Traditionally, insurers have hired independent, outside
lawyers or law firms to represent their policy holders.
Recently, however, a disturbing trend has emerged: some insurance
companies have started to use their own in-house attorneys or
``captive’’ law firms to defend policy holders.
Although insurers tout the cost-saving benefits that
this type of arrangement may provide, they tend to ignore the
serious ethical and professional considerations that can arise from it.
I) Defining Insurance
A) The nature of the risk: Risk = the inherent uncertainty
of events described in terms of chance or probability.
1) Risk-transfer: this is like betting that you will get more than you
give: the insurance company will decide how much the bet will cost.
B) Coping with Risk
1) Here you are looking at the probable benefits and costs about an
2) You can cope with risk via limiting the probability of loss, i.e.
creating safety devices to dangerous machinery to limit the amount of
injuries that could occur.
3) You can cope with risk via limiting the effects of loss, i.e. wearing
a seat belt or getting a car with an air bag to limit what loss could occur.
4) Via diversification, i.e. having a stock portfolio instead of
investing all money into one company in case of a stock market crash.
5) Self insurance, i.e. a restaurant owner trains his cooks to prepare
the chicken well enough no patrons will get salmonella.
6) Ignore risk or assume the risk, i.e. tight rope walker.
II) Classification of Insurance
Three types of classifications:
(A) marine and inland
(C) Fire and casualty
-Other kinds of insurance
A) Marine and Inland
1) Modern marine insurance has several branches:
a) Transportation insurance for goods in transit; Instrumentalities of
transportation insurance (for bridges, tunnels, piers, etc.); Insurance
for the vessels; bailees’ customers policies; Personal and commercial
floaters (for movable personal or business property); insurance for loss
due to the unavailability of a particular vessel or conveyance; and insurance
protecting a carrier against liability to those who ship their goods.
2) Inland marine insurance: Deviated from traditional definition
a) Initially covered ships and cargoes in inland waterways
b) But expanded to cover goods that were subjected to other kinds of
transportation risks and ultimately to goods that were capable of being
c) Expands actual shipping, to ground transportation etc.
Insurance – contract under which the insurer promises to pay proceeds
upon the death of the person whose life is insured.
1) Term versus Whole Life
a) Term = pure insurance; the insured purchases coverage for a specified
duration and the designated beneficiary collects the proceeds only if the
insured dies with the specified term.
b) Whole life = a policy of term insurance and a savings plan, i.e. part
of every premium covers the cost of the insurance and the remainder goes
into the savings component of the products years go by less goes into
premium and more goes into savings component; amount of savings = cash
i) Credit insurance = if insured debtor dies or becomes disabled before a
debt is discharged, the insurer discharges the debt or makes the periodic
payments on the debt. Excess goes to the insured’s estate.
ii) Deposit term insurance = a blend of whole life and term; coverage
looks like renewable term coverage with a large 1st year premium that
drops significantly over time.
iii) Whole life insurance can either be straight life / ordinary life,
limited-payment life, or based of a graded premium
iv) Endowment life insurance = limited payment life insurance
v) Convertible term insurance = gives the insured the option in the
future to convert the policy from term to whole life by agreeing to pay
the appropriate premiums for whole
vi) Universal life = where the insured can modify the amount of the death
benefit and the change the timing of the premium payment to respond to
the changing economic
vii) Variable life = identical to universal except that the cash value
amount if not cash per se, rather invested in stocks and bonds of the
2) Other Categories of Life Insurance
a) Industrial Life = kind of life insurance written in small amounts and
for which the insured
pays small, frequently assess sums.
b) Participating policy = dividends based upon the company’s earnings are
paid by the company to the policy holder; dividends are held in a fund
for the insurer.
i) Mutual life insurance = the insured under a mutual life insurance
policy pays a premium slightly larger than the expected loss of the of
the administrative expenses , i.e. the holder of the mutual life
insurance policy participates in the carrying of the risk
c) Non-participating policy= policy where no dividends are paid.
d) Annuities = a K between a financial institutions and an individual
under which the institution, in exchange for the individual’s prior
payment promises to make periodic payments to the individual; opposite of
a life insurance policy or insurance against the risk of long life so an
not to cause burdens on others from old age (more an investment than
insurance) ---- so do both: get life insurance plus and annuity.
3) Life Insurance and taxes = important tool for individuals
who wish to avoid income taxes as their wealth accumulates
C) Fire and Casualty Insurance
1) Fire = coverage for loss caused by hostile fire.
2) Casualty = the insured’s legal liability for injuries to others or for
damage to other’s property.
3) Worker’s compensations = liability for injury or death related to the
job where the employer is
4) Surety ship = the practice of one person agreeing to guarantee the
debts or obligations of another.
Surety bond is essentially a promise, evidenced by as writing, to a
creditor that one person or
company (the surety) will pay the debt or perform the obligation of some
other person (the obligee)
should that person fail to pay or perform.
5) Accident insurance = reimbursement for pecuniary loss suffered as a
result of injuries sustained in
6) Health insurance = reimburses for pecuniary loss arising out of
disease related illness
D) Other kinds of insurance
1) Title insurance = insurance against defects in legal title to
2) Reinsurance = form of insurance for insurance companies where insurer
consumer’s risk by transferring a part of the assumed risk to some other
insurance company; here
the insured reduces the potential liability which enables the insurer to
write more insurance directly
to the consumers.