Chapter 6: Basic Legal and Contract Analysis

(T/F) The requirement that the insured must cooperate with the insurer in legal proceedings against the insured by a third-party claimant is an example of a condition subsequent.

True

legal rights: sue claims that the insurance agent told her something that contradicts the language of the contract

Under the parol evidence rule, oral evidence cannot be used to modify the contract.

unilateral nature vs personal nature vs consideral nature

Unilateral nature. The insurance contract is a unilateral one because only one party, the insurer, makes a legally enforceable promise. If the company fails to fulfill the promises it makes, such as to pay the specified benefits at the death of the insured, the insurer may be held legally liable for breach of contract. The insured makes no such promises after the contract comes into force (although, of course, failure to live up to policy conditions like paying the premiums may release the insurer from the contract). Personal nature. The insurance contract is personal and covers the person rather than the property. Insurance provides repayment of a loss arising out of an undesired happening by indemnifying the person who has incurred the loss. Conditional nature. The obligation to perform on the part of one of the parties to an agreement may be conditioned upon the performance of the second party. A clause in an insurance contract requiring such performance is usually referred to as a condition. Failure of one party to perform relieves the other party of his or her obligation

intentional concealment or misrepresentation with the objective of forcing an insurer to provide a benefit which otherwise would not be provided

fraud

(T/F) Warranties are widely used today

False. · In todays world, we don't really use warranties. They've been replaced by representations.

Your client owned a precious stone that was destroyed soon after he gave it to his girlfriend. Does your client have an insurable interest?

. No insurable interest exists because your client did not own the precious stone at the time it was destroyed. For property to be insurable, an insurable interest must exist at the time of the loss.

For a life insurance contract to be enforceable, there are 4 specific elements

1. Offer and acceptance 2. Legal purpose - Can't be speculative - Has to be licensed company 3. Competent parties - Can't be minor, intoxicated, legally insane 4. Consideration - Value must be exchanged -Premium from the buyer at a aforementioned promise from the company

what are 3 reasons for requiring insurable interest in insurance contracts?

1. prevent gambling 2. decrease moral hazard 3. help measure the actual loss. Without an insurable interest, a contract is a wager or gambling contract. It also could be an undesirable incentive for some persons to cause losses or injuries on purpose. When an insurable interest exists, no profit results because policyowners merely receive repayment for the loss they have suffered.

Offer and Acceptance

A legally binding agreement, or contract, requires both an offer by one party and an acceptance by another party. "meeting of the minds" In insurance, the offer is usually made in a request for coverage by the prospect, or applicant. Before a contract is effective, acceptance of the offer is necessary. In property and liability insurance, the agent often has authority to bind, or accept, the offer even without receiving any payment from the applicant. In life insurance, a written application with the first premium payment is usually considered the offer to the insurer. Most courts hold that acceptance occurs if the applicant meets the normal underwriting standards of the insurer, and coverage becomes effective as of the time of the application and premium payment. If the premium was not paid with the application, the offer to insure is made by the insurer

legal purpose

A legally binding contract must have a legal purpose or object. The courts will not enforce a contract that has an illegal purpose or is contrary to public policy

Teddy, your client's son, says he has heard that if he has an accident with his old car, the insurance company will buy him a new car. How does Teddy's insurance work as a contract of indemnity?

As a contract of indemnity, insurance provides compensation for a covered loss but only to the extent of that financial loss. Insurance will not buy a new car. However, it will pay an amount of money that reflects the cost of repairing or replacing the vehicle that was damaged or destroyed, subject to any deductible that might apply.

The wording in an endorsement to your client's insurance policy conflicts with the terms of the policy itself. What is the significance of this conflict for your client?

As a general legal principle, whenever the wording in an endorsement or rider conflicts with the terms of the policy to which it is attached, the endorsement or rider takes precedence. The assumption underlying this principle is that an alteration of the basic agreement between the policyowner and insurer more accurately reflects the true intent of the parties than does the basic agreement itself.

Legal rights: sue claims that one of the provsions in the insurance contract is unclear

As a general rule, the benefit of doubt in an insurance contract goes to the insured if the terms are unclear

(T/F) If there is an ambiguous clause in an insurance contract, the courts will typically interpret the clause in favor of the policyowner.

True

What is the major distinction between a noncancelable policy and a guaranteed renewable policy?

Both noncancelable and guaranteed renewable policies give the policyowner the right to renew the coverage at each policy anniversary date, although possibly only to some stated age, such as 65. These policies may not be terminated by the insurer during the period of coverage. A truly noncancelable policy guarantees future rates for the coverage in the contract itself. In a guaranteed renewable policy, the insurer does not guarantee future rates for the coverage. Instead, the insurer retains the right to raise the rates for broad classes of insureds, but not just for individual insureds with poor claims experience

(T/F) Most insurance contracts are contracts of adhesion.

True

Purpose of declaration in an insurance contract

Declarations are factual statements that identify the specific person, property, or activity being insured and the parties to the insurance transactions; they also provide descriptive information about the insurance being provided

Purpose of exclusions in an insurance contract

Every insurance policy has exclusions—situations that the insurer does not cover. The exclusions usually apply to certain perils, types of losses, types of property, or types of activities.

6 elements of fraud

False representation—A party must misrepresent a past or existing fact. • Knowingly made—A party must know a fact to be false or must have made the representation in reckless indifference toward the truth or falsity of the statement made. • Intent to influence or deceive—One party must have intended to influence or deceive another party. Material fact—The misrepresented fact must have influenced or induced the other party to enter the contract or affected the terms under which the other party would have been willing to contract. • Reasonable reliance—The innocent party must show justification in relying on the statement. Detriment—In a suit for damages, the plaintiff must show injury or loss.

(T/F) A valid offer to buy life insurance may be transmitted orally.

False. A written application and the first premium payment are usually submitted by the applicant as the offer to the insurer through the agent, who issues a conditional receipt.

(T/F) Property and liability insurance policies are freely assignable by policyowners without the insurer's approval.

False. Because they are personal agreements between the insurer and the policyowner, property and liability insurance policies are not freely assignable by policyowners. They have to obtain the insurer's approval to affect a transfer. Life insurance policies, however, are freely assignable by policyowners.

(T/F) Life insurance policies are considered contracts of indemnity.

False. Life insurance contracts are valued contracts and are not contracts of indemnity.

(T/F) ***The misrepresentation or concealment of a material fact by an applicant for insurance will void a contract that the insurer has issued to the applicant.

False. The misrepresentation or concealment of a material fact by an applicant for insurance will not void the contract but will make it voidable by the insurer.

(T/F) An example of a condition precedent in an insurance contract is that the insured is required to cooperate with the insurer in defending a liability claim.

False. This is an example of a condition subsequent.

The purpose of this is to require an insurable interest in the contract, to prevent

GAMBLING · Don't want to make johnny dying from the plague · This HAS to exist at the time the policy is purchased (inception)

(T/F) Some exclusions are found in insurance policies because the risks are typically covered by other insurance.

True

Purpose of insuring agreements in an insurance contract

Purpose of definition in an insurance contract

legal rights: sue wants to ignore a portion of the contract she did not read

Sue is bound by the contract whether she read it or not. A planner should take great care to explain the contract to his or her client because the chances are good that the client will not read and/or understand it.

Cheryl Eng, a client of yours, was responsible for an auto accident that damaged the other driver's car. Cheryl was pleased to hear that the other driver had insurance that paid for the damage to his car. Cheryl has just learned that the other driver's auto insurance company has asked Cheryl's insurer for reimbursement. "Can they do that?" she asks you. How does the doctrine of subrogation applies to insurance contracts?

The common-law doctrine of subrogation gives the insurer whatever rights the insured possessed against responsible third parties. It is basically a process of substitution, with the other driver's insurer taking over the legal rights of its insured to recover from Cheryl. In common law, it is a matter of equity that, on paying the insured the amount of the loss, the insurer has a right of action against any other person who may have caused the loss. The right of the insurer against other negligent persons usually does not rest on any contractual relationship, but arises out of the nature of the contract of insurance as one of indemnity. If the insured is indemnified, it would be inequitable for him or her also to try to collect from the party responsible for the loss. If the insured were permitted to do this, a double collection of the loss from both the insurer and the party responsible might result in a profit to the insured. Subrogation also holds wrongdoers responsible for the results of their wrongful actions, instead of permitting them not to pay only because an insurance contract bought by someone else was in force. The overall cost of the insurance to policyowners is also reduced in this manner.

Purpose of definition in an insurance contract

The definitions section carefully defines terms used in the policy. Because ambiguities in the contract are likely to be construed against the insurer, this section of the policy is a substantial help in making the insurer's intentions precise.

consideration

The final requirement for a valid contract is some consideration exchanged by both parties to the agreement—a right or something of value given up, or an obligation assumed. In insurance, the applicant typically makes a premium payment, or the contract may become effective on the basis of the applicant's promise to pay and to meet other conditions of the contract. The insurer's consideration is its promise to pay for specified losses or to provide other services to the policyowner

Purpose of conditions in an insurance contract

The insuring agreement is not an absolute promise by the insurer with "no strings attached." Instead, the promise is a qualified one, enforceable only if the policyowner fulfills a number of conditions that are spelled out in the policy

(T/F) As a general legal principle, whenever the wording in an endorsement or rider conflicts with the terms of the policy to which it is attached, the endorsement or rider takes precedence.

True

competant parties

Valid contracts require that the party making the offer and the one accepting the offer be legally competent to make the agreement. In insurance, the most common problem arises in connection with applicants who are under the age of legal majority. Some insurance contracts are voidable by applicants who are minors, and these applicants will receive a full return of the premiums paid if they later decide to make the contract void. Some states have made exceptions for life, health, and auto insurance contracts by establishing special age limits of 14 or 16; beyond this age, minors are considered to have the legal capacity to insure themselves, and a contract is binding on them. A similar problem may occur in insurance written for insane or intoxicated persons. They cannot make legal contracts because they fail to understand the agreements. Insurers, too, must be competent to enter into a legal contract by meeting charter and license requirements of the states. In cases where such legal capacity is lacking, many courts have nevertheless held the contracts binding on the insurer, or on its corporate officers personally, rather than penalizing a good-faith purchaser of the coverage

voidable contract

a contract that can be affirmed or rejected at the option of one of the parties but is binding on the other party. May be the result of concealment, misrepresentation or fraud.

Subrogation

a process by which an insurer takes over the legal rights of recovery if its insured has against a responsible third party.

factual statements that are a part of an insurance policy and that identify the specific person, property, or activity being insured; the parties to the insurance transaction; and other descriptive information about the insurance being provided

declarations

explanations of the meaning of key terms in an insurance policy to clarify the coverage

definitions

failure by one party to a contract to affirmatively disclose to the other party all of the important facts that are the exclusive knowledge of the first party. Even if it is not intentional or fraudulent, concealment can make an insurance contract voidable.

concealment

an agreement in which one party has an obligation to perform only if the other party meets certain conditions specified in the agreement

conditional contract

Insurance has a _________________________, in that benefits are paid based on particular events. Policyowners buy insurance against many perils, despite feeling that such perils will not really cause losses to them. Insurance can be considered a service contract or a bundle of services, rather than a single physical product

contingent nature

A ________________ is prepared in all its details by one party, in contrast to a bargaining contract, in which the terms are negotiated between the parties to the contract. An insurance contract is usually characterized as a __________________ because the insurer ordinarily prepares all its details.

contract of adhesion

a contract that is not negotiated. It is drafted entirely by one party (insurance company). The other party can only accept or reject the contract. Ambiguities will be interpreted in favor of the policyowner.

contract of adhesion

a policy in which the insurer agrees, if a covered loss occurs, to pay an amount directly related to the amount of the loss

contract of indemnity

a provision added to a property or liability insurance policy, sometimes for an extra or reduced premium charge, by which the scope of the policy's coverage is clarified, restricted, or enlarged

endorsement

a list of illnesses and injuries that result in disability, or specific circumstances under which disability occurs, for which the DI insurance policy will not pay DI insurance benefits to the insured

exclusions

Insurance transfers the _____________________- to the insurer, an organization that is in the business of bearing risks. I

financial risk of losses

a continuance provision in an insurance contract that gives the insured the right to renew the coverage at each policy anniversary date, usually up to a stated age. Under this provision, the coverage cannot be terminated during the policy term, and renewal is guaranteed up to the stated age. However, unlike a noncancelable contract, the insurer has the right to raise the premium rate for broad classes of insureds.

