>>So here we are. And this should not
be a big mystery, because insurance is just
another type of what?>>Contract.
>>Contract, good. So we spent three chapters
talking about it, and we slipped it in
in other ways, too. We talked about warranties and
how they relate to contracts, and now just a special
kind of contract. Still has to have all the
elements of a contract, but it has a particular
purpose in mind. And as the first
bullet says there, these contracts are all about
transferring or allocating risk. So there is a risk certain
things might happen to you. Name some things that
could happen to you.>>Death.
>>Death. That one is
for certain. (students laughing)
There is a 100% chance that that’s
gonna happen. The question is what? “When and how?” So some people– that
is their whole life job is just trying to figure out
when and how you’re gonna die. And…
(student laughing) Sounds kind of morbid. But what kind of things are
they going to take into account?>>Your health.
>>Your health. Your age, your lifestyle,
what you do for a living.>>Family history.
>>What is happening in the rest of
your family. Are you going to have things
that your relatives have had? What else?
>>Number of children you have.>>Right. So there is lots of
different factors that could affect
when and how you die. Where you
live at, even. Like, where was
I recently? Downtown Chicago
or something. I bet the life expectancy of
somebody who lives in Chicago is shorter, especially
if you are a pedestrian. (students laughing)
Oh, my goodness, man! First of all, everybody
there drives like idiots. Sorry if you
are from there. And everybody who walks just–
I saw people standing in the middle of the road on
your cell phone in traffic. I am like, “What are you–
you are going to get killed.” They just went
around them. So it seems like life expectancy
might be a little lower in those type
of situations. Or if you’re window-washing
skyscrapers or something. I dunno what it is, but
that might affect the risk. So as you have these
different types of risk, that you might die, that
you might have poor health, that your house might
burn down, whatever it is. You could save up
a pile of money and then tell someone where
it’s at after you go, right? I mean, that is
one way to do it! Stuff it in
your mattress. Another way, though, is to give
your money to someone else with an agreement they will
give it to someone else when that risk occurs. So… and we keep talking
about risk, risk, risk. Well, what is risk? According to the chapter,
it is prediction concerning potential loss on
known and unknown factors. There is even risks
that are unknown. Like, we can only really
anticipate the risks we can know about,
if that makes sense. Like, it’s hard to anticipate
risks we wouldn’t know about. Right– you know, once
the first asteroid hits us, after that, we will
probably be really aware. But until then, we are like
that, “Ehhh, that can’t hit–” that’d be a policy,
the Asteroid Policy. Probably won’t last
very long after that, but once they
start hitting… according to all the
movies I’ve seen, at least. But– is it
on this slide? Yeah, there it is–
it kinda came up, surprise, on the bottom there. You know, terrorism
is an example of that. I mean, think
about before 9/11, people who owned
tall buildings didn’t necessarily anticipate
something was going to happen, and there was a
provision in policies that says “all risk
insurance,” and “all risk” isn’t
really ALL risk. I mean, there is a risk
that aliens could abduct you. Maybe there is not–
I don’t know.>>We don’t know!
>>We don’t know because if you
have been abducted, you wouldn’t
be here today. So anyway… so there is a risk that some
things are going to happen. Others are risks we don’t
know about until they happen, and then we start
contemplating them, and then we try to say, “Hey,
you are in a tall building “therefore you need to have
this type of protection.” Then, if some other type
of terrorism happens– I mean, think of things
happening today in the news. Is there any type of
risk you can anticipate that maybe really hasn’t
happened a whole lot yet?>>(indistinct).>>(laughing)
I mean…>>Aren’t we thinking
about going to war with like Korea
or something?>>Oh, don’t be
spreading that rumor! (students chuckling) I mean, war is
a risk, right? I mean, there has got
to be insurance for that. Depending on what part
of the country you are in, there is a good chance you
may or may not be at war in a particular time. But yeah, I think
that is something that is happening
in the news today.>>(indistinct).>>Yup, that is one that
could happen– nuclear war.>>Hostage situations.
