NYL 2024 Chaps 1-5

Contracts

"C.L.O.C" -Competent parties -Legal purpose -Offer and acceptance (agreement) -Consideration

negligence

-Simple negligence is the failure to act in a reasonable or prudent manner. -Gross negligence involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm. -Willful and wanton negligence is considered even more severe.

PREFERRED RISKS

Preferred risks are judged to be a better than average risk for an insurance company. Preferred risks have a lower potential for loss. Insurers offer coverage to preferred risks for a lower-than-average premium.

Pure risk

Pure risk is a type of risk that involves the chance of loss only; there is no opportunity for gain; it is insurable. -ex: injury, illness, death

non-admitted insurer

may still offer surplus lines insurance without a certificate of authority if no authorized insurer in the market is available or willing to take the risk. The surplus insurance market is heavily regulated, requires additional licensing, and typically does not offer the consumer the same protections as the primary insurance market.

Legal Purpose

means an insurance contract must be legal in nature and not in opposition to public policy.

Rescission

means the contract is made null and void.

Reasonable expectations

means the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.

Surplus lines

nontraditional insurance market

Valued contract (Life Insurance)

pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.

Conditional

policy describes the insurer's promise to pay benefits depends on the occurrence of an event covered by the contract.

tort law

provide full compensation for proved harm

Applicants

provide the insurer with a completed application and initial premium as consideration for insurance.

RISK PURCHASING GROUPS (RPGS)

purchase insurance from an insurance company; they do not themselves act as insurers. Membership in an RPG means increased bargaining power and streamlined administration for individuals and businesses participating in the group. The risk purchasing group becomes a master policyholder, and its members receive certificates of insurance.

SURPLUS LINES INSURANCE

refers to the nontraditional insurance market. Surplus carriers provide coverage for unusual risks or unique situations. Surplus lines insurance is available to those who need protection that is not available through the commercial insurance carriers authorized to do business in the applicant's state. To qualify for surplus line coverage, the insured must demonstrate that he has made an unsuccessful effort to secure coverage in the authorized market.

Producer

refers to those individuals who solicit the sale of insurance products to the public. Licensed producers are obligated to act in a fiduciary capacity on behalf of the insurers with which they place insurance business and the clients they represent in insurance transactions. Producers are typically considered to be part of the sales department.

Underwriters

identify, assess, examine, and classify the amount of risk represented by an applicant (proposed insured) to determine if coverage should be provided and, if so, at what cost (premium). An underwriter approves or declines insurance applications and determines the cost to provide insurance.

Fraud

includes the deliberate knowledge of or intentional deceit to make false statements to be compensated by an insurance company.

REINSURERS

they insure other insurers. Reinsurance is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer (primary insurer/ceding company- net retention). Usually, reinsurance occurs to limit the loss any single insurer would face should a huge claim become payable. Reinsurance can also enable a company to meet specific objectives, such as favorable underwriting or mortality results.

Stranger-Originated Life Insurance (STOLI)

transactions are life insurance arrangements where investors persuade individuals (typically seniors) to take out new life insurance.

Specified (Named) Perils

list those perils that they cover. If a loss is caused by a peril that is not listed within the insurance policy, then the loss is not covered.

Physical Hazard

Physical hazards are physical or tangible conditions existing in a manner that makes a loss more likely to occur.

Broker

A Broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Law of Large Numbers (spread of risk)

A Principal of Actuarial Science- The law of large numbers is a fundamental principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period.

Adhesion

A contract of adhesion describes a contract that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the terms of the contract on a "take it or leave it" basis when accepted.

Hazard

A hazard is any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.

RECIPROCAL INSURERS

A reciprocal insurer in an unincorporated organization overseen by a board of governors or directors in which individual members (also called subscribers) agree to insure each other. This arrangement makes the reciprocal insurer a risk sharing mechanism rather than a form of risk transfer.

RISK RETENTION GROUPS (RRGS)

A risk retention group (RRG) is a specialized insurance company created under the terms of the Federal Liability Risk Retention Act (LRRA) of 1986 to provide liability insurance for individuals and entities with a common bond. Though RRGs are a specialized form of mutual insurance company (owned by its members)

Adverse Selection

Adverse selection is broadly defined as selection against the company. It includes the tendency of people with higher risks to seek or continue insurance to a greater extent than those with little or less risk. Adverse selection also includes the tendency of policyowners to take advantage of favorable options in insurance contracts.

Agent

An agent represents themselves and the insurer at the time of application.

Aleatory

An aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event.

CAPTIVE INSURER

An insurer established and owned by a parent firm or group of firms to insure the parent's loss exposure A risk retention group (RRG) can be established as a type of captive insurance company.

Indemnity contract

Contracts of indemnity attempt to return the insured to their original financial position.

