCIPLE OF INSURABLE INTEREST

2. Life Insurance:
- Insurable interest dose not apply when you
purchase life insurance on your self.
- The beneficiaries are not required to have an
insurable interest in your life.
- If you buy a life insurance policy on the life of
another person, you must have an insurable
interest in that person’s life. i.e. close family, or
marriage.
PRINCIPLE OF INSURABLE INTEREST

2. Life Insurance:
- Cousins cannot insure each other unless a
pecuniary relationship is present
- For example: a corporation can insure the life of
an outstanding salesperson because his death
might cause the firms’ profit to decline.
PRINCIPLE OF INSURABLE INTEREST

When must an insurable Interest Exist?

- In property insurance: it must exist at the time of
loss. There are two reasons
1. Most property insurance contracts are contracts
of indemnity. If the insurable interest does not
exist at the time of loss, the insured would not
incur any financial loss.
2. You may have an insurable interest not at the
time of writing the contract, but in sometime in
the future. Example: ocean marine insurance
PRINCIPLE OF INSURABLE INTEREST

When must an insurable Interest Exist?

- In life insurance: it must be met only at the
inception of the policy, not at the time of death.
- Because it is not a contract of indemnity.
- Beneficiaries have a legal claim to receive policy
proceeds, they do not have to show that they had
a financial loss.
PRINCIPLE OF INSURABLE INTEREST

Now test yourself:

To collect covered insurance under a property
insurance contract, when must an insurable
interest exsit?
I. At the inception of the contract
II. At the time of loss

a) I only
b) II only
c) Both I and II
d) Neither I nor II
PRINCIPLE OF INSURABLE INTEREST

Now test yourself:

To collect covered insurance under a property
insurance contract, when must an insurable
interest exsit?
I. At the inception of the contract
II. At the time of loss

a) I only
b) II only
c) Both I and II
d) Neither I nor II
 PRINCIPLE OF INSURABLE INTEREST

• Insurable interest is required to all of the

following EXCEPT:

a) To prevent gambling
b) To measure the extent loss
c) To reduce premiums
d) To reduce moral hazard
PRINCIPLE OF INSURABLE INTEREST

• Insurable interest is required to all of the

following EXCEPT:

a) To prevent gambling
b) To measure the extent loss
c) To reduce premiums
d) To reduce moral hazard
FUNDAMENTAL LEGAL PRINCIPLES OF
INSURANCE CONTRACTS

Legal
Principles

Insurable Subrogatio Utmost

Indemnity
Interest n Good Faith
 PRINCIPLE OF SUBROGATION

• Subrogation means substitution

• “ it is the substitution of the insurer in place of
the insured for the purpose of claiming indemnity
from a third person for a loss covered by the
insurance”
• It only applies when the insurer makes a loss
payment.
• Insured gives the insurer any legal rights to
collect damages from the third party.
 PRINCIPLE OF SUBROGATION

• Purpose of Subrogation
- It has three basic purposes:

1. To prevent insured from collecting twice for the same loss.

2. It used to hold the negligent person responsible for the
loss.
3. It helps to hold down insurance rates.
 PRINCIPLE OF SUBROGATION

• Principles of Subrogation
- It can be discussed in four points:
1. The insurer is entitled only to the amount it has
paid under the policy.
- Sharing policy
 PRINCIPLE OF SUBROGATION

• Principles of Subrogation
• Example of subrogation recovery:
- The insured must be reimbursed in full for the loss; the
insurer is then entitled to any remaining balance up to
the insurer’s interest, with any remaining amount going
to the insured.
- Andrews house worth $200,000, is insured for $160,000
with AXA. The house got damaged because of faulty
wiring. Thus, Andrew received $160,000 from the
insurance company. The insurer then tried collect from
the third party and got $100,000.
Out of this 100,000, Andrew got $40,000 (to reach house
worth) and the insurer can retain the remaining
$60,000.
 PRINCIPLE OF SUBROGATION

• Principles of Subrogation
2. The insured cannot impair the insurer’s
subrogation rights.
- For example, if the insured waives the right to
sue collect from the third party, the right to
collect from the insurer for the loss is also
waived.
3. Subrogation does not apply to life insurance
and to most individual health insurance
contracts.
- Because it only applies to contracts of indemnity
 PRINCIPLE OF SUBROGATION

• Importance of Subrogation
4. The insurer cannot subrogate against its own
insureds
FUNDAMENTAL LEGAL PRINCIPLES OF
INSURANCE CONTRACTS

Legal
Principles

Insurable Subrogatio Utmost

Indemnity
Interest n Good Faith
PRINCIPLE OF UTMOST GOOD FAITH

• “A higher degree of honesty is imposed on both

parties to an insurance contract than is imposed
on parties to other contracts”
- It is supported by three important legal doctrines:
1. Representation
2. Concealment
3. Warranty
PRINCIPLE OF UTMOST GOOD FAITH

1. Representations:
“ statements made by the applicant for insurance”
- Answering questions such as age, weight,
occupation, etc.
PRINCIPLE OF UTMOST GOOD FAITH

1. Representations:
• The insurance contract is voidable at the insurer’s
option if the representation is:
1. Material: if the insurer knew the true facts, the policy
would not have been issued, or it would have been
issued on different terms.
2. False: the statement is not true or is misleading
3. Relied on by the insurer: the insurer relies on the
misrepresentation in issuing the policy at a specified
premium
PRINCIPLE OF UTMOST GOOD FAITH

1. Representations:
- Example: Joseph applies for life insurance and
states in the application that he has not visited a
doctor within the five last years. However, six
months earlier, he had a surgery for lung cancer.
- He has made a material error, false and relied on
by the insurer. And the contract is voidable at the
insurer’s option.
PRINCIPLE OF UTMOST GOOD FAITH

1. Representations:
- The insurer must prove that the applicant spoke
fraudulently, even if it was a statement of opinion
or belief.
- Innocent misrepresentation: is unintentional,
material fact, if relied on by the insurer, also
makes the contract voidable.
- This doctrine also applies to statements made by
the insured after the loss occurs. (i.e. when
claiming for settlement)
PRINCIPLE OF UTMOST GOOD FAITH

2. Concealment:
“Intentional failure of the applicant for insurance to
reveal a material fact to the insurer”
- It is the same as nondisclosure, intentionally
hiding information from the insurer.
- Legal effect: the contract is voidable at the
insurer’s option.
PRINCIPLE OF UTMOST GOOD FAITH

2. Concealment:
- To deny claim based on concealment, a non-
marine insurer must prove the following:
1. The concealed fact was known by the insured to be
material
2. The insured intended to defraud the insurer.
- Its applied in a harsher manner in marine
insurance. The insurer can just show that the
concealed fact is material to deny payment of a
claim.
PRINCIPLE OF UTMOST GOOD FAITH

3. Warranty:
“A statement that becomes part of the insurance
contract and is guaranteed by the maker to be true
in all respects”
- It is a harsh legal doctrine.
- Even a minor breach of the warranty, allow the
insurer to deny payment of the claim.
PRINCIPLE OF UTMOST GOOD FAITH

3. Warranty:
- To soften this doctrine, it had been modified as
follows:
1. Statements made by applicants are considered
representations not warranties.
2. Liberal interpretation of warranty breach if it has a
temporary or insignificant risk.
3. The insurer cannot deny a claim unless the breach
of warranty increases the hazard.
4. Insured is allowed to recover for a loss unless the
breach of warranty actually contributed to the loss.
REQUIREMENTS OF AN INSURANCE
CONTRACT
• An insurance policy is based on the law of
contracts.
• Insurance contract should meet four requirements
to be legally enforceable.
1. Offer and Acceptance
2. Consideration
3. Competent Parties
4. Legal purpose.
REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- The applicant makes the offer, and the company
accepts or rejects the offer.
- Sometimes the agent invites the insure to an
offer.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In property and casualty insurance:
- Offer and acceptance can be written or oral.
- In the absence of a specified legislation, oral
insurance contracts are valid.
- But they are written, mostly.
- Offer: applicant filling the application and paying
the first premium.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In property and casualty insurance:
- then the agent accept the offer on behalf of the
company.
- Agents have the power to bind their companies
through the use of a binder.
- Binder: a temporary contract for insurance and
can be either oral or written. And then the
insurance contract can be effective immediately.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In property and casualty insurance:
- In some cases, the agent is not authorized to bind
the company, and the application must be sent to
the company for approval.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In life insurance:
- The procedure is different.
- The life insurance agent does not have the power
to bind the insurer.
- Application is always written
- Application must be approved by the company.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In life insurance:
- Offer: applicant filling the application and paying
the first premium.
- A conditional premium receipt is then given to the
applicant. It specifies the date at which the
insurance contract is effective. For example,
immediately, or at a date in the future ( after the
medical test)
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In life insurance:
- Different set of rules applies when the applicant
does not pay the first premium when filling the
application.
- in this case before life insurance is in force:
1. The policy should be issued and delivered to the
applicant.
2. First premium must be paid
3. Applicant must be in good health.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
1. Offer and Acceptance:
- In life insurance:
- Some insurers requires that there must be no
interim medical treatment between the
application and delivery of the policy.
- These requirements called “conditions
precedent”. They must be fulfilled before the life
insurance is in force
 REQUIREMENTS OF AN INSURANCE
CONTRACT
2. Consideration
- “ the value that each party gives to the other”.
- Insured consideration:
1. Payment of premium
2. Agreement to abide by the conditions specified in the
policy
- Insurers consideration:
1. the promise to do certain things specified in the contract.
(paying for loss, provide loss prevention and safety, etc. )
 REQUIREMENTS OF AN INSURANCE
CONTRACT
3. Competent Parties
- Each party should be legally competent.
- “parties must have legal capacity to enter into a
binding contract”
- All adults are legally competent but there are
some exceptions.
- Insane persons, intoxicated persons, and
corporations that act outside the scope of their
authority.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
3. Competent Parties
- Minors lack full legal capacity.
- Some states allow minors to enter into a valid life
insurance contract at age of 15.
- Insurers to be legally competent they should be
licensed to sell insurance, and sold insurance
must be within the scope of its charter.
 REQUIREMENTS OF AN INSURANCE
CONTRACT
4. Legal Purpose
- An insurance contract that encourages or
promotes something illegal or immoral is contrary
to the public interest and cannot be enforced.
DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS

• Insurance contracts are different from other legal

contracts.
• In addition to what is discussed earlier, other
insurance contract legal characteristics are:
1. Aleatory Contract
2. Unilateral Contract
3. Conditional Contract
4. Personal Contract
5. Contract of Adhesion
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
• Aleatory Contract:

- Specifically, the word aleatory means: dependent on

chance.

- “ an aleatory contract is a contract where the values

exchanged may not be equal but depend on an uncertain
event”
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
• Aleatory Contract:
Example:
1. Jessica pays a premium of $600 for $200,000 of
homeowners insurance. If it is destroyed shortly,
she will receive an amount that exceeds the
premium paid.
2. Joan has been paying home insurance premium
for 8 years, but damages have never happened.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
• Aleatory Contract:

On the other hand, other commercial contracts are

commutative.

- Commutative means: interchanging.

- “ a commutative contract is one in which the values

exchanged by both parties are theoretically equal”

- Example: a buyer of real estate pays a price that is viewed

to be equal to the value of the property.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
1. Aleatory Contract:
- Although there is an essence of chance,
insurance contract is not gambling. How?
- Gambling creates a new speculative risk that did
not exist before the transaction
- Insurance is technique of handling an already
existing pure risk.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
2. Unilateral Contract:

- The word unilateral means: one-sided

- “ A unilateral contract means that only one party makes a

legally enforceable promise”

- Only the insurer makes the promise to pay claims and other
services.

- After paying the first premium the insured is not legally

obliged to continue paying or comply with the contract
conditions.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
2. Unilateral Contract:

- Insured must continue to pay if he wants to benefit from the

services, but he cannot be legally forced to do so.

- If premiums are paid, the insurer must accept them and

provide protection under the contract.

- However, commercial contracts are bilateral. Meaning: “each

party makes legally enforceable promise to the other party”

- If you bought a house and did not pay the price, the seller of
the house can sue you to get the money. But the insurer
cannot take you to court if you did not pay premiums.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
3. Conditional Contract:
- The insurance contract is a conditional contract.
- The insurer’s obligation to pay the claim depends
on whether the insured has complied with all
policy conditions.
- “conditions are provisions inserted in the policy
that qualify or place limitations on the insurer’s
promise to perform”
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
3. Conditional Contract:
- Conditions imposes certain duties on the insured
if he or she wishes to collect for a loss.
- The insurer is not obligated to pay a claim if the
policy conditions are not met.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
4. Personal Contract:

- “In property insurance, the contract is between the insured

and the insurer”

- In other property insurance does not insure the property, by

the property owner from loss. He is compensated if the
property is damaged.

- Accordingly, the applicants should be acceptable to the

insurer and must meet certain standards, i.e. character,
morals and credit.
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
4. Personal Contract:

- The insurer’s consent (approval) is required before a

property insurance can validly be assigned to another party.

- In contrast, life insurance can be assigned to anyone,

because it will not change the risk or probability of death.

- Loss payment for a property loss can be assigned to

another party without the insurer’s consent
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
5. Contract of Adhesion:

- “ The insured must accept the entire contract with all of its
terms and conditions”

- The insured cannot insist that certain provisions be added

or deleted or the contract to be rewritten to suite him/her.

- “ the courts have ruled that any ambiguities or

uncertainties in the contract are construed against the
insurer”. That is, the insured get the benefit of the doubts.
Why?
 DISTINCT LEGAL CHARACTERISTICS OF
INSURANCE CONTRACTS
5. Contract of Adhesion:
- The previous is enforced by the principle of
reasonable expectations:
- “ An insured is entitled to coverage under a policy
that he or she reasonably expects it to provide,
and that be effective, exclusions or qualifications
must be conspicuous, plain and clear”
- Example page: 186
LAW AND THE INSURANCE AGENT

- An insurance contract is usually sold by an agent

who represents the principle (insurance
company).
- The agent has the authority to act on behalf of
someone (principle)
LAW AND THE INSURANCE AGENT

• General Rules of Agency:

- Rules of law that govern the actions to agents
and their relationships to insured include the
following:
1. There is no presumption of agency relationship
2. An agent must have authority to represent the principle
3. A principle is responsible for the acts of agents acting
within the scope of their authority
LAW AND THE INSURANCE AGENT

• General Rules of Agency

1. There is no presumption of agency relationship
- some visible evidence of an agency relationship
should exist.
- For example: business card, rate data, and
applications, etc.
LAW AND THE INSURANCE AGENT

• General Rules of Agency

2. An agent must have authority to represent the principle
- An agent’s authority is derived from three
sources:
A. Express authority
B. Implied authority
C. Apparent authority
LAW AND THE INSURANCE AGENT

• General Rules of Agency

2. An agent must have authority to represent the principle
A. Express Authority

I. It refers to the powers specifically conferred on

the agent.
II. These powers are stated in the agency
agreement between the agent and the
principle.
III. The agreement might withhold some powers
and deny others.
LAW AND THE INSURANCE AGENT

• General Rules of Agency

2. An agent must have authority to represent the principle
B. Implied Authority
I. The authority of the agent to perform all incidental
acts necessary to fulfill the purposes of the agency
agreement
II. For example: if the agent has an express authority to
deliver life insurance, it is implied that he has the
power to collect the first premium.
LAW AND THE INSURANCE AGENT

• General Rules of Agency

2. An agent must have authority to represent the principle
C. Apparent Authority

I. If the agent acts with apparent authority to

do certain things, and the third party
believed that the agent is acting within the
scope of reasonable authority, the principle
is bound with the agents action.
II. The third party should perform due diligence
to determine the actual agents’ authority
LAW AND THE INSURANCE AGENT

• General Rules of Agency

3. A principle is responsible for the acts of agents acting within
the scope of their authority
- The responsibility includes fraudulent acts,
omissions, and misrepresentations.
- “knowledge of the agent is presumed to be the
knowledge of the principle with respect to
matters within the scope of the agency
relationship”
LAW AND THE INSURANCE AGENT

• Waiver and Estoppel

- Direct relationships with the law of agency and
powers of agents.
- An insurer is may be legally required to pay a
claim that is ordinarily would not have to pay.
LAW AND THE INSURANCE AGENT

• Waiver and Estoppel

- Waiver: “ Is the voluntary relinquishment of a known
legal right.”
- If the insurer voluntary waives a legal right under the
contract, it cannot deny the payment of a claim on
the ground that such a legal right was violated.
- Example: The insurer receives an application with
missing information, but he did not contact the
applicant. Later on, the insurer cannot deny
payment of claim based on that missing information.

• Because it has waived its requirements.

LAW AND THE INSURANCE AGENT

• Waiver and Estoppel

- “ Estoppel occurs when a representation of fact
made by one person to another person is
reasonably relied on by that person to such an
extent that is would be inequitable to allow the
first person to deny the truth of the
represntation”
• Waiver and Estoppel
- In simple words: “ if one person makes a
statement of fact to another person, who
reasonably relies on the statement to his or her
detriment, the first person cannot deny the
statement was made”
- It prevent persons from changing their minds to
the detriment of another party.
END OF CHAPTER 9