INSURANCE

A 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.

See:
indemnity insurance
insurable interest
insurance policy
insurance premium
cover note
fire insurance
restoration
home contents policy
personal effects insurance

See glossary of important terms.

INSURANCE VALUATION APPLICATIONS

Insurance 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.

Insurance 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.

The 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.

TYPICAL INSURANCE COVER

The 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:


Insurance can be broadly classified into:

• property
• liability
• personal.

Valuation practice and property management are mainly concerned with insurance under the property and liability heads.

"DUTY OF GOOD FAITH" ("UBERRIMAE FIDEI")

In 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:

...there 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).

Therefore, the parties must FULLY disclose all RELEVANT facts. The Act provides remedies available to the parties where there has been non disclosure or misrepresentation.

Under 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.

THE PRINCIPLE OF INDEMNITY

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.

EXAMPLE

If 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.

INSURABLE INTEREST

The 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:


The 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.

THE RIGHT OF SUBROGATION

Once 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.

EXAMPLE

If 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.

DOCTRINE OF PROXIMATE CAUSE

The 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.

EXAMPLE

Building 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.


See fire insurance
4