contract under which the insurer agrees to indemnify the insured for
loss suffered as a result of the occurrence of some specified event
which will cause the destruction, or damage to property in which the
insured has an interest. A duty rests on the insured to minimize loss
and damage such as storm damage. For example, where a storm breaks a
window then further damage from rain should be minimized by the
insured blocking the broken window with some cover.
glossary of important terms.
has an important effect on the value of the real estate. It enables
group protection of buildings against damage and destruction by some
accidental event; the insured against happening. Under the insurance
concept, individual losses are spread over a number of policy holders
so that the loss for example, from fire damage, falls lightly on many
rather than heavily on one person. Insurance is also an important
part of property management ("risk management") on behalf
of the owner. Group protection reduces the risk to capital investment
and therefore, reduces the required rate of return of an investment
property. Insurance companies require the valuation of improvements
for indemnity cover insurance, replacement cost or damage caused by
the insured against risk.
cover is a contract by which the insurer, in consideration for a sum
of money (the premium) undertakes to indemnify the insured against a
specific risk or to compensate the insured or his/her estate on the
happening of a specified event. Insurance is not a wager because the
insured has an insurable interest in the property and does not gain
advantage after the insured against happening. Insurance policies
against for example, fire or loss of profits, indemnify the insured
while insurance covering accident or death are in the form of
compensation. Insurance is subject to Commonwealth legislation; the
Insurance Contracts Act 1984. This Act has largely, replaced common
law rules relating to insurance.
Insurance Council of Australia (ICA) claims that 25% of the
population have no home building or contents insurance. Of those with
building insurance, 27% do not have adequate cover and about 35% of
contents is underinsured.
parties agree to a policy that sets out the conditions of the
contract. Conditions not stated in the policy are assumed to be those
that normally appear in the insurance company's policies. Typical
real estate insurance policies are:
- fire with appropriate extensions
- houseowners and householders (h & h).
- public risk
- life policy held by the mortgagee over the
life of the
can be broadly classified into:
practice and property management are mainly concerned with insurance
under the property and liability heads.
OF GOOD FAITH" ("UBERRIMAE FIDEI")
most contracts it is not necessary for the parties to reveal ALL they
know about the subject of the contract; the principle of buyer
beware. However, in insurance contracts:
is implied in such a contract a provision requiring each party to it
to act towards the other party, in respect of any matter arising
under or in relation to it, with the utmost good faith s13
Insurance Contracts Act 1984 (see also ss21/22).
the parties must FULLY disclose all RELEVANT facts. The Act provides
remedies available to the parties where there has been non disclosure
the duty, the insurance company is required to reveal to the insured
all limitations of the insurance contract and the insured is required
to reveal all those matters that may affect the rate of premium or
whether or not the insurer would have accepted the risk. The relevant
questions are usually on the insurance proposal form.
PRINCIPLE OF INDEMNITY
is an insurance principle that states that the insured cannot benefit
from the insurance policy. That is, the compensation paid by the
insurer cannot exceed the damage suffered by the insured. In other
words, the insured cannot be better off after the insured against
event, than he/she was before it. This is the principle of indemnity
polices as opposed to replacement cost polices.
a homeowner suffers $100 000 of damage to his/her home and the
building is insured for a maximum amount of $200 000, the insured
cannot receive more than $100 000 in compensation.
insured must be in a position to suffer a loss if the event insured
against happens or to benefit from it not happening. This is called
an insurable interest. Typical insurable interests are:
- an owner's interest
- a mortgagee's or
- a lessee or lessor's
- a vendor or purchaser's
existence of an insurable interest is necessary to avoid the contract
from being a wager and safeguards the property because the insured
benefits from its preservation. However, if the insured does not have
an insurable interest, the contract cannot be void solely for that
reason s16 Insurance Contracts Act 1984. Nor is a legal or
equitable interest required at the time of the loss s17
Insurance Contracts Act 1984.
RIGHT OF SUBROGATION
the insured has been insured by the insurance company, the company is
entitled to take the place of the insured and succeed to all relevant
rights including remedies against a third party in connection with
the policy. This is called subrogation.
the Insured's house was deliberately set on fire by a third party and
as a result, the insured suffered damage, the insurance company will
pay the insured the value of the damage (if covered). The insurance
company can then elect to subrogate the right of the insured and sue
the third party for damages. In that action the company effectively
becomes the insured person. See s65 Insurance Contracts Act 1984.
OF PROXIMATE CAUSE
proximate cause is the active cause that sets in motion a train of
events that brings about a natural result, traceable in a direct line
to the first cause without the intervention of an external force,
beginning and operating from an independent source.
A suffers flood damage while building B suffers damage after
subsidence caused by the washing away of a retaining wall during the
flood. A has a policy extension that covers floods while B does not.
A can claim insurance compensation but B cannot, because the
proximate cause of B's damage is flooding.