Ruth owns and manages an insurance agency. While she was on vacation, she hired
ID: 408231 • Letter: R
Question
Ruth owns and manages an insurance agency. While she was on vacation, she hired a temporary employee, Kathie, to answer telephone calls and questions. Kathie is not an insurance agent and has no insurance experience. During the week, Kathie misunderstood the extent of her responsibilities and agreed to bind coverage for several policyholders who represented loss exposures not written by the companies the insurance agency represented. Considering the responsibilities of an agent to a principal, explain whether Ruth has violated any of these responsibilities?
Some insurance policies cover a wide range of perils. All perils, or risks, are covered except those that are specifically excluded. The term “all risks” insurance, which was once used to describe these policies, is being replaced by other terms, such as “special coverage” or “special perils”. Explain how the term “all-risks” may have been a violation of the unfair trade practices laws.?
Explanation / Answer
Agent's Responsibilities to Company
The agent's contract or agency agreement with the insurer will specify the agent's duties and responsibilities to the principal. In all insurance transactions, the agent's responsibility is to act in accordance with the agency contract and thus for the benefit of the insurer. In accordance with the agent's fiduciary obligation to the insurer and his or her agency agreement, the agent has a responsibility of accounting for all property, including money that comes into his or her possession. As part of the agent's working relationship with the insurer, it is important that pertinent information be disclosed to the insurer, particularly with regard to underwriting and risk selection. If the agent knows of anything adverse concerning the risk to be insured, it is his or her responsibility to provide this information to the insurer. To withhold important underwriting information could adversely affect the insurer's risk selection process. In accordance with agency law, information given to the agent is the same as providing the information to the insurer.
It is the agent's responsibility to obtain necessary information from the insurance applicant and to accurately complete the application for insurance. A signed and witnessed copy of the application becomes part of the legal contract of insurance between the insured and the insurer.
Finally, the agent has a responsibility to deliver the insurance policy to the insured and collect any premium that might be due at the time of delivery.
The agent must be prepared to provide the insured with an explanation of some of the policy's principal benefits and provisions. If the policy is issued with any changes or amendments, the agent will also be required to explain these changes and obtain the insured's signature acknowledging receipt of these amendments.
Company's Responsibility to Agent
The company is required to permit the agent to act in accordance with the terms of the agent's employment contract, and the company must recognize all the provisions of that contract.
In addition, the company must pay the agent the compensation agreed upon in the contract, must reimburse the agent for proper expenditures made on behalf of the principal, and must indemnify the agent for any losses or damages suffered without fault on the part of the agent but occurring on account of the agency relationship.
Potential Liabilities of Agent/Errors and Omissions (E&O) Exposure
Errors and omissions (E&O) insurance is needed by professionals who give advice to their clients. It covers negligence, error, or omission by the insurer or producer who is the insurer's representative. E&O policies protect producers from financial losses they may suffer if insureds sue to recover for their financial loss due to a producer giving them incorrect advice (error) or not informing them of an important issue (omission). Because a producer's office is very busy, he or she must take special care to follow strict procedures in regard to taking applications, explaining coverages, collecting premiums, submitting changes to policies upon an insured's request, and preparing claim forms.
Agent's Responsibility to Insured/Applicant
An agent has a fiduciary responsibility to the insured, the insurer, the applicant for insurance, current clients, and so forth. The agent has a fiduciary duty to just about any person or organization that he or she comes into contact with as part of the day-to-day business of transacting insurance.
Agency Law
An understanding of the law of agency is important because an insurance company, like other companies, must act through agents.
Agency Law Principles
Agency is a relationship in which one person is authorized to represent and act for another person or for a corporation. Although a corporation is a legal "person," it cannot act for itself, so it must act through agents. An agent is a person authorized to act on behalf of another person, who is called the principal.
In the field of insurance, the principal is the insurance company and the sales representative or producer is the agent. When one is empowered to act as an agent for a principal, he or she is legally assumed to be the principal in matters covered by the grant of agency. Contracts made by the agent are the contracts of the principal. Payment to the agent, within the scope of his or her authority, is payment to the principal. The knowledge of the agent is assumed to be the knowledge of the principal.
