Business Law
Marketing and Finance
Basics of Insurance Law Principles
2024/2025
1. Insurance may be based on Public Law or on Private Law.
"Insurance" means
sharing or shifting a person's/company's risk (i.e. the risk to suffer a damage or to become
liable to compensate the damage of another person)
to another person (namely to an insurer/insurance company) or to the insured
community or to the general public/society ("socialization of risk").
2. In case insurance is based on Public Law (in other words: in case a law stipulates a
compulsory insurance relationship without a private contractual relationship between
insurer and insured person), then a specific insurance relationship is usually
compulsory for the insurer and the insured person and also the scope of insurance
coverage is mandatory regulated and defined by law. The insurer is either the State itself
or a state owned insurance company or social agencies belonging to the State. Such
Insurance is (usually) existing/valid "automatically" in case the elements of the
respective Public Law are fulfilled (for instance: employment contract, pupil enrolled at
school etc).
Please mind that Public Law may also stipulate that a person is legally obliged to take out a private
insurance (for instance car insurance, professional liability insurance, aviation insurance) with a
specific mandatory (minimum) scope of insurance, such mandatory insurance is however not based
on Public Law but on Private Law (meaning without an insurance contract entered into by the car
owner and the insurance company no insurance coverage!)
Example: Social Security. "Social Security" usually addresses coverage of risk in relation
to health, accident, pension and unemployment. Usually all these kinds of insurances
are connected with an employment relationship or with a close family relationship with
an employed person (partner, parent). Accident insurance as part of Social Security often
only provided for accidents during work and on the way to/from work and occupational
diseases. In case a person wants to have an increased insurance coverage (for instance
consultation of private doctors, use of private hospitals, coverage for accidents during
leisure time, increased unemployment benefits etc) then an additional private insurance
providing such additional coverage must be taken out.
Therefore it is advisable to check the coverage of state insurances to find out properly if
additional private insurances are necessary or not (most people don't).
Please mind that in many countries also self-employed persons (for instance free-lancers)
are also ensured on basis of such (mandatory) Public Law based state insurances.
3. Insurances based on Private Law require taking out a corresponding insurance contract.
Without such contract, no insurance coverage is provided.
4. Private Insurance Contracts have a long legal history in order to manage entrepreneurial
risk in particular as to maritime shipping or other remote business activities (first
testimonies Mesopotamia approx. 4000 years ago).
5. Sometimes Public law requires that a person must take out a private insurance with
specific minimum coverages. Example: motor vehicle (car) liability insurance, aircraft liability
insurance, professional liability insurance (of doctors, lawyers, engineers etc). Other
professions may not require a compulsory professional liability insurance, but taking
out a professional liability insurance may be nevertheless very recommendable (for
instance manager professional liability insurance).
6. Private law based insurance means that a company (an insurer) takes over (to a certain
degree and up to a certain maximum amount) a specific risk of another person (the
insured person) against payment (insurance premium / insurance fee: "initial
premium" and "renewal premium": Ddifference between "initial" and"renewal"
premium: in case of delay with payment of initial premium, usually right of insurer to
cancel the entire contract, however in case of delay with payment of renewal
premium: usualy right of insurer to declare suspension of insurance relation, right
of insurer to terminate contract after grace period; but nevertheless still irrespective
of the delay with payment insurance coverage maintained for risks during the period for
which premiums were paid!).
7. In some civil codes (for instance the Austrian one), the insurance contract is thus placed
in the section "Gambling Contracts". In case of the occurrence of the insured event the
insurer is obliged to pay and/or to provide the agreed services ("just like in gambling").
8. Please note that an insurance only takes over a risk (= the upfront unknown risk that a
damage might happen in future), bur does not take over a "certainty" (= does not
take over the certainty that an already incurred damage shall be covered and does
not take over the certainty that a specific damage will happen for sure).
It is a fundamental Insurance law principle that an insurance represents a
precautionary measure (German: "Vorsorglichkeit"), covering possible future
damages/risks exclusively.
