Luna Puspita 1006805246 I.

Risk and Insurance

The Law of Insurance, Summary

A. Risk There are a lot of definitions about what is risk. In a general perspective, risk can be defined as: a) the possibility of an unfortunate occurrence; b) doubt concercing the outcome of a situation; c) unpredictability; d) the possibility of loss; or e) the chance of gain, such as hoped for benefit from a gamble or investment strategy. The similarity between all of the terms is that risk has the elements of uncertainty or unpredictability or danger. Risk management may be defined as the identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise. The reason that the risk management is important are because: a) it reduces the potential for loss by identifying and managing hazards; b) it gives shareholders a greater degree of confidence in a companys ability to manage its risks; and c) it provides a disciplined approach to quantifying rxisks. Risk management involved 3 steps, which are: a) Risk Identification, which involves discovering the company threats that may exist and the potential threats that may exist in the future; b) Risk Analysis, which examine the past data to evaluate or analyze the risk; and c) Risk Control, which involves reducing or even eliminating the risk. There are three categories of risks, namely: a) the Financial and non-financial risk; In order for a risk to be insurable, the outcome of the adverse events must be capable of measurement in financial terms. For example, the financial value of the risk in accidental damage to a motor car is the cost of repairing or replacing the vehicle. b) pure and speculative risk Pure risk means where there is the possibility of a loss but not a gain, and where the best that people can achieve is a break-even situation. In the other hand, speculative risk cannot be insurable. For example, fire could damage or destroy property or cause an interruption to the running business. c) particular and fundamental risk. Fundamental risk is a risk that occur on such a vast scale and are uninsurable. In the other hand, particular risk is a risk that are localized or even personal in their cause

Luna Puspita 1006805246

The Law of Insurance, Summary

and effect. For example, a theft of personal possession from home is an event that only affects an individual, and included in the particular risk. There are four aspects of a risk that need to be examine in order to decide whether a risk can be insured or not, which are: a) The event insured against must be fortuitous or unforeseen; b) There must be insurable interest; c) insuring the risk must not be against public policy; d) the question of homogeneous exposures. Peril and Hazard is the final aspect of risk. A peril is defined as that which gives rise to a loss (for example, when lightning occurs, the natural peril can result in damage), and a Hazard is defined as that which influences the operation or effect of the peril (for example the existence of local diseases in a safari holiday is a hazards in travel insurance). Further, hazards can be break down in two parts, the physical and moral hazards. Physical Hazards relates to the physical characteristics of the risk and includes any measurable dimension of the risk, where as in Moral Hazards arises from the attitude and behavior of people.

B. Insurance The primary function of insurance is to act as a risk transfer mechanism, which is to transfer a risk from the insured to the insurer. The basic concept of insurance is that the losses of the few who suffer misfortune are met by the contributions of the many who are exposed to similar potential loss. In insurance, the insurer sets itself up to operate a pool of insurance. Insurance brings many benefits to policy holders and to society as a whole, such as: a) it releases capital within companies that can be used in the business; b) enterprises are encouraged to start or expand; c) employees are kept in work; d) losses are reduced in size and number; e) the nation benefits from the investment; and f) the nation benefits from so-called invisible exports. An insurer may choose to share a risk by means of co-insurance, that means each insurer receives a stated proportion of the premium and pays the same proportion of any losses that occur. The term co-insurance is also used in relation to the amount of a risk that the insured may retain. Dual insurance is a term used when there are two or more policies in force which cover the same risk. In the other hand, self-insurance means that an individual

Luna Puspita 1006805246

The Law of Insurance, Summary

or company has decided not to use insurance as the risk transfer mechanism, but to carry the risk themselves by means of funding. There are several types of general (non-life) insurance, which are: 1) property insurance, that cover risks to actual property; 2) pecuniary insurance, which is the insurance of intangibles such as income, revenue, or value; 3) motor insurance; 4) liability insurance; 5) marine and aviation insurance; 6) combined or packaged policies; and 7) health insurance.

II.