Presumption of Agency
If a company supplies an individual with forms and other materials (signs and evidences of authority) that make it appear that he or she is an agent of the company, a court will likely hold that a presumption of agency exists. The company is then bound by the acts of this individual regardless of whether he or she has been given this authority.
Authority
An agent has one of three types of authority:
Collection of Premium
All premiums received by an agent are funds received and held in trust. The agent must account for and pay the correct amount to the insured, insurer, or other agent entitled to the money. Any agent who takes funds held in trust for his or her own use is guilty of theft and will be punished as provided by law.
Rights, Duties, and Liabilities Between Principal and Third Parties
if an agent acts within the scope of his/her authority, a principal is bound by the act of his/her agent[i]. Moreover, a party is responsible for any action or inaction by the party or the party’s agent[ii]. The liability of the principal to a third person upon a transaction conducted by an agent is based upon facts such as:
Terms of all type of Risk
TYPES OF RISK
There are different types of risk. The most important types of risk include:
(i) Pure Risk
(ii) Speculative Risk
(iii) Particular Risk
(iv) Fundamental Risk
(v) Static Risk
(vi) Dynamic Risk.
PURE RISK
Pure risk is a situation that holds out only the possibility of loss or no loss or no loss. For example, if you buy a new textbook, you face the prospect of the book being stolen or not being stolen. The possible outcomes are loss or no loss. Also, if you leave your house in the morning and ride to school on your motorcycle you cannot be sure whether or not you will be involved in an accident, that is, you are running a risk. There is the uncertainty of loss. Your motorcycle may be damaged or you may damage another person’s property or injured another person. If you are involved in any one of these situations, you will suffer loss. But if you come back home safely without any incident, then you will suffer no loss. So in pure risk, there is only the prospect of loss or no loss. There is no prospect of gain or profit under pure risk. You derive no gain from the fact that your house is not burnt down. If there is no fire incident, the status quo would be maintained, no gain no loss, or a break-even situation. Therefore, it is only the pure risks that are insurable.
Different Types of Pure Risk
Both the individual and business firms face different types of pure risks that pose great threat to their financial securities. The different types of pure risks that we face can be classified under any one of the followings:(i) Personal risks
(ii) Property risks
(iii) Liability risks
Personal Risks
Personal risks are those risks that directly affect an individual.
Personal risks detrimentally affect the income earning power of an individual. They involve the likelihood of sudden and complete loss of income, or financial assets sharp increase in expenses or gradual reduction of income or financial assets and steady rise in expenses. Personal risks can be classified into four main types:
(i) Risk of premature death
(ii) Risk of old age
(iii) Risk of sickness
(iv) Risk of unemployment
Risk of Premature Death
It is generally believed that the average life span of a human being is 70 years. Therefore, anybody who dies before attaining age 70 years could be regarded as having died prematurely. Premature deaths usually bring great financial and economic insecurity to dependants. In most cases, a family breadwinner who dies prematurely has children to educate, dependants to support, mortgage loan to pay. In addition, if the family bread-winner dies after a protracted illness, then the medical cost may still be there to settle and of course the burial expenses must have to be met. By the time all these costs are settled, the savings and financial assets of the family head may have been seriously depleted or possibly completely spent or sold off and still leaving a balance of debt to be settled.
The death of family head could render some families destitute and sometimes protracted illness could so much drain the financial resources of some families and impoverish them even before the death of the family breadwinner.
When a family breadwinner dies, the human-life value of the breadwinner would be lost forever. This loss is usually very considerable and creates grate financial and economic insecurity. What is a human life value? A human life value is the present value of the share of the family in the earnings of the family head.
Risk of Old Age
The main risk of old age is the likelihood of not getting sufficient income to meet one’s financial needs in old age after retirement. In retirement, one would not be able to earn as much as before and because of this, retired people could be faced with serious financial and economic insecurity unless they have build up sufficient savings or acquired sufficient financial assets during their active working lives from which they could start to draw in old age.