Consequently on basis of this fundamental Insurance law principle pre-contractual
incurred damages/losses and foreseeable damages/losses are excluded
from insurance coverage (German:
"Vorvertraglichkeit").
Therefore – not surprisingly – it is legally not possible first to suffer a damage and
then "cleverly" to look for an insurance that covers the already suffered damage!
Such approach would also criminal law wise represent insurance fraud.
Health insurances usually therefore know in addition to be on the safe side a waiting
period of some months in order to exclude that already existing health problems are
claimed (exclusion or reduction of such waiting period possible if agreed).
Existing legal quarrels cannot be covered by taking out a new legal insurance in order to
have a legal procedure financed by an insurance company. (There are alternative ways to
finance a legal procedure: litigation funding.)
So the specific damage subject to an insurance coverage
a) must not have existed at insurance contract conclusion and
b) must not have foreseen at insurance contract conclusion and
c) must not have been likely to happen at the time of insurance contract
conclusion.
Otherwise such a "pre-contractual damage" is not (never) covered by any
insurance contract and the insurer does not have to make any payments (and can
keep the already received premiums).
не обогатяване
9. Principle of "No Enrichment"
An insured person shall not be enriched by the payment/services of an insurer: insurer is
only obliged to compensate the insured event and – if any – to provide the agreed
services in such event, but is not obliged to pay out more than necessary for such
compensation. In case for instance awrong doer already compensated the
insurded damage, good luck for the insurer, because the is no damage
anylonger to be compensated by the insurer.
Apart from this aspect: The agreed insurance amount is therefore usually to be
understood as a maximum cap (threshold) if not expressly agreed otherwise.
Example: Insurance coverage for the event of fire "one million". This means that
insurer only has to pay the amount damaged up to maximum one million, but not one
million in any case: so if the damage amounts to 70.000, then only 70.000 are to be
paid out by the insurer, not the one million overall coverage.
10. No enrichment: Over insurance insurance
Similar to the "No Enrichment" Principle: As a rule, the actual value of the insured object
has to be compensated by an insurer, even if the insured amount is higher. Popular
mistake of insured individuals believing, that the insured amount will be paid out even if
the actual value of the damaged object is lower. Example: furniture is insured with Euro
50.000.- Furniture is destroyed, expert evaluates actual value of the furniture before
destruction Euro 20.000 maximum. Insurer has to pay Euro 20.000.- maximum (event of
overinsurance). Only in the very rare case, that the insurance contract expressly
waives the objection of over insurance, the insurer will have to pay the amount as
stated in the insurance contract. ("Underinsurance" usually means that the damage
exceeds the insured amount. The not insured "excess" (=amount above the agreed
maximum/cap) may be claimed against the wrong-doer on basis of torts.
Therefore in any case better to have a realistic insurance coverage, the value of the
insured object cannot be “increased” by an insurance policy!
Also: only value of the insured property at the time of loss is compensated, not new
objects in order to replace the old (destroyed/lost) ones: the value of the old destroyed
furniture is compensated, not the price for new furniture.Such compensation ("new for
old") would be atypically and must be expressly agreed in the insurance contract.
11. Double insurance
In case the same risk is insured twice, coverage is only provided once, because also
the damage only happened "once" and can be compensated "once". Only in case the
insurance contract states an absolute amount to be paid out, such payments may be
claimed simultaneously double/triple etc.
So an event may be double or triple etc insured but it is then up to the insured person to
choose which insurance shal cover the damage (and which insurance not).
This principle is also applicable in case of State Insurances. So if a person is
simultaneously employed and also self-employed (for instance manager of a company
[employee] gives also lectures or seminars as self-employed person, he/she will be
simultaneously insured by the State Health Insurance for Employees and the State Health
Insurance for Traders. He/she will have to pay both insurance premiums compulsory,
however cannot claim payment twice but /
has to choose which State Insurance shall provide the payment/services (the
payment/services provided by different State Insurances are usually not identical).