>>Right! Yeah, I mean, think
about key employees and how somebody might–
depending on what part of the world
you are in. Recently in the news,
they were talking about convicting some
pirates around Somalia who were–
>>”Arrghh.”>>”Arrghh,” right?
Who were stealing people off of ships and then
holding them for ransom. Depending on where
you are shipping, this could be a
real problem, right? I guess they decided
to attack a–>>French battleship.
>>A battleship. (all laughing)
Oops! So now, their defense is,
“We never were able to,” right? “We fired on them, and they
returned some heavy fire.”>>”We’re sorry, we’re sorry!”
>>(laughing) “Never mind. “We were just saying
hi– hello– oops. “This thing
just went off.” They apparently had
rocket launchers and all kinds
of stuff. But yeah, you gotta
watch who you pick on. So there is that. What other kind of– I mean,
think about things happening in the news that you just would
not think could have happened.>>Poison in the mail.
>>What’s that?>>Poison in the mail.
>>Right. Getting things
through the mail. You know, there was
a time where Anthrax was not something
you would get. Even today, when
I was coming in, they were talking
about WikiLeaks. Have you heard about this?
>>(multiple) Yes.>>Get so upset– “I don’t
like Oprah, so there.”>>She’s done
after this year.>>(laughing)
I thought you were talking about Oprah
when I came in.>>We were.
>>Oprah gave away more cars.>>I know–
she gave away iPads.>>One of my best friends
was on that show.>>Oh, wow.
>>I’m kidding, I love her. But I wanted to be there.
>>Yeah. So there is a risk that Oprah
might give you something.>>(laughing) I’ll take it.
>>But that would be good. So WikiLeaks… a site where they put
information out there, and the latest one
was supposedly some embarrassing governmental
information about other governments, and how we might characterize
leaders of other countries. But if you think about it,
even when I was a kid, my dad said, “Don’t put
anything in writing “you don’t want the entire
stinkin’ world to hear or see.” And it is true. But there is a risk
with that, right? I mean, you really could
affect your reputation or your business if that kind
of information gets out.>>The Army private who leaked
it is actually in custody.>>Yeah? Yeah, that
is not good. Well, I mean, I thought of
it because of terrorism. Like, now, they are saying
WikiLeaks may be terrorist… because they are
basically doing things that would damage
the government. Interesting. So all this is about managing
the different type of risk that we can’t always anticipate
but, as they happen, we do. So these terms should not
be unfamiliar to you. You have probably heard of
an insurance policy before. Everyone has one,
or has had one, or needs one. What kind of insurance
do you have?>>Car.
>>Life, health. Yeah, so these policies
are all contracts. The premium is the consideration
that you need for a contract. Remember the four elements
of a contract? What are they?
>>Offer. Acceptance.
>>Which is? Agreement. That first element. Consideration is
the second one, yes. What is next? Good time to review. What?
>>(indistinct).>>Capacity– yeah,
capacity is the other one. And then, the last–
legality. You gotta have
an insurance policy that is for a
legal purpose. All right, so make sure you
know about those four elements. An underwriter. We were talking earlier about
those that determine risk, allocate risk. That is what they do in putting
terms into insurance policies. Then, we’ve
covered agency. Remember that chapter?
What chapter was that? Yeah, 17. So in that chapter,
we talked about an agent being someone who
represents a principal as they deal
with third party. So in this case, an insurance
agent represents who?>>The insurance company.
>>Yeah, a lot of times…. if you hear the term
“agent,” they do. I mean, an agent is
an agent, right? They could represent
whoever is the principal, but, in some cases, that
is the insurance company. In other cases, they
might be a broker, right? They can work for you
to get you the best deal. I can’t help but think of
the two big players on TV– what is it–
Flo, the annoying woman– I mean, I guess it
depends on whether– some people like her,
some people don’t like her.>>You either love her
or you hate her.>>I know, I think
that’s where she falls. Or the lizard–
GEICO. You know, all about finding
you the best deal, right?>>(indistinct) insurance–
the guy who is like, “I am a hot– I’m a teenage
girl,” and smashes into–>>No, he is really
a hot teenage girl. (students laughing)
>>He’s like a really
hot teenage girl, and then, the dude runs–
>>Isn’t it State Farm?>>(indistinct).>>Those commercials are funny–
he is like, “I am a wind storm!” (indistinct).