FRATERNAL BENEFIT SOCIETIES

Fraternal societies are noted primarily for their social, charitable, and benevolent activities. They have memberships based on religion, nationality, or ethnicity. They also issue insurance covering their members. It must be a nonprofit organization; It must have a lodge system that includes ritualistic work and maintains a representative government form with elected officers. The fraternal organization must exist for reasons other than obtaining insurance.

INDUSTRIAL INSURER

Home service or debit insurers specialize in a particular type of insurance called industrial insurance. Industrial insurance is characterized by relatively small face amounts (usually $1,000 to $2,000). Generally, the selling agent visits the policy owner's home each week to collect premiums.

Homogenous Exposure Units

Homogeneous exposure units are similar objects of insurance that are exposed to the same group of perils.

Loss Exposure

Loss exposure is the risk of a possible loss.

Loss

Loss is the unintentional decrease in the value of an asset due to a peril. An indirect loss is also known as "Consequential Loss" because the loss is a consequence of or results from a direct loss. Direct losses result when a person or property is damaged, destroyed, or killed without an intervening cause.

Moral Hazard

Moral hazard is a hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual's general insurability.

Morale Hazard

Morale hazard is a hazard arising from indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.

personal producing general agency (PPGA)

PPGAs are generally responsible for maintaining their own offices and administrative staff. Agents hired by a PPGA are considered employees of the PPGA, not the insurance company, and are supervised by regional directors.

Peril

Peril is the immediate, specific event causing loss and giving rise to risk.

SELF-INSURERS

Rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses. Large companies often use Self-insurance for funding pension plans and some health insurance plans. A self-insurer will often look to an insurance company to provide insurance above a specified maximum loss level. The self-insurer will bear the amount of loss below that maximum amount.

Reinsurance

Reinsurance is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Risk Avoidance

Risk avoidance occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation.

Risk

Risk is the uncertainty regarding loss, the probability of a loss occurring for an insured or prospect.

Risk Management

Risk management is the process of analyzing exposures that create risk and designing programs to handle them is called risk management. (1) detecting the potential loss exposure; (2) selecting a method or tool to reduce risk; (3) executing a course of action; and (4) reviewing the measures taken periodically.

Risk Pooling/Loss sharing

Risk pooling and loss sharing spread risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.

Risk Reduction

Risk reduction takes place when the chances of a loss are lessened, or the severity of a potential loss is minimized.

Risk Retention

Risk retention is the act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. Risk retention is often associated with self-insurance.

Risk Transfer

Risk transfer is the act of shifting the responsibility of risk to another in the form of an insurance contract. -Buying insurance is the best way to transfer risk. Additional examples include incorporation and hold-harmless clauses in contracts. Reinsurance: One method insurers use to prevent a catastrophic loss is through reinsurance, which is defined as transferring risk from one insurer to one or more other insurers. Many insurers can minimize exposure to substantial loss by reinsuring risks.

STANDARD RISKS

STANDARD RISKS: Standard risks are considered to have an average potential for loss. Standard risks are typically insured in return for a predetermined standard premium.

Speculative Risk

Speculative risk is a type of risk that involves the chance of both loss and gain; it is not insurable. -ex: gambling in the stock market

SUBSTANDARD RISKS

Substandard risks are judged to be a poor risk for an insurance company and have a higher-than-average potential for loss. Substandard risks might either be insured for an increased premium, covered with a lower benefit, or declined altogether.

ceding company vs reinsurer

The company transferring the risk is called the ceding company (primary insurer). The company assuming the risk is the reinsurer.

treaty reinsurance

The most common reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed.

Reciprocal Insurers

The policyholders themselves insure the risks of the other policyholders. Each policyholder assumes a share of the risk brought to the company by others.

Fiduciary

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer.

independent agency system

a creation of the property and casualty industry, does not tie a sales staff or agency to any one particular insurance company

adjuster

a person who engages in investigative work to obtain information for adjusting, settling, or denying insurance claims. An insurance adjuster will primarily rely on completed claim forms but may also investigate an insured's identity, habits, conduct, business, occupation, honesty, integrity, or credibility. It depends on the claim. The title "public adjuster" refers to a person who, for compensation, acts on behalf of insureds or aids them with insurance claim settlements.

authorized insurer/admitted insurer

an authorized company is issued a certificate of authority.

dometic insurer

an insurance company authorized (admitted to transact insurance business) in the state where it is chartered or incorporated is classified as a domestic insurer only in that state

Mutual insurance companies

are also organized and incorporated under state laws, but they have no stockholders. Instead, the owners are the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner. They have the right to vote for members of the board of directors. Mutual companies are referred to as participating companies because the policyowners participate in the distribution of dividends. While stock insurance companies use some of these profits to pay stock dividends to shareholders, mutual insurers hold such excess earnings as a divisible surplus, which they return to their policyowners.