EXCEPTION: Pensions accrued in different social insurances (for instance self employed
and employed positions) may be claimed in the aggregate, but there are also pension
systems that stipulate no such summarized amount, but take each other into
consideration (meaning that ONE pension is paid out taking into consideration either
insurance periods or paid premiums), however the increased amount may then fall under
a higher income tax category and the "increase" is reduced by higher tax rates.
12. Sale of the insured object
In case an insured object is sold and the insurance contract was not terminated by the
seller up to the selling, the acquirer enters instead of the seller into the respective
insurance contract but has a special right for termination for a certain period of time
(usually one month or even longer).
13. Confirmation of Cover
In case the insured event can be activated (not caused!) by the insured person the terms
and conditions of the respective insurance may require to "ask the insurer before" by
requesting a formal "confirmation of cover" on behalf of the insurer. Background: the
insurer may want to check the situation before if indeed an insurance case is given or
not.
For instance many private additional health insurers require such formal requests for
confirmation of cover before hospitalization or legal expense insurances require such
formal requests before any claim is submitted to court (in order to check if the claim is
somehow realistic and not a mission impossible or even malicious).
In case such Confirmation of Cover was not obtained by the insured person, the insurer is
entitled to refuse coverage.
14. After successful activation of an insurance, the insurer is entitled to terminate the
insurance contract. Reason: an insurer is not obliged to continue the insurance
relationship if it turns out that obviously the insurance contract is no business case
for the insurer anymore ("no obligation for insurances to maintain an insurance
contract"). This is a significant difference to Public Law based Insurance
relationships.
Example: A person is significantly ill every year. The Private Health Insurance may
terminate the insurance contract, the Public Law based State Insurance has to pay until
the end of such person's life.
15. Any pre-contractual risk factors must be disclosed by the applicant to the potential
insurer, of which the applicant is aware at the time of conclusion of the contract and
which are relevant to evaluation of the risk. A relevant risk is the risk that may affect the
insurer's decision to enter into the contract at all or on the agreed terms and conditions
(Sec 16 Austrian Act on Insurance Contracts). In case of a violation of these duties
to disclose properly, in most jurisdictions the insurer is entitled to terminate the
insurance contract when becoming aware of this breach.
16. Please be aware: So any potential risk factors must be disclosed and it is not advisable
for an applicant to "cleverly hide" such factors (for instance not disclosed a serious
disease in case of health insurance contracts), because this will lead to the situation that
premiums are to be paid all over the years but when the risk occurs, the insurance is
entitled to refuse payment and to terminate the insurance contract! This might also be
one of the reasons, why insurance brokers / insurance employees are very indulgent
and "lenient" in asking specific questions respectively accepting even unrealistic
answers of the applicant (and not insisting): Anyway the insurance company is
entitled to refuse pay-out (after having received all over the years the premiums!) in
case the insurance company can prove that the insured person did not disclose the
factors that finally (also) caused the damage. The fact that the insured person's
non-disclosure (or that the insured person was even lying) was obvious to the insurer
(to the insurer's employees or broker) is irrelevant in this respect! The insured person
would have to prove that he / she actually disclosed to the insurer before the contract
was agreed respectively as soon as the insured person became aware of such factor. The
insured person has "pro-actively" to disclose any such risk immediately: before the
contract conclsion and during the contract period of the insurance, without being
asked!
17. An insurance contract requires in many jurisdictions written form. In any case, a written
"Insurance Policy" – a written text together with a description of the insured risks and
the insurance coverage (maximum amount of insurance benefits and insurance services)
and the insurance premium – must be handed over to the insured person.
18. In many jurisdictions, the presentation of the original native copy of such insurance
policy is a must-have criterion for successfully claiming insurance benefit and insurance
services.
Additional conditions for successful claims are demonstration of insured case, fully paid
insurance premiums, raising the claim within a certain limitation (during a maximum
period), duly fulfilled obligations/duties during the insured period (for instance
notification of increased risk exposure, change of circumstances as previously expressly
or implicitly agreed).
Please mind that risk increase is in some jurisdictions (for instance Germany) just subject
to notification duty, in other jurisdictions (for instance Austria) subject to notification
duty plus subsequent termination option for insurer.
