Chapter 2) Legal Concepts and Contracts

Aleatory contracts

Aleatory contracts are those in which there is an unequal exchange of value. Insurance contracts are aleatory contracts because payment of benefits is contingent upon the occurrence of an uncertain loss. One party has the potential to receive more benefit than the other. An example of this is the payout of a life insurance policy for a young healthy person who unexpectedly dies prematurely.

Four elements must be present in every contract to be valid and legally enforceable. These elements include: __________ and acceptance, _____________, ______________ parties, and _______________.

Four elements must be present in every contract to be valid and legally enforceable. These elements include: Offer and acceptance, Consideration, Competent parties, and Legal purpose.

Conditional Contract

Insurance contracts are conditional because all parties to the contract must meet certain conditions when a loss occurs in order for the contract to be legally enforceable. An example of a condition in a life insurance contract is submitting the insured's death certificate to the insurance company for payment of the death benefit. Conditional contracts can be thought of as "if-then" contracts: if a loss occurs, then the insurance company will pay benefits.

Misrepresentations

Intentional misstatements made by the insured. Misrepresentations that are material to the risk may void the contract. Misrepresentation occurs when an insured lies on a health insurance application by stating that they do not have a medical history of headaches, when in fact, they do.

Casualty Insurance

It is a form of insurance, which protects against the risk of legal liability for injury, death, disability, damage and destruction to property.

Tort Law

Law based on legal liability for civil wrongs.

Related to indemnity, _____________ is the right of the insurer to assume the rights of the insured and sue the responsible third party for damages inflicted upon the insured. ______________ primarily applies to property and casualty, and seldom to life and health insurance.

Related to indemnity, subrogation is the right of the insurer to assume the rights of the insured and sue the responsible third party for damages inflicted upon the insured. Subrogation primarily applies to property and casualty, and seldom to life and health insurance. Example: A life insurer does not have the right to sue a commercial airline for the death of an insured in a plane crash. A property and casualty insurer, on the other hand, can sue the responsible third party for damages due to negligence in a car accident.

Insurable interest requires that an individual have a valid concern for the well being of the person insured. In a life policy insurable interest can be present in all of the following, EXCEPT: Select one:

Second cousins are not considered to have an insurable interest in an insured - just on the basis that they are related. The correct answer is: Second cousins

Representations

Statements made by the insured, to the best of his knowledge.

Warranties

Statements that are guaranteed to be true and are part of the legal contract. Breach of warranty is grounds for voiding an insurance contract.

Contract of Adhesion

Take it or leave it agreements, where the insured has no say in the contract terms and conditions.

Death Benefit

The amount paid to the beneficiary under an insurance policy upon the death of the insured.

Provisions

The characteristics, privileges, duties of all parties, and rights of a policy.

All of the following statements are true regarding warranties, EXCEPT: Select one: a. Warranties are statements that are guaranteed to be true in every respect. b. Insurance companies are held to the principle of warranties. c. Insureds are held to the principle of warranties. d. Breach of warranty is grounds for voiding an insurance contract.

Warranties are statements that are guaranteed to be true and are part of the legal contract. Insurers are held to the principle of warranties, not insureds. Breach of warranty is grounds for voiding an insurance contract. The correct answer is: Insureds are held to the principle of warranties.

Joyce applies for a health insurance policy. When the agent delivers the policy to Joyce, an additional premium is required to account for Joyce's medical conditions. Joyce must agree to pay the additional premium before the policy is effective. The insurer has made: Select one: a. An invitation to offer b. Acceptance c. A counter-offer

When the insurer issued Joyce's policy with a higher premium, the insurer made a counter-offer. Joyce must agree to pay the extra premium in order for the coverage to take effect. The correct answer is: A counter-offer

What type contract is said to be, if...then? Select one: a. Conditional b. Adhesion c. Unilateral d. Personal

A conditional contract is said to be, if'then because certain events must happen before it can be fully executed. The correct answer is: Conditional

Personal Contract

A contract between an individual and an insurer. Most insurance is considered a personal contract. Life insurance is not considered a personal contract because a policyowner has no stake in the risk assumed by the insurance company. A policyowner has ownership of their life insurance contract and can give it away (a process called assignment), if they so choose.

In order to be valid, a contract must have: Select one: a. Legal purpose b. Public purpose c. Government purpose d. Private purpose

A contract must have a legal purpose to be enforceable. The correct answer is: Legal purpose

Payment of Premiums

A required provision in a life insurance policy stating when premium payments are due, how and to whom they must be paid.

Conditions

The conditions of the policy are the rights and responsibilities of all parties of the contract. All policy provisions are listed in the conditions section.

Exclusions

The exclusions section of the contract states what the insurer will not do. This includes the risks that the insurer will not cover.

Insuring Clause

The insurer's promise to pay covered losses as long as the insured pays the premiums and abides by the terms and conditions.

Beneficiary

The named person(s) who receive the policy benefits.Example: Tom purchases a life insurance policy on his own life. He would most likely make his wife, Linda, the beneficiary; however, Tom could make anyone the beneficiary, such as a famous actor or football star.