Service Representatives

are insurance company employees who do not engage in sales activities that pay commissions. They need not be licensed unless they receive commissions, solicit or countersign policies, or collect premiums from policyowners.

Representations

are statements made by the applicant that they consider to be true and accurate to the best of the applicant's belief.

Reserves

are the accounting measurement of an insurer's future obligations to its policyholders. They are classified as liabilities on the insurance company's accounting statements since they must be settled at a future date.

Indemnity contract

attempt to return the insured to their original financial position. Pays amount equal to the loss.

Actuaries

calculate policy rates, reserves, and dividends. They also make other applicable statistical studies and reports. Actuaries are concerned about the cost of insurance as a whole or the cost for a specific class of risk.

advance premium assessment mutual

charges a premium at the beginning of the policy period.

void

contract is simply an agreement without legal effect. A voidable contract is an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties to the contract.

Unilateral

contracts mean only one party, the insurer, makes any kind of enforceable promise.

PREVENTION

eFor example, constructing a building using masonry materials rather than wood, removing flammable materials from a premises, or de-icing the wings of an aircraft before takeoff illustrate loss prevention.

pure assessment mutual company

each member is assessed a portion of the losses that actually occur.

RISK SHARING

ex: If the coinsurance split is 80%/20%, then the insurance company carries 80% of the risk, and the insured carries 20%. Often this risk-sharing mechanism is used in conjunction with the risk retention mechanism known as a deductible.

solicitor

has the authority to seek insurance applicants for a company but does not have any authority to bind coverage on behalf of a company to a customer.

stock insurance company

insurance company owned by private investors. Typically, such companies are publicly traded commercial entities organized and incorporated under state laws to make a profit for their stockholders (shareholders). Stock insurers are structured the same as any other corporation. Stockholders may or may not be policyholders. When declared, insurers pay stock dividends to their stockholders. In a stock company, the directors and officers are responsible to the stockholders. Therefore, a stock insurance company is owned and controlled by its stockholders who share in its divisible surplus.

Special (Open) Perils

insurance policies do not name the perils they cover. Instead, such policies begin by saying they cover all direct causes of loss.

Treaty reinsurance

involves an automatic sharing of the risks assumed based on previously established criteria. In some situations, a primary insurer will seek reinsurance tailored to cover a specific risk or exposure without an ongoing agreement. This type of reinsurance is known as facultative reinsurance.

Parol Evidence Rule

involves parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Utmost Good Faith

involves the belief that both the policyowner and the insurer must know all material facts and relevant information, and as such, they will provide each other with all material facts and relevant information.

Material misrepresentation

is a false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk.

Warranty

is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract.

Insurance Policy

is a written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Voidable Contract

is an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties in the contract.

Policy rider or endorsement

is an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature.

Implied Authority

is an authority not explicitly granted to the agent in the contract of agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities.

alien insurer

is an insurer authorized in any state within the U.S., but its principal office is located outside this country.

foreign insurer

is authorized in one state but organized and incorporated under the laws of a different state

LLOYD'S OF LONDON

is not an insurer but rather a syndicate of individuals and companies that individually underwrite insurance. Lloyd's function is to gather and disseminate underwriting information, help its associates settle claims and disputes, and, through its member underwriters, provide coverages that might otherwise be unavailable in certain areas.

solicitors

is not licensed to sell insurance. A solicitor represents a producer and solicits prospective applicants to meet and discuss their insurance needs with that producer on their behalf.

Competent Party

is one who is capable of understanding the contract being agreed to. 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.

Apparent Authority

is the appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent-insurer relationship.

Express Authority

is the explicit authority granted to the agent by the insurer, as written in the agency contract.

Concealment

is the failure of the applicant to disclose a known material fact when applying for insurance.

Insurable Interest

is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss.

Estoppel

is the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Consideration

is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. The applicant gives consideration in exchange for the insurer's promise to pay benefits.

Subrogation

is the right for an insurer to pursue a third party that caused an insurance loss to the insured.

Waiver

is the voluntary giving up of a legal, given right

SERVICE PROVIDERS

sell medical and hospital care services to their subscribers, not insurance, in return for a premium payment. Another type of service provider is a health maintenance organization (HMO). HMOs offer a wide range of health care services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to the services of specific physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMOs provide financing for health care plus the health care itself. HMOs are known for stressing preventive health care and early treatment programs. The third type of service provider is the preferred provider organization (PPO). Under the usual PPO arrangement, a group desiring healthcare services (e.g., an employer or a union) will obtain price discounts or special services from certain select health care providers in exchange for referring its employees or members to them. PPOs can be organized by employers or by the health care providers themselves. The kind of services provided is spelled out in the contract between the employer and the health care professional (i.e., a physician or a hospital). Insurance companies can also contract with PPOs to offer services to insureds.