19. In case obligations/duties are breached, consequences may be the entitlement of an
insurer to refuse paying out insurance benefits completely or – as the case may be –
partly.
20. Usually it is up to an insurer (insurance company) to accept or to refuse taking over of a
specific risk. However, it is against public policy (public morals) of a legal system taking
over of a risk that the insured person may materialize with intent or willful act (gross
negligence). Therefore an insurance against crimes or intentionally committed
administrative wrongs is legally in Europe not admissible. So also insurances covering
parking offences, fare dodging (=using public transport without paying), tax crimes, etc
are not legally valid!
21. In business practice, there exists no insurance covering the risk of contractual non-
performance as such or the risk of contractual defective performance of an insured
person as such.
So the risk
a) if and
b) how a contract will be performed
is not possible to insure and is not part of insurance business.
This principle is – at second sight – absolutely logic because the insurer would take
over the typical entrepreneurial risk or the insured person! This is not the purpose of any
insurance:
Insurances cover the risk of possible damages arising out of a contractual
performance but never the damage of “non-performance”.
The risk of non-performance (non-payment) and the risk of defective
performance however can be secured by other instruments (which do not represent an
insurance):
a) guarantee contract
and
b) letter of credit ("LOC")
ad a) GUARANTEE: the guarantor promises in case of non-performance/defective
performance a compensation up to a defined amount. The guarantee contract is a
special type of contract and shall not be mixed up with "guarantee" of the correct
performance of an own contract ("warranty"). Thus the guarantee contract (entered into
between the guarantor and the beneficiary) backs up the "main" (=underlying)
contract entered into between the beneficiary and the client of the guarantor.
Ad b) A (“Stand by”) Letter of Credit does not secure the payment/compensation for a
possible damage, but represents a guarantee for the payment of a price (whereas a
guarantee contracts usually cover possible damages due to non-performance/default
performance). A letter of credit is payable usually against presentation of certain
documents (take over/hand over certificates or bill of loading etc plus the stand by letter
of credit) that demonstrate that certain deliveries were made as agreed (and therefore
the price is due to be paid).
Such guarantee contracts / letters of credit are usually issued by insurance companies or
by banks. In principle, if such issuance is not provided on a permanent business basis,
also others – even private persons – may issue such guarantees or LOCs (example: Parent
Company Guarantee).
These instruments (guarantee contract and stand by leter of credit) usually have a
limited period of validity and are not subject to insurance business, but banking
business.
Main differences between "(Bank) Guarantee"/"LOC" and Insurance:
Contractual situation and relation in case of a Bank Guarantee:
Customer/Client asks his Bank to issue a bank guarantee to a third person
(=the beneficiary/reciever), who is usually the business partner of the
Customer/Client
who requests to receive such Bank Guarantee as a security for the "main"
contract (=the legal instrument for the business between the customer
and the beneficiary)
The beneficiary and the bank's client have concluded or will conclude a
"main/underlying" agreement that needs to be backed up/secured by a
bank guarantee.
Therefore, the Bank (the "Guarantor") enters into a Guarantee Contract
on request of his Client (which whom he has a Banking Contract or
another type of business relationship) with the third person (the
"Beneficiary").
Therefore on basis of this Guarantee Contract, the Bank has the right of
recourse against his Customer/Client (right to get compensated by the
Client), in case the Bank Guarantee is drawn (=used/called) by the
Beneficiary.
Contractual situation and relation in case of an insurance: Direct contract (=the
insurance contract) between insurer and his client (=the insured person) who is
simultaneously the beneficiary. No "Three Party" situation (as in case of Guarantees),
therefore also no basis for any "recourse". The Insurer bears finally the materialized risk
taken over (the insured person might have to bear a “deductible” [a certain sum up to an
agreed amount if agreed so in the Insurance Contract).
Insurer checks type and extent of damage before paying out to the insured
person (to the "beneficiary") – Guarantor checks only the guaranteed pay-
out conditions (which may be "abstract" which means the presentation of
the “demand letter” by the beneficiary is sufficient) before paying out to the
beneficiary (the receiver of the Bank Guarantee).