Policy Face

The policy face, also referred to as the title page, typically is the first page of the contract and contains the following information: The named insured, Policy number, Policy issue date, Policy limits, Premium amount, Premium due dates, A right of examination statement (right to return the policy), and Signatures of the insurer's secretary and president are also part of the policy face.

What are the basic elements of a legal contract? Select one: a. Offer, acceptance, consideration, competent parties and legal purpose b. Acceptance and consideration c. Policy face, insuring clause and adhesion d. Competent parties, acceptance and reason

There are four elements to a legal contract: agreement (offer and acceptance), consideration, competent parties and legal purpose. The correct answer is: Offer, acceptance, consideration, competent parties and legal purpose

The amount of coverage under a life insurance policy. Synonymous with face value.

face amount

The purpose of an ________________ is to indemnify (make whole) the insured when a covered loss occurs.

insurance policy

___________ is an exchange of value between parties of the contract. The insurance company provides _____________ by promising to pay a covered loss. The insured provides ______________, as well as an offer to buy, through the statements on the application and payment of premium.

Consideration is an exchange of value between parties of the contract. The insurance company provides consideration by promising to pay a covered loss. The insured provides consideration, as well as an offer to buy, through the statements on the application and payment of premium.

Premium =

Premium = Consideration

All parties to a contract must be of a legal age, mentally capable of understanding the terms of the contract, and not influenced by drugs or alcohol. Which of the following elements of a legal contract is described? Select one: a. Competent parties b. Consideration c. Agreement d. Legal purpose

All parties to a contract must be of legal competence. This means that all parties must be of a legal age, mentally capable of understanding the terms of the contract, and not influenced by drugs or alcohol. The correct answer is: Competent parties

Consideration

An exchange of value between parties of the contract. Consideration is one of the four elements required in a contract.

Legal Purpose

An insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Legal Purpose is one of the four required elements of a contract.

An insurance policy is a _________

An insurance policy is a contract.

All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol. Competence is one of the four required elements of a contract.

Competent Parties

Insurance contracts are conditional. Which of the following would be a characteristic of a conditional contract? Select one: a. If a loss occurs, then the insurance company will pay benefits. b. Only the insurance company makes legally enforceable promises in the contract. c. The contract is a "take it or leave it" contract. d. There is an unequal exchange of value with the contract.

Conditional contracts are "if-then" contracts: if a loss occurs, then the insurance company will pay benefits. The correct answer is: If a loss occurs, then the insurance company will pay benefits.

If the applicant submits the application to the insurer without the initial premium, the applicant is inviting the insurance company to make an ________. In this case, the insurer makes an _________ to the applicant by issuing the policy with a premium invoice. If the applicant pays the initial premium, the applicant has accepted the ________.

If the applicant submits the application to the insurer without the initial premium, the applicant is inviting the insurance company to make an offer.

If the insurance company receives the application and initial premium, but issues the policy with modified coverage or premium, the insurance company has made a ___________ _____. If the applicant accepts the __________________, agreement occurs. However, if the applicant refuses the modified terms of the policy, there is no contract and the insurance company will return any initial premium paid. Acceptance occurs when the policy is issued.

If the insurance company receives the application and initial premium, but issues the policy with modified coverage or premium, the insurance company has made a counter-offer. If the applicant accepts the counter-offer, agreement occurs. However, if the applicant refuses the modified terms of the policy, there is no contract and the insurance company will return any initial premium paid. Acceptance occurs when the policy is issued.

legal contract whereas

In a contract a whereas clause is an introductory statement that means "considering that" or "that being the case." The clause explains the reasons for the execution of the contract and, in some cases, describes its purpose. The whereas clause may properly be used in interpreting the contract.

____________ Insurance is defined as insurance that compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. The term ____________ means, "to make whole."

Indemnity

Unilateral Contract

Insurance contracts are said to be unilateral because they are one-sided.Only the insurance company makes legally enforceable promises to pay benefits in the event of a covered loss. The applicant does not make any legally enforceable promises to the insurance company, not even the payment of premiums. However, if the applicant fails to pay premiums, the insurance company has the right to cancel the contract.

All of the following are part of the consideration element of an insurance contract, EXCEPT: Select one: a. The insurer's promise to pay a covered loss b. The applicant's statements on the application c. The initial premium paid by the applicant d. The applicant's promises

Insurance contracts are unilateral. Only the insurer is legally upheld to performing the promises made in the policy. The correct answer is: The applicant's promises

Contract Law

Law based on legal contracts. Contract law defines a contract as a legally binding agreement between two or more parties where a promise of benefits is exchanged for valuable consideration. An agreement must have both an offer and an acceptance.

An insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Legal Purpose is one of the four required elements of a contract.

Legal Purpose

Which of the following terms best describes the applicant's statements on an insurance application? Select one: a. Indemnities b. Adhesion c. Representations d. Warranties

The applicant's statements on the application are representations, not warranties. The correct answer is: Representations