General Insurance

An admitted or authorized

insurer is an insurance company that has qualified and has received a Certificate of Authority from the Department of Insurance to transact insurance in the state.

Adverse Selection

Insurance companies strive to protect themselves from adverse selection, the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.

Mutual Companies

Mutual companies are owned by the policyowners and issue participating policies. With participating policies, policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are therefore nontaxable. Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed.

Consideration

The binding force in any contract is the consideration. Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.

Representations

are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.

Apparent

authority is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, when an insurer furnishes an agent with a rate book, application forms, and sales literature, the insurer cannot later deny that such a relationship existed.

The principle of utmost good faith

implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.

A domestic

insurer is an insurance company that is incorporated in this state. In most cases, the company's home office is in the state in which it was formed - the company's domicile. For instance, a company chartered in Pennsylvania would be considered a Pennsylvania domestic company.

The agent is responsible to the

insurer with regards to completing applications for insurance, submitting the application to the insurer for underwriting, and when issued, delivering the policy to the policyowner and explaining the contract. Also, if the insured submits payment to the agent, it is the same as submitting a payment to the insurer.

A warranty

is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such strict definition, statements made by applicants for life and health insurance policies are usually not considered warranties, except in cases of fraud.

An insurer

is any person or company engaged as the principal party in the business of entering into insurance contracts. There are several classifications of insurers depending on the type of ownership, location of incorporation, and other characteristics.

Loss

is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.

A fiduciary

is someone in a position of trust. More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

The major difference between government programs and private insurance programs

is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

Fraud

is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Waiver

is the voluntary act of relinquishing a legal right, claim or privilege.

Private insurance companies

may offer many lines of insurance. They may be formed as stock, mutual, reciprocals or fraternal insurers, and they must be authorized to transact insurance by the state insurance departments.

In a unilateral contract

only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Producers are required to

perform in a professional manner at all times. Professionalism can be defined as a person in an occupation requiring an advanced level of training, knowledge, or skill. Being professional means placing the public's interest above your own in all situations. Any deviation could result in a penalty.

Pure risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type insurance companies are willing to accept.

There are several ways to transfer risk

such as hold harmless agreements and other contractual agreements; but the safest and most common method is to purchase insurance coverage.

Market Conduct describes

the way companies and producers should conduct their business. It is a type of Code of Ethics for producers. Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct regulations include, but are not limited to the following: Conflict of interest; A request of a gift or loan as a condition to complete business; and Supplying confidential information.

Indemnity

(sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

insurer

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fiduciary responsibility

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an agent handles the funds of the insured and the insurer.

Producer/Insurer Relationship

An agent will always be deemed to represent the insurer, not the insured.

Conditional Contract

As the name implies, a conditional contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

General Agency System

General agent-entrepreneur represents 1 company- Exclusive - Compensation and commissions- Appoints subagents

Imlied Example

If the agency contract does not specifically authorize the agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums.

Statistically predictable

Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)

Not catastrophic

Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.

Elements of Insurable Risks

Not all risks are insurable. As noted earlier, insurers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. Furthermore, even pure risks must have certain characteristics in order to be insurable.

Self-Insurers

Self-insuring is when a person or entity, as an alternative to the purchase of insurance from an insurance company, develops a formal program identifying, evaluating and funding its losses. It is frequently used for workers compensation where losses are fairly predictable and states have established regulations for self-insurance.

Authority and Powers of Producers

The agency contract details the authority an agent has within his/her company.

Transfer

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.

Legal Purpose

The purpose of the contract must be legal and not against public policy.

Offer and Acceptance

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application. Acceptance, takes place when an insurer's underwriter approves the application and issues a policy.

Due to chance

a loss that is outside the insured's control.

Definite and measurable

a loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Insurance companies are classified

according to the location of incorporation (domicile). Regardless of where an insurance company is incorporated, it must obtain a Certificate of Authority before transacting insurance within the state.

With regards to an insurance contract

any knowledge of the agent is presumed to be knowledge of the insurer. If the agent is working within the conditions of his/her contract, the company is fully responsible.

The government

provides insurance in those areas where private insurers either cannot, or will not, write insurance. Those insurance programs provided by the government are commonly called social insurance, such as Medicare, Social Security, Federal Crop insurance and National Flood insurance.

Managerial System

...General agent-entrepreneur represents 1 company - Exclusive- Compensation and commissions- Appoints subagents

Ambiguities in a Contract of Adhesion

Because only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Indemnity Example:

Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount of insurance).

Elements of a Legal Contract

In order for insurance contracts to be legally binding, they must have 4 essential elements: Agreement - offer and acceptance -Consideration Competent parties &Legal purpose

Avoidance

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Randomly selected and large loss exposure

There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

Law of large numbers Example

When an insurance company issues a policy on a 35-year-old male, the company really has no way of knowing or accurately predicting when he will die. However, the Law of Large Numbers looks at a large group of similar risks - 35-year-old males of similar lifestyles and health conditions - and makes some conclusions based on statistics of past losses. This allows the insurance company to have a general idea about the predicted time of death for this type of insured and to set the premiums accordingly.