(students laughing)>>They are all on YouTube–
they are pretty funny. If you watch Hulu–
anybody ever use Hulu? He is usually one of their
commercials that come on, and they have all of his heads,
and he is all the different man. You can click on them–
it is pretty funny. So, insurable interests. In order to
have insurance, you have to have an insurable
interest in something. Like, for example,
my family has an insurable
interest in my life. I have an insurable
interest in my car. You all could not take out
an insurance policy on me. I mean, you couldn’t
pool your money together, hoping that I die
and you collect.>>How can employers–
>>”How– why not?” You’re like,
“I want to do this.” Right, key employees. So you could have key
employee insurance because you are going
to suffer a loss if you lose that
key employee, and sometimes, there is
a lot of money tied up in training that person
and investing in them.>>What are, like,
the key employee–>>Well, “key employee,” I think,
is kind of a legal term, like we say
“reasonable person.” Like, what is
a key employee? Walmart got in
trouble for that. Walmart was insuring
all their employees. Right– yeah, so the greeter
had a $100,000 insurance policy. Now, I am
paraphrasing. Walmart, please
forgive me. But in some cases– not that
greeters aren’t key employees. That is not
how I mean it. But when the family didn’t have
enough money to bury the person but Walmart was able
to collect on it, this is a problem. So yeah, key employee
insurance is another insurable
interest you may have. And then, like I was
just mentioning, there is different types of
insurable interest you have. You might have it on life,
you might have it on property. I was going to have it on
my wife’s wedding ring. However, I thought she would
find out it’s not real, so I couldn’t have it appraised.
(students laughing) Sorry, honey– hope you
never listen to this. So we will talk about
appraisal in a minute. And now, one of my students
will run into my wife one day, and say, “Oh, let
me see your ring!”>>”Oh, that’s fake.”
>>”It’s fake, by the way.” (students laughing) It was a difficult
financial time for me, so. All right. So if insurance
is a contract, it is governed by the general
principles of contract law, it’s regulated by the state–
which it’s true– you have to be licensed
to sell insurance. You have to comply
with state law. Notice that it says an
application is an offer here, and then, later, it’s
gonna say the application can become part of the
insurance contract. Yeah, “can become.” So often, insurance
companies will say, “Whatever you said
in the application becomes part of
our agreement. So then, later, if
you say something that wasn’t
entirely accurate– and why might you say something
inaccurate or dishonest?>>(indistinct) when
you know you have–>>Right, right– there
is something going on you don’t want them
to know about because you want it
to be covered. You’ve a bad driving
history– what’s that?>>Money issues.>>Right, you don’t want
them to know about that. Maybe you say
you are older when you are
really younger… or you are younger
when you are older. It has to be supported
by consideration because that is an element of
contract, and the parties– the insurance company,
as well as the insured– need to have
capacity. So all these provisions
have their own slide. So you don’t have to keep
writing all these down… is what that
little arrow means, “more coming.” But we’ll talk about
the application. When insurance
is effective. It is not necessarily
effective the date it is signed or the date you
apply for it. And that has made a
difference in the past as to whether something
is covered or not. Talking about specific
provisions and clauses. There is an exhibit in
your chapter– 23-3. What is 23-3?>>The insurance clauses
and provisions.>>Yeah, so provisions
and clauses. So beside this, on the slide,
you can write “exhibit 23-3.” ‘Cause there is going to
be a question about that. It should be on the
left-hand bottom side. 682, is that right?