Insurable Interest Insurable interest is one of the elements necessary to create a valid insurance

contract. It is the legal right to insure arising out of a financial relationship recognized at law, between the insured and the subject-matter of insurance. There are some features of insurable interest, which are: a) subject-matter, which may arise at common law, under a contract, and under a statute; b) legal relationship; c) financial value; d) insurers insurable interest; e) anticipated insurable interest. First, subject-matter of insurable interest can be divided into subject-matter of insurance, which is the item or event insured, and the subject-matter of the contract, which is the name given to the financial interest a person has in the subject-matter of the insurance. Second, the legal relationship of insurable interest is the relationship between the insured and the subject-matter of the insurance must be recognized in law. Third, the financial value of the insurable interest means that the subject-matter of insurance must have financial value. Fourth, insurers insurable interest means that the insurer and the co-insurer have an insurable interest in the risk that they have assumed. Fifth, anticipated insurable interest means that the expectation of acquiring insurable interest at some time in the future may not be enough to create insurable interest in general non-marine insurance. Different rules apply to different classes of Insurance. In the life assurance contracts, the insurable interest must exist at inception but need not exist at the time of a loss. In marine insurance contract, the insurable interest must exist at the time of a loss but need not exist at inception, provided that there is a reasonable expectation of interest. In general insurance contracts, the general rule is that the insurable interest must exist at both the inception and at the time of a loss, though some connection other than a full insurable interest may be sufficient at inception.

Luna Puspita 1006805246

The Law of Insurance, Summary

In property insurance, insurable interest usually arises out of ownership, though certain others who are not the full owner can also have an insurable interest. Whereas, in the liability insurance, a person has insurable interest to the extent of any potential legal liability that they may incur to pay damages awarded by a court and other costs.

III.

Utmost Good Faith Utmost good faith is a positive duty voluntarily to disclose, accurately and fully,

all facts material to the risk being proposed, whether requested or not. This shall means that the party to a contract must volunteer material information in all negotiations before the contract comes into effect. This principle applies equally to both the proposer and the insurer throughout the contract negotiations, even though it will apply differently to each party, where the proposer has the duty to disclose all material facts about the risk to the insurer and the insurer must be entirely open with the proposers. In the case there is an absence of a specific policy condition or requirement in a policy, the duty of disclosure will revive only at the time of negotiation prior to renewal. There are some policies that have an all-embracing condition requiring continuing disclosure of all material facts, which defined as every circumstances that would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. There are several important rules about the insurers waiver. First, insurer are considered to have waived their right to information if they are put on enquiry about a fact but do not follow it up, and cannot refuse to pay a claim in these circumstances. Second, insurers have the option of waiving their right to avoid a policy on the grounds of non-disclosure, in which case the policy remains in force. Third, insurers are estopped from asserting their right to avoid a contract for non-disclosure if they act in a way that indicates that the policy remains in force. The insured must make a full and complete disclosure of all material facts relating to the contract. The FSA rules require an intermediary to explain the importance is this matter. In the matter of a retail customers, unless there is evidence of fraud, FSA rules states that the insurers will not refuse to meet a claim on the basis of non-disclosure of a material fact that the insured could not have been expected to disclose. Further, in the duty of disclosure, the policy wordings can modify the duty

Luna Puspita 1006805246

The Law of Insurance, Summary

of disclosure and making it a continuing duty not just in the beginning of the contract. The proposer has a very heavy duty to disclose material facts. However, there are some facts that are, indeed, material but do not need to be disclosed. This is because the insurer ought to know them or could find them out. The facts that do not need to be disclosed are: a) facts of law, because everyone is deemed to know the law; b) facts of public knowledge; c) facts that lessen the risk, because it would be unusual not to advise the insurer of facts that lessen the risk since they are matters that usually have the effect of producing a lower premium or better cover from them; d) facts where the insurer has waived its right to the information; e) facts that a survey should have revealed, however this would only apply in circumstances where the insurer has actually carried out a survey; f) facts that the insured does not know. However there are tests that need to be applied for this facts, which are whether it is reasonable to expect the insured/proposer to disclose a material fact, and whether misrepresentation is negligent; g) facts covered by policy terms, because the insured is not required to declare those things that are specifically dealt with the policy term; and h) spent convictions. There is a general rule that if the insured is in breach of the duty of disclosure, the insurer may avoid the contract entirely, ab initio (from the beginning). The legal rule is that non-disclosure arises and gives grounds for avoidance by the second party to the contract where a fact is within the knowledge of the first party or the insured, a fact is not known to the second party, or a fact is calculated, if disclosed, to induce he second party to enter the contract at terms they consider to be better, or not to enter the contract at all. FSA rules states that the insurer will not refuse to meet a claim on the grounds of misrepresentation of a fact material to the risk, unless the misrepresentation is negligent. The misrepresentation must concern a fact and not an opinion, and must other wise meet the conditions relating to non-disclosure.