A foreign

insurer is an insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam or American Samoa). For example, a company chartered in California would be a foreign company within the state of New York.

Life insurance

insures against the financial loss caused by the premature death of the insured;

Casualty insurance

insures against the loss and/or damage of property and resulting liabilities.

Insurance transfers

the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. If there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss.

Competent Parties

The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Exposure

is a unit of measurement used to determine rates charged for insurance coverage. A large number of units having the same or similar exposure to loss are referred to as homogeneous, The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss.

A nonparticipating

(stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

Exclusive Agency System/Captive Agents

1 agent represents 1 company - Exclusive- Commissions on personal sales- Renewals can only be placed with the appointing

Independent Agency System/ American Agency System

1 independent agent represents several companies- Nonexclusive - Commissions on personal sales- Business renewal with any company

The purpose of retention is

To reduce expenses and improve cash flow; To increase control of claim reserving and claims settlements; and To fund for losses that cannot be insured.

misrepresentations

Untrue statements on the application are considered and could void the contract.

Self-insurers

frequently structure their programs to only retain losses up to a certain specified limit and purchase insurance to cover loss above that level. (This is called stop-loss coverage.)

Property insurance

insures against the loss of physical property or the loss of its income-producing abilities;

Risk

Risk is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Sharing

Sharing is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Stock Companies

Stock companies are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, stock companies issue nonparticipating policies, in which policyowners do not share in profits or losses.

5. Law of Large Numbers

The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group). The law of large numbers states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.

Financial Status (Independent Rating Service)

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following various independent rating services: AM Best- Fitch- Standard and Poor's- Moody's- Weiss

Physical hazard

A condition of the subject of insurance that creates or increases the chance of loss, such as structural defects, occupancy, poor housekeeping or location.

Contract of Adhesion

A contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance contracts are offered on a "take-it-or-leave-it" basis by an insurer.

Moral hazrd

A dishonest predisposition on the part of an insured that increases the chance of loss. This could include an applicant who has been previously convicted of arson, falsifying an insurance claim, etc.

Fraternal Benefit Societies

A fraternal benefit society is an organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government. Since fraternals sell only to their members and are considered charitable institutions, they are not subject to all of the regulations that apply to the insurers that offer coverage to the public at large.

Hazard

A hazard is a condition or situation that creates or increases the probability of or extent of a probable loss from a peril. From an underwriting standpoint, insurers are concerned with 3 types of hazards:

Morale hazard

Applicants who demonstrate a careless attitude that could increase the chance of loss that would be greater than would otherwise be the case.

Insurer and Principal

In applying the law of agency, the acts of an agent, while acting within the scope of their authority, are the acts of the insurer.

Personal Contract

In general an insurance contract is a personal contract, because it is between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer's approval. Life insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing.

6. Marketing (Distribution) Systems

Insurance companies market their products in different ways: through agents or direct solicitation to the customers.

Aleatory Contract

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Surplus Lines

Insurance that is not available in the regular market place from admitted insurers is referred to as Surplus Lines. It usually involves insurance for high risk individuals and is placed with nonadmitted insurers who specialize in offering insurance to the high risk market. While surplus lines insurers are not admitted, most states require that they be on that state's "approved" list.

Reasonable Expectations

It is not always practical or necessary to state every direct and indirect provision or coverage offered by an insurance policy. If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could reasonably expect coverage. For example, if an insurance company advertises in large print that insurance is available regardless of pre-existing conditions, the buyer could reasonably expect any pre-existing conditions to be covered, even if the small print on the back of the sales brochure specifies that not all pre-existing conditions would be covered.

Aleatory Example:

John purchases a life insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and he unexpectedly died, his beneficiary will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.

Perils

are the causes of loss insured against in an insurance policy.

Express

authority is the authority a principal intends to grant to an agent by means of the agent's contract. It is the authority that is written in the contract.

Implied authority is authority that is not expressed or written into the contract

but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in the written contract.

To protect themselves from adverse selection

insurance companies have an option to refuse or restrict coverage for bad risks; or charge them a higher rate for insurance coverage.

A nonadmitted or nonauthorized

insurer is an insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may not transact insurance.

An alien

insurer is an insurance company that is incorporated outside the United States.

Health insurance

insures against the medical expenses and/or loss of income caused by the insured's sickness or accidental injury;

Speculative risk

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Reinsurance

is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. Reinsurance is used by insurers to protect against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer). The other insurer is called the assuming insurer, or reinsurer.

Estoppel

is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Contractually

only those actions for which the agent is authorized can bind the principal (insurer). In reality, an agent's authority is much broader. There are 3 types of agent authority: express, implied, and apparent.

A material misrepresentation

is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they would be considered fraud.

Concealment

is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.

Risk retention

is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays.