Policy Provisions and Contract Law
The part of a policy that clarifies terms in the policy is the
Definitions * The component of a policy that clarifies terms is the definitions.
If a property is covered by Company A for $20,000 and Company B covers the same property for $40,000, how much will Company A pay on a $24,000 loss?
$8,000 *Pro rata liability applies. Each policy pays a percentage of the loss based on the percentage of coverage that policy provides. Company A carries 1/3 of the total coverage ($20,000 + $40,000 = $60,000). Therefore, it is responsible for 1/3 of the $24,000 loss, or $8,000.
Components of every property or casualty policy
-Declarations -Definitions -Insuring Agreement -Additional Coverage -Conditions -Endorsements -Exclusions and Policy limits