guaranteed renewable

representation

incidental statement preceding the contract. To void the contract, any representation must be both false and material. Its not part of the contract.

spells out the general description of the coverage provided by the DI insurance contract. It identifies the parties to the contract and includes the insurer, the insured's name, policy number, the date of issue, and the length of the insuring period. The ________________________also generally states whether the policy is noncancelable, guaranteed renewable, conditionally renewable, or optionally renewable.

insuring agreement

an insurance contract is an_____________________ that represents value. Other _____________________ include stock certificates and savings bonds.

intangible asset

Parol (spoken) evidence rule-

legal principle: oral contemporaneous evidence may not be used to contradict or vary the terms of a valid written contract. Written contract prevails over anything said by either party. Statements by the agent selling insurance do not alter the written policy.

Although the written contract is not ordinarily subject to modification by oral evidence, the language of the policy is nevertheless not binding in clear cases of ___________________

mutual mistake of fact. In some cases, the injured party has a right in equity to ask that the contract be reformed to the true agreement. An example might be a contract that misspells the name of the insured.

a continuance provision in an insurance contract that gives the insured the right to renew the coverage at each policy anniversary date, usually up to a stated age. Under this provision, the coverage cannot be terminated during the policy term, renewal is guaranteed up to the stated age, and the premium rate is guaranteed in the contract.

noncancelable

Insurance is a conditional contract, because the insurer is

obligated to pay claims, defend the insured against liability claims, or perform other services only if the insured (or the life insurance policyowner) has complied with policy conditions

the insurer reserves the right to refuse to renew the coverage at each policy anniversary date, either for specified reasons or for any and all reasons

optionally renewablw

a legal principle that specifies that oral contemporaneous evidence may not be used to contradict or to vary the terms of a valid written contract

parol evidence rule

a statement in an insurance application that is substantially true to the best of the applicant's knowledge and belief. A false representation of a material fact is a misrepresentation.

representation

warranties

response to a question on an insurance application that if FALSE makes the policy voidable EVEN if the false statement is not material.

Insurable Interest

right or relationship with regard to an insurance contract such that the policy owner will suffer financial loss from damage, loss, or destruction to that subject matter

a process by which an insurer that has paid a claim takes over the legal rights of recovery its insured might have against a responsible third party

subrogation

you get into an accident and it's another person's fault. You file a claim. They drag their feet. You get irritated. You file with your own company. They pay you. They take the ______________________ and go back and sue the other company to collect.

subrogation

concealment vs misrepresentation

the failure to disclose relevant information (material fact). Primarily in application or claim. Usually occurs in application or claim. knowingly making a false statement of a material fact as an insurance applicant

for life insurance, insurable interest must exist _____________________________ for property it must exist _______________

time policy is purchased time there is a loss

a life insurance contract is unilateral because the promise of only one party to the contract is required to make it legal. The insurance company promises to fulfill the contract obligation. The policyowner's obligation is to pay premiums. See also contract of indemnity

unilateral contract

an insurance contract in which the amount of recovery does not depend on the financial amount of the loss but rather on the limit specified in the contract

valued contract

· During the contestable period, if the company can determine that concealment, misrepresentation, or fraud took place, they can ________ the contract

void

a contract that is entirely without legal effect and, therefore, unenforceable by either party. In essence, a void contract never was a contract.

void contract

Either concealment or misrepresentation may make an insurance contract a ___________________________, which may be affirmed or rejected at the option of one of the parties, although it is binding on the other.

voidable contract

a contract that can be affirmed or rejected at the option of one of the parties but is binding on the other party

voidable contract

a statement that becomes a part of an insurance contract and that must be strictly complied with. If false, makes the policy voidable, even if the false statement is not material. not used widely today, mostly representations.

warranty

Property and Casualty are almost always contracts of indemnity

· Policyowner is entitled to payment of an amount directly related to the amount of a covered loss · Insurance is seeking to compensate the insured for approximately the amount lost, but not more · Applies primarily to property insurance

Life contracts are almost always Valued contracts

· Policyowner is entitled to recover the amount specified in the policy, regardless of any measurable financial loss · If you buy $1 mil life insurance policy, and you die, and there are no loans on the policy, your benes are getting $1 mil