>>Yup.>>Okay, so we
will get to that. Language about interpreting
the provisions of an insurance contract, how
insurance can be canceled, our rights and duties
under contract, just like other contracts
we have talked about, and then some of the defenses,
which should be a no-brainer. What– not that if
you can’t answer it, you don’t have
a brain, but… basically, what do you think
an insurance company– because I am
kind of jaded. I feel like insurance
companies really make money by not paying claims.
>>(indistinct).>>I know–
it is shocking. But what kind of reasons do you
think they may come up with for not wanting
to pay you?>>Because it was
not in the contract.>>Right–
it’s a contract. It’s not in the contract,
it’s not covered. Your house was
destroyed by a flood, you didn’t have
flood insurance. It was really destroyed by the
hurricane before the flood, so it is not
covered that way.>>A friend of mine–
she got in an accident when it was
raining out. She got cut off by a truck
and hit the guard rail, and they measured
her treads and they said her treads were
worn, so they didn’t pay.>>Wow, I have never
heard that before. What’s that?
>>(indistinct).>>Yeah, I mean, maybe they
didn’t want to pay that. Everybody, go change
your tires!>>Are you going to
pay for them?>>No, no, I am just going
to say crazy things.>>When my mother’s house
was broken into–>>I thought you
said “blown up.”>>It was blown up, but
when they broke into it, they inadvertently
somehow blew the house up.>>Inadvertently, accidentally
blew her house up?>>I don’t know– she used to
testify against a lot of people.>>Is she in witness
protection now?>>No. (laughing)
>>Because we’re recording. I don’t want to
talk about her if…>>But the insurance
company fought that saying that because it was
a hazard of her occupation.>>(laughing)
Her occupation was testifying–>>(indistinct).>>Oh, that as a nurse, you
should risk that somebody is gonna break into your
house and blow it up? Well, hey, nurses out there,
watch out.>>Right… that is crazy.
>>That is pretty crazy. I mean, I have had lots of
death threats against me. (students laughing) What’s that?
>>Students?>>I know, but stay
away from the windows.>>They are usually
only after the exam.>>Right, yeah.
(students laughing) Only after final
grades are posted. No, the Michigan Militia–
I am on their “wanted” list.>>Really?
>>If any of you are in– you’re like, “Really?
I had better go look that up.”>>(indistinct).
>>”Cool, is there a reward?”>>That is crazy.
>>My grandpa was a prison guard at Ionia State Prison,
so he had–>>Ah, he might know me.
>>He had crazy– name is Toms.>>T-H-O-M?
>>T-O-M-S. Big, huge, tall,
6’7″, huge man. But anyway, he– I never
understood when I was little why he always
had a PO box.>>(laughing)
“Ship that bomb
to the post office.” (students laughing)
Yeah.>>I was like, “Oh,
that makes sense.”>>Yeah, I’ve had some
close run-ins before. Well, I was a prosecutor
for five years, and everybody said they
wanted to kill me.>>He worked with
the crazies. ‘Cause he was an RN, so he
worked with the crazy people.>>Well, yeah– I mean,
I did that, too. I was in the– I told you that–
psychiatric facility. Not that I was–
I mean, I was there doing other things.
(students laughing) That’s right–
and then, what else? I did something else that caused
people to not like me very much. Teach– no, what else was it?
(students laughing) I did something else–
I dunno. It will come
to me later. Um, cancellation. You know, sometimes,
people are concerned that if they don’t
pay a premium, the insurance
gets canceled. Or if they need to get out of an
insurance contract, can they? Oh, yeah, we already got to
the end of this, didn’t we? Sorry– we got off
a little bit there. So the application,
as I mentioned, may become part of
the insurance contract because the insurance company
has concerns about misstatements or misrepresentations
in the policy. And later, we’re gonna talk
about the anti-lapse provision– or the–
um– somebody help me–
23-3.>>Anti-lapse, appraisal,
arbitration, incontestability.>>Incontestability clause! Incontestability clause saying
that, after a certain point, the insurance company should
not be able to go back and say, “You said something
wrong on your application.” So if you make it part of
the insurance contract, then it could be a breach
of contract later. All right, and
effective date. You know, we
mentioned that… it depends on when the
contract is actually binding. For example, it has been a
while since I got a vehicle, but when I go
to get insurance, I will call them from
wherever I am at and say, “I need insurance. “How much is
it gonna be?” They tell me right
on the spot. And then, I ask
for the insurance to be faxed
right there. And I know
when I leave– ’cause I know that if I leave
and I don’t have insurance, something is going
to happen to me. So when it is effective
is important to know. And that could be on
the other end, too. Something lapses, and you
don’t know it has lapsed and then something
happens. And as it mentions
in the bottom one, it might be a condition
in the contract. “Once you pay
the premium, “then you will have
insurance in effect,” or “Once you pass the
physical examination.” It is one thing to
disclose certain things on the application, but you
need to pass a physical exam in some cases. Now, coinsurance. If you knew how
bad I was at math, you’d know that I won’t
ask you this on a quiz. But since you don’t know–
yeah, I won’t ask you. But– and this is–
what page is that?>>682.
>>682 still. We are kind
of stuck there. So on page 682, they kind
of give you a math example of coinsurance. It starts out on this slide,
“If an owner insures a property “for at least
80% of–” why wouldn’t somebody insure
their property for less than?>>(indistinct).
>>Yeah. Why wouldn’t they do that?
>>They are cheap.>>(laughing)
Yes, you are darned right! Because earlier, I said
sometimes you pay in, you never get
anything out. Why pay so much if
there is a risk that you won’t actually
have a total loss? So why not make
your premiums cheaper? Well, if you do and
then you do have a loss, maybe you won’t be able
to recover as much. So you take the
amount of insurance, you divide it by the
coinsurance percentage, which is, in this case
in this example, 80% times whatever
the property value is, and, if you divide
that all out, you’ll get what you’ll
actually be able to recover under these type
of clauses. In other words, the
owner is responsible for the difference
themselves. So yeah, this
is that exhibit. And I will probably
either have some statement and then, you will go,
“Oh, that looks familiar. “That sounds true.” But watch and make sure
the statement matches up with the type
of clause. Or I might have
a scenario, and then, list these
different type of clauses and you have to
pick the right one. So make sure you know the
different types of clauses and what they mean and how to
differentiate between them. So anti-lapse clause–
basically, it’s that idea of if you didn’t make a
payment for some reason, you would have some
type of grace period before your insurance
policy would lapse, whether it is auto
or whatever. Sometimes, this is something
you can control, sometimes it is not. I had a situation where
an employer overpaid me, which is easy, but–
thank you. And so, the next pay period,
instead of taking out what they overpaid me, they took out my entire paycheck
and what they overpaid me. ‘Cause apparently,
just paying me anything was overpaying me. And my wife called me,
and she says, “Do you know we are
bouncing checks?” I am like,
“How is that possible? “I just looked at our
checking account and it is fine, “and I just got paid.” She’s says,
“Well… (laughing) “you had better look into that
‘you just got paid’ thing.” And apparently, they were
authorized to put in amounts and take out what they put in,
but nothing different. So instead of letting me know
and working something out, they just sucked out
everything they put in, and then,
corrected it later. But anyway, the reason
I am telling that story is because meanwhile,
back on the farm, the insurance company
wasn’t getting paid– it is “ranch,”
that is right. You know, anybody–
money coming in, no money coming in. Money still going out–
that didn’t work so well. So luckily, I had
a grace period. Appraisal clause. I won’t tell you
who that employer was. The appraisal clause–
you think of an appraisal, like, determining the
value of something. It could be on the
front end, tail end. Could be you need
to insure something and you need to come to
some type of agreement as to how much
it is worth. I mentioned that whole
ring example earlier. Don’t mention that
to my wife. Or on the other end,
if you get a loss, right, but how much
is the loss? Anybody ever had that
situation come up, been in an accident
or something, and there is a
question about– you know, they don’t necessarily
take your word for it. They want to have
some kind of appraiser or somebody take
a look at it.>>(indistinct).
>>Sometimes. But if that
doesn’t work out and there is some type
of disagreement, if you look closely at
most insurance policies, there is an
arbitration clause which says if you have a
disagreement with the insurer, usually you don’t
take that to court. You try to settle
that with them or go through some
neutral third party. We mentioned
incontestability earlier– a clause that says that after
a certain period of time, the insurance company
shouldn’t be able to go back and contest the
original statements made in the
application.>>Is that a
popular thing?>>Yeah. It is a popular thing
for insured people to want in their
insurance contract. Sometimes, it is
required by law. That at some point,
you shouldn’t– you know the idea you
can’t wait forever to bring a cause of action
or to raise a legal defense. After a certain point, you
shouldn’t just try to avoid paying all claims by
claiming it was something. You know, at that point,
you shouldn’t be relying on things that
were made– that is why I said,
sometimes, they make it part
of the contract and if you committed fraud in
entering into the contract, they might ask for– to be able
to avoid their obligations under the contract. Multiple insurance. I don’t know if anyone
has had this come up. Each year, I have open
enrollment for insurance here. And one of the
things they ask is, “Do I have any
other insurance?” “And what sources and
what does it cover?” So you might have multiple
insurance policies that could kick in
in any given situation. What is the general rule
about how much you can get? You know, we talk about
in terms of remedies and other areas– you know, you shouldn’t
be made more than whole. So you shouldn’t be able to
recover for the same thing from two different
contracts. And if there is something that
some other company might cover, then one
insurance company probably doesn’t
want to pay it all. All right, so… cancellation. I think of this kind of
like “at-will employment.” Like, you could still quit
your insurance company, but for them, there
is a little more to it. Like putting in
notice, in writing, that they are going to cancel
in compliance with the terms of the insurance
policy and law. Now, you might be able
to get out of a contract. It might have some
ramifications, right? Anybody know the difference
between whole life and term life? Anybody have
life insurance?>>Term expires.
>>Right. Well, doesn’t it all,
at a certain point? So yeah, often,
“term” is for a term, and often, term is paying in,
saving nothing, and you are not
going to see it. Versus whole life is often
some kind of savings component built in to it. And so, depending on
where you are at in that, if you get out of it,
you might suffer a loss or be some penalty
for that. So there is this
idea of “good faith,” and if, for some reason,
an insurance company doesn’t follow that, then there
might be an action against them for acting in
“bad faith.” And that could be everything
from not paying a claim that you are entitled to
receive a benefit from to just delaying for
a long period of time. And as we have been
through Hurricane Katrina and other big
disasters, some people have had
some real issues with how long it takes
to get claims paid. You never know when mayhem
is going to come along. It took me a while to get
why the guy is so beat up. I’m like, “Why do they get
such a nasty-looking, “beat-up guy to do
those commercials?” So we mentioned defenses
against payment earlier. Here are some examples
of what the insurance company might raise to an
otherwise valid contract. Fraud– something you said
was a misrepresentation done intentionally to induce
them to enter into a contract. And it mentions giving
them your wrong age or providing information
that was inaccurate or not providing information
you should have. Smoking is a
big one, right? No one wants to admit
that they smoke, when it comes to
insurance, at least. And they might later
argue that you were. Concurrent causation. “Concurrent” meaning
“at the same time.” “Causation”
means “caused.” Put it together. Maybe there are multiple
factors that cause a loss. And then, the question becomes
whether it is something that the contract
covered. Earlier, I was mentioning
that example of homes that were destroyed and somebody claiming,
“Well, it was flooded, “therefore should recover,”
and then the insurance company saying, “Yes, but it was
destroyed by a hurricane “before it flooded.” So there is those questions
that come up in terms of… “Was the actual reason
for the–”

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