For the correct fulfillment of insurances many insurance companies must have an
insurance by itself (=reinsurance).
For the correct fulfillment of guarantees/LOCs however no such reinsurance is usual due
to the right of recourse against the Client/Customer.
22. Typical classes of insurances :
1. Indemnity Insurances
Fire Insurance
Hail Insurance
Water Insurance (covers damages caused by water and similar liquids from water pipes and fittings /
devices connected, other damages caused by water are without explicit agreement not insured, for
instance flooding or leaking roof or improper handling!)
Animal / Pet Insurance (against damages caused by animals / pets or also in case of diseases ["pet
health insurance"])
Transport Insurance (main specifics information obligations and strict
compliance to the agreed transport methods / forwarding company's
general terms and conditions). Carriage of goods, freight forwarder and
carrier liability, hull insurance.
Third Party Liability Insurance (covering obligations of the insured
person vice versa persons damaged by the insured person, for instance
professional liability insurances of entrepreneurs. A third party liability
insurance covers the payments of justified claims for damage
compensation of third parties and defends wrongfully asserted claims for
damages.) Professional Liability Insurance, Environmental Liability
Insurance, Product Liability Insurance, Motor Vehicle Insurance etc.
Legal expense insurance (in each case insurer has to be informed
BEFORE a court action is made: confirmation of coverage).
Legal expense insurances may cover only "passive" court actions (being
sued/being the defendant) or may even cover "active" court actions
(being the plaintiff/claimant) or may cover only private issues (as
consumer, as family member) or also in professional matters (as
employee, as employer, as sole entrepreneur vis a vis clients etc), up to
agreement with the insurer.
Also up to agreement with insurer if coverage includes not only direct
legal costs but also costs of expertise, interpreters, and also if coverage is
also provided if the case is lost or not.
2. Life Insurance (usually limited to a maximum certain age: therefore a 70 year old
cannot take out a life insurance or death after age x is not covered anymore) are
either endowment insurance (payout of the premiums paid if a certain age is
reached alive or pay out of the agreed insurance value if the agreed age is not
reached alive, suicide sometimes excluded; "expensive") or death insurance
(payout of the insurance value if death happens before agreed age, "cheaper").
3. Health Insurance (if already State Law Health insurance exists, then a private
health insurance makes only sense if additional coverage provided [private
"hotel-like" hospitals, private doctors compensated across the globe etc; if no
State Law Health Insurance exists [for instance foreign privates, foreign
entrepreneurs, then anyway advisable to take out a private standard [plus
additional] health insurance.).
4. Accident Insurance (private accident insurance). For employees usually
only necessary to cover out-of-work accidents, because work accidents (plus
travel to and from work) are already covered by “Public Law” State Accident
Insurance. Activities with increased risk exposure (paragliding, parachuting,
base jumping etc) are usually excluded respectively require specific
(expensive) insurances (if an insurer is willing to agree to such specific
insurance).
Please mind that self-employed persons are often NOT included in any state
accident insurance and therefore are NOT covered by any accident insurance
(during work or out of work) if no private accident insurance is taken out!
23. OPERATIONAL MANAGERS are often responsible to choose the proper insurances and
to maintain the necessary insurances for the business operations they are assigned
to. Thus operational managers have to read and understand the insurance coverages
and also the risks that are not included and covered by the respective insurances. In
case the terms and conditions of insurance contracts are unclear (to the responsible
managers) these terms and conditions must be clarified before the contract is signed
off. Insurance is not a "boring burocratic" issue ("better to ignore and better to
invest the time to concentrate on "real significant business issues") but has to be
taken – of course – seriously.
Operational managers therefore have to involve insurance experts (such as
insurance department or legal department or external legal support) sufficient
ahead of time before a contract is concluded which requires risk management in terms
of insurance!
24. In some jurisdictions insurances are subject to specific taxes (insurance tax) which
trigger significant costs and must be calculated when risk management evaluation is
made. Usually such insurance tax has to be collected and transferred by insurer
(insurance company) as a surcharge to the premium to the insured person.
