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Insurance Law
Faulkner Law - Thomas Goode Jones School of Law
Mitchell, Wendell W.

 
Introduction pp. 1-30
Monday, August 17, 2009
9:46 AM
Purpose of insurance
1                     A tool to help manage risk
2                     Commonly used by a most individuals
 
History
 
1.            The origins of modern insurance contracts can be traced at least as far back as 14th century Italy and shipping.
 
2.            By the 16th century the practice of insuring ships and their cargo had spread to London.
 
3.            Late in the 17th century much of this marine insurance business was being transacted in a gathering placed called Lloyds Coffee House, which ultimately evolved into the modern Lloyds of London.
 
4.            In 1666 Fire insurance developed after the Great London fire in London and shortly thereafter life insurance
 
i.              ran into opposition because of concerns over fraud
 
5.            Liability insurance in US in 1880’s
 
Contemporary Insurance System
1                     Insurance protecting individuals and businesses is an essential feature of our economic system, for it helps to provide the security necessary to reduce risk, cushion economic hardship, and encourage productive investment.
2                     Insurance is a risk-distribution arrangement for the compensation of damages or loss that is entered into by one party as its business, rather than as an incident of another business transaction.
 
i.              The principal sellers of insurance are stock and mutual companies, although a few unusual forms of operation such as reciprocals and fraternal benefit societies that are holdovers from an earlier age still exist.
ii.             Insurance against loss of property and against legal liability falls into a category separate from insurance against loss of life, ill health, and disability.
How insurance works / Function of insurance
 

       Risk-transfer -the transfer of risk from a comparatively risk-averse party to less risk-averse or risk-neutral parties.
a)            A risk neutral party is indifferent as between a small risk of suffering a large loss and greater risk of suffering a small loss, when each risk has the same expected value: the probability of a loss multiplied by its magnitude if it occurs.
b)            A risk averse party would prefer the large risk of suffering a small loss to a smaller risk of suffering the large loss.
2)            Risk-pooling -insuring a large number of insureds posing homogeneous and independent risks, allows an insurer to reduce the amount of variance in its expected losses to a very small range
a) Diversification of the risk i) Insuring a large number