Even some of the workers who make sufficient savings for old age would still have to contend with corrosive effect of inflation on such savings. High rate of inflation can cause great financial and economic distress to retired people as it may reduce their real incomes.
· Risk of Poor Health
Everybody is facing the risk of poor health. It is only when people are healthy, that they can meaningfully engage themselves in any productive activity an earn full economic income. Poor health can bring serious financial and economic distress to an individual. For example, without good health, nobody can gainfully engage himself in any serious economic undertaking an maximized his economic income.
A sudden and unexpected illness or accident can result in high medical bills. Therefore, poor health will result in loss of earned income and high medical expenses. And unless the person has adequate personal accident and health insurance cover or has made adequate financial arrangements for income from other sources to meet these expenses, the person will be financially unsecured.
Risk of Unemployment
The risk of unemployment is a great threat to all those who are working for other people or organizations in return for wages or salaries. The risk equally poses a great threat to all those who are still in school or undergoing courses of vocational training with the notion of taking up salaried job after the training period. Self-employed persons, whose services or products are no longer in demand, could also be faced with the problem of unemployment.
Unemployment is a situation where a person who is willing to work and is looking for work to do cannot find work to do. Unemployment always brings financial insecurity to people. This financial insecurity could come in many ways, among which are:
(i) The person would lose his or her earned income. When this happens, he will suffer some financial hardship unless he has previously built up adequate savings on which he can now start to draw.
(ii) If the person fails to secure another employment within reasonable period of time, he may fully deplete his savings and expose himself to financial insecurity.
(iii) If he secures a part-time job, the pay would obviously be smaller than the full-time pay and this entails a reduction of earned income. This would also bring financial insecurity.
SPECULATIVE RISK
Speculative risk is a situation that holds out the prospects of loss, gain, or no loss no gain (break-even situation). Speculative risks are very common in business undertakings. For example, if you establish a new business, you would make a profit if the business is successful and sustain loss if the business fails.
If you buy shares in a company you would make a gain if the price of the shares rises in the stock market, and you would sustain a loss if the price of the shares falls in the market. If the price of the shares remains unchanged, then, you would not make a profit or sustain a loss. You break-even. Gambling is a good example of speculative risk. Gambling involves deliberate creation of risk in the expectation of making a gain. There is also the possibility of sustaining a loss. A person betting $500 on the outcome of the next weekend English Premier League Match faces both the possibility of loss and of gain and of no loss, no gain. Most speculative risks one dynamic risk with the exception of gambling situations.
Other examples of speculative risk include taking parts in a football pool, exporting to a new market, betting on horse race or motor race.
Speculative risks are no subject of insurance, and then are therefore not normally insurable. They are voluntarily accepted because of their two-dimensional nature of gain or loss.
All risks cover is an optional extra on your contents insurance, to cover certain items for loss, damage or theft, when they are outside of the home. This includes worldwide cover for up to 60 days in each policy year.
All risks cover is available to add on for renters and for owner occupied properties.
There are two different types of cover available; specified and unspecified all risks.
Specified all risks
If you have specific items that you take outside the home and are typically valued at more than €1,000 each, you can insure these under specified all risks. Items such as laptops, mobile phones, tablets, bicycles and hearing aids, to name a few, will need to be specified on the policy regardless of their value if you want to insure them under this section.
Any items that you have chosen to specify on your policy will be noted in a table in the policy cover details of your insurance schedule, along with their description and value. You have the option to specify up to a maximum of 6 items on your policy.
We will need a valuation for any item valued at over €6,000 that is specified on your policy. The details needed on the valuation can be found here.
Unspecified all risks
If you have a number of personal items that you take outside the home and are valued at less than €1,000 each, you can insure these under unspecified all risks. This cover can be used to insure items such as jewellery, watches, bags or other items that you carry with you regularly without having to insure each one individually.
Don’t forget that certain items must be specified in order to be covered.
If you have selected unspecified all risks, the total value insured will be noted on your insurance schedule in the policy cover details section.
The above is a summary only for full details of cover please refer to your policy pack which was issued to you when you purchased your policy.
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