Now, insurance.
We're looking at property insurance, think of car insurance, and think of life insurance
and so on.
When you think about insurance, this is personal in nature.
You cannot assign your insurance without permission.
Why not?
It may increase the insurance company's risk of loss.
For example, she drives a 20-year-old car, she drives 3 miles a week, she has no tickets,
no accident, and her insurance is 50 dollars a year.
I have a brand new turbo sports car, I drive 300 miles a week, and I have 17 speeding tickets,
4 DUIs and 6 accidents.
My insurance is 50 dollars an hour.
Okay?
Would I like you what's on your insurance to me?
Yes.
Would it increase the insurance company's risk of loss?
Definitely.
Therefore, insurance is personal.
It is not assignable.
You cannot transfer it without the insurance company�s permission.
Remember when we talked about title insurance?
Same thing with property, not assignable.
You cannot give that, it's personal in nature.
Now, we look at insurance.
We�re talking about something called an insurable interest.
What is an insurable interest mean?
It means that in order to buy insurance, you have to have some interest that is insurable.
That means that you must suffer some risk of loss.
Now, the question is, when do you have to have an insurable interest when you take out
the insurance?
If we're looking at something called life insurance, then you have to have an insurable
interest when the policy is taken out.
If we're looking at property insurance, then you have to have an insurable interest at
the date of loss.
So, you don't necessarily need an insurable interest at each time.
With life insurance...let's say she and I are partners in this partnership.
If she dies, our partnership will suffer a loss, so we're allowed to have insurance in
each other.
Why?
Because I have to have an insurable interest when the policy is purchased.
Now, 3, I buy a 5 year policy, but 3 years later we're no longer partners.
She dies.
I'll still get paid.
As long as I have an insurable interest when we got the policy, versus property insurance.
With property insurance, you have to have an insurable interest not when you bought
the policy, but at the time of loss.
I buy renters insurance on my apartment, and its 5 years.
Three years later I move out.
The 4th year it burns down, I don't have any loss.
Therefore, I'm not going to collect.
Why?
Because you need to have an insurable interest at the date of loss.
Now, you have to own the property to buy insurance?
No, I just gave an example...I'm a renter.
What if you gave me a piece a property as collateral for a loan?
Could I get insurance in it?
Yeah, because if that collateral, and you back out, then I get the property.
But if the property gets damaged, there's nothing to get.
So the question is, what are examples of an insurable interest?
First bullet: the owner the property has an insurable interest.
What is the owner?
The owner that is called fee simple.
You own it outright.
A secured creditor may have it if that is collateral for a loan.
It says a lessee, right, if you're leasing the building, you rent it for 5 years, you
can get insurance.
The beneficiary of a trust, a shareholder in corporate property, a buyer of goods has
an insurable interest as soon as the goods exist and are identified to the contract.
Now, the one thing that does periodically show up as the next item what's called a co-insurance
clause, a co-insurance requirement?
What is that?
This says that we want to make sure you do not under insure and still collect the full
face amount of the policy.
This is called a co-insurance requirement.
So here's the deal.
It says we don't want you to underinsure and still collect.
So, let's say for example you have a 10 million dollar home.
I know the whole house isn't going to burn down because it's spread out over 10 acres,
I've got fire sprinklers, grass, la la la la la...but the insurance company doesn't
want me to buy a million dollars of insurance.
They want me to buy 10 million, because then the premiums go way up.
So what they do is, they set up this thing called a co-insurance requirement.
The purpose is to prevent me from underinsuring and still collect the full value of the loss.
Here's the formula in your notes.
It's basically the face amount of the policy, divided by the required amount of insurance,
times the loss, equals the result.
Now, I'm going to collect the lower of the face, the loss or the result?
Huh?
Let's pretend I have a 10 million dollar home.
Now, I don't want to buy 10 million dollars� worth of insurance because it's too expensive.
Let's say my loss is 800,000 dollars.
So I have an 800,000 dollar fire.
Let's say I only bought a million dollars of insurance.
Well, normally you'd say 800,000 dollar loss, you bought a million, and you should get covered.
Oh, I forgot to tell you.
There's a co-insurance requirement up 80%, let's say.
That means I'm required to buy 80% of the fair market value, which is 8 million dollars.
So I only bought a million.
I'm supposed to buy 8 million.
Therefore, I'm only going to collect 1/8th of the loss, which equals 100,000 dollars.
Therefore, I get the lower of this, this or this.
What's lower?
A million, 800 or 100?
100.
That's how insurance companies work.
They go, "Look, we don't want you to buy a million.
We want you to buy 8."
Now, had I bought 8 million, then I would have gotten a 100%, but because I only bought
a million, I've only bought 1/8th, I only get 1/8th of my loss.
Now, this only applies to a partial loss because if the whole buildings destroyed, what do
I get?
I get the face of the policy, which would have been a million, but when it's a partial
loss, that's when you only get a portion of it.
Therefore, you only get a portion of it to make sure.
So, if you look in your notes, you'll see it says face over acquired times loss equals
result.
What do you collect?
The lower of, the smallest of, the amount of the loss, the face value, and it says limit
based on co-insurance clause.
Ignore percentage if it's a total loss.
So if it's a total loss, 10 million dollars, then you get the lower of the two.
Then it says more than one insurance company.
Now, if you have more than one insurance company, that's called a pro rata share.
Let's say I have a million dollar policy in one company and 2 million on another.
That would be 3 million.
I would collect 1/3, 2/3.
You get a pro rata proportionate share.
That is called pro rata, and that's how much you would collect.
On the next page it says life insurance coverage.
As I mentioned earlier, with life insurance, when do you have to have an insurable interest?
You need an insurable interest when the policy is obtained not at the date of loss.