Chapter 2 The Insurance contract

What describes the principle of indemnity?

The principal of indemnity states that when a loss occurs an individual should be restored to the approximate financial condition he or she was before the loss.

Aleatory Contract

1 parties performance depends on an uncertain event, which means the exchange of value might appear to be unequal. Example: On and ins contract the insured pays premiums and in return for those premiums the ins co only makes a promise to pay benefits if a loss occurs. If no loss no benefits are paid If a large loss occurs, the ins co may pay benefits to the insured that far exceed the amount of money pad in premium.

Offer and Acceptance also called agreement.

1st party makes offer the 2nd party must except it. i.e. ins contract. the insured makes the offer by completing the application and the ins co accepts the offer by issuing the policy Must be competent under the law.

Ambiguity

A problem arises in the insurance contracts, when the insurer does not make the terms and agreements of the policy perfectly clear. because it is an adhesion ins policy the courts usually resolve any ambiguity in policy wording in favor of the insured.

Under an ins contract, the uncertainty of events can lead to unequal financial results for the 2 parties. this means ins is what kind of contract.

Aleatory. If no loss occurs the insured will receive no benefits although he or she paid premiums, but if a large loss occurs, the insured might receive benefits that far exceed the premium payments.

Parts of the Contract: Declarations

Almost always on the first page of policy, name of insured, address, amount of coverage provided, description of the property if property involved and cost of policy.

Definitions

Clarifies the meanings of certain terms used in the policy. Example: an auto ins policy may cover a newly acquired auto. the definitions section includes a definitions newly acquired auto sot it is understood that the term refers only to passenger vehicles and not other types of vehicle the insured might purchase.

Contracts exhibit certain characteristics to be legally enforceable.

Competent parties; i.e. not a minor, insane or under influence. Be formed for a legal purpose, can't be against public policy or in violation of the law is not enforceable.

What is the consideration that an insurer gives to the insured under an ins contract?

Consideration is the thing of value exchanged under a contract. The insured's consideration is the premium; in return the insurer promises to pay for certain losses if they occur.

Insuring agreements

Heart of policy, states in general what is to be covered, or in other words the losses for with the insured will be indemnified. This sections also describes the type of property covered the perils agains which it is insured.

What is meant by contract of adhesion?

Ins Policies are contracts of adhesion because the in company drafts the policy provisions and the insured adheres to the policy terms.

Personal contract.

Ins contract does not insure property, it insures the person who owns the property.

Adhesion

Ins contracts are contracts of adhesion, which means 1 party has greater power over the other party in drafting the contract. The insurer has greater power over drafting the contract because the provisions of the contract are prepared by the insurer. The insured, does not take any part in the prep of the contract just adheres to the policy terms.

A Contract

legal agreement between two or more competent parties that promise in exchange for a certain consideration. Ins co agrees to pay for an insureds losses in exchange for certain premium, then 2 parties enter into contract. can be oral, but usually written form of ins policy

Conditional Contract

Ins policy includes numbers of conditions that both the insured and the insurer must comply with. Example: if a covered loss occurs, the insured must notify the insurer about the loss, and the insure must use the valuation methods specified in the policy to settle the loss. GROUND RULES for the policy. Describes the responsibilities and obligations of both the ins co and insured

**Requirements for forming a valid Contract

The 4 requirements for forming a valid contract are Competent parties, a legal purpose, offer and acceptance and consideration. Oral contracts are valid, do not have to be in a written or include signatures ...but good idea.

The ground rules are described in which part of an ins policy?

The Conditions describe the responsibilities and obligations of the insurer and the insured.

What part of an insurance policy describes what property and/or perils will be covered by the contract?

The Insuring agreement state what types of losses the insured will be indemnified for. this section also describes the type of property covered and the perils agains which it is insured.

Another characteristic Contract of utmost good faith

the ins co relies on the truthfulness and integrity of the applicant when issuing a policy. The insured relies on the company's promise and capability to provide coverage and pay claims

Unilateral contract

Unilateral means 1 sided. An ins policy is 1 sided because only the ins company is legally bound to perform its part of the agreement. If there is a loss the insurer is legally bound to pay for the loss under the terms of the policy. Insureds are not legally obligated to pay premiums. If insured stops paying premiums the ins co can cancel coverage, but can't take the insured to court for breaking contract.

Consideration

both parties to a contract must provide consideration promised in the contract. the consideration the insured provides is the premium, the consideration the insurance company provides is the promise to pay if certain losses occur.

Contract of Indemnity

when a loss occurs an individual should be restored to approximate financial condition before the loss. An insured can only be indemnified to the extent of his or her insurable interest. Ins is not gambling..insured does not win nor lose. It does not always happy exactly to loss situations. In cases when insured selects deductibles or coinsurance amounts, ins payments might be less than the actual loss amount. Example: Ben and Jerry cousins each own 50% of a 200,000 duplex. Ben purchases a $200,000 in his name only if the total property is totally destroyed by fire, Ben would only be entitled to collect $100,00 (the extent of his insurable interest).

Exclusions

Describe the losses for which the insured is not covered. If an excluded loss occurs, the insured will not be indemnified.