MGMT-2007EL Chapter 5: Insurance
![](https://new-preview-html.oneclass.com/rKZ3w4gpqWELjZVEzX6zj8nX2G5YyBMv/bg1.png)
Chapter 5 – Insurance
Insurance
Insurance – allows one party (the insured) to transfer the risk of loss or the occurrence of an uncertain future
event to another party (the insurer)
In consideration for this benefit, the insured pays a monetary amount (a premium) to the insurer. The amount
of the premium will increase with the likelihood of the loss or the risk assumed by the insurer!
If the loss or the uncertain future event should occur, the insurer will compensate the beneficiary or
beneficiaries, the parties whom the compensation is to be paid named in the policy by the insured
The insurance contract protects a potential victim from the consequences of a possible accident by shifting the
risk of loss to the insurer. The insurer spreads the risk of loss among all individuals who are insured
• Premiums are held and invested by the insurer and are available to compensate a beneficiary for the loss
• At any given time, it is very unlikely that more than a small percentage of the total number of insureds
will suffer an unforeseen or unplanned loss
• Consequently, the premiums constitute a pool of funds to compensate the insureds for their loss
THE INSURANCE INDUSTRY
Both agents and brokers owe significant duties to the people they represent, so it can be important to determine
whether that party is acting for the insurance company or for the insured!
Insurance Broker – person(s) acting on behalf of the insured; operates an independent business, usually
dealing with several different insurance companies in the course of finding the best deal for their client
Often, businesses need the assistance of a broker to ensure adequate coverage
• In the event of a large risk, a broker may further spread the risk by involving 2 or 3 insurance
companies, each taking a percentage of the total
• One company will often carry the risk on paper, but turn to the reinsurance market where the risk is
divided among a larger number of secondary market companies
• Many of these companies operate only behind the scenes so that the policyholder has to deal with only
one adjuster in the event of a claim
Insurance Agent – person(s) acting on behalf of an insurer to handle policies; hired by an insurance firm to sell
insurance policies on its behalf
While insurance agents owe important obligations to their principals (the insurance corporations), they still owe
a duty of good faith to the customer; thus, agents will be held liable if they fail to provide the insurance
coverage asked for or otherwise fail to properly service the client’s needs
Adjusters – representatives of the insurer who are in charge of investigating and settling claims after the
insured-against event occurs; value the loss for the insurance company
THE INSURANCE CONTRACT
An insurance policy is a standard form contract used by insurers which contains the terms of the insurance
contract, and must conform to statutory requirements
![](https://new-preview-html.oneclass.com/rKZ3w4gpqWELjZVEzX6zj8nX2G5YyBMv/bg2.png)
The industry is tightly regulated by the Insurance Companies Act, which requires all non-provincial insurance
companies to be registered, and sets out the amount of reserves that must be retained to cover eventual claims
• Insurance legislation make certain terms mandatory and imply other terms into contracts of insurance if
the parties have not expressly addressed the matter
• It is possible to insure almost anything against damage or loss, with regard to almost any event.
However, most policies will exclude certain types of events, such as war, unless specifically included
Rider – a clause that is added to a new insurance contract before it takes effect in order to provide insured
coverage for an event which is specifically excluded by the standard form insurance policy
Endorsement – a document attached to an existing insurance contract that amends the policy in some way; may
add, remove, or alter the scope of the coverage
TYPES OF INSURANCE
Liability Insurance
Liability Insurance – provides the insured with protection against the consequences of his/her careless actions,
or those of employees or family members; type of insurance most closely associated with torts
This form of insurance will NOT provide coverage where the insured is not the one at fault, and will NOT cover
wilful acts, such as assault, theft, arson, or fraud. There must be negligence or some other basis for liability on
the part of the insured for the insurer to pay out on the policy!
There are many instances where liability insurance may be desired
→ Businesspeople should maintain appropriate insurance coverage to avoid potentially devastating claims
against them or their employees
→ Directors of companies may insure themselves against claims by employees, shareholders, or creditors
→ Corporations may obtain product liability insurance to compensate members of the public who are
injured by their product
→ Individuals often obtain personal liability insurance when they purchase their homeowner’s insurance.
Owners of vehicles must also obtain liability insurance for any damage that may be caused by the driver
Professional Liability Insurance – speciality insurance for lawyers, doctors, and other professionals that is
designed to cover risks occurring in their practices
Builder’s Risk Policy – insurance against liability & forms of loss taking place during the construction process
Umbrella Liability – a package of several types of insurance, allowing the insurer higher limits of coverage for
a more economical premium
Property Insurance
Property Insurance – provides compensation to the insured if the insured building is damaged or destroyed;
includes fire insurance, that against vandalism, and plate-glass insurance
• An insurer may only be liable for the purchase price or actual value of the property at the time of loss. It
may not be liable for its replacement value or improvements made to the property after purchase
• If the insured has made improvements to the property and has not notified the insurer, the insurer will
not be liable for the loss of the improvements
Insurance companies often set limits on what the company will pay in the event of a loss or apply a higher
deductible. Most insurance contracts require injured parties to maintain certain safety & security standards
Document Summary
Insurance allows one party (the insured) to transfer the risk of loss or the occurrence of an uncertain future event to another party (the insurer) In consideration for this benefit, the insured pays a monetary amount (a premium) to the insurer. The amount of the premium will increase with the likelihood of the loss or the risk assumed by the insurer! If the loss or the uncertain future event should occur, the insurer will compensate the beneficiary or beneficiaries, the parties whom the compensation is to be paid named in the policy by the insured. The insurance contract protects a potential victim from the consequences of a possible accident by shifting the risk of loss to the insurer. Both agents and brokers owe significant duties to the people they represent, so it can be important to determine whether that party is acting for the insurance company or for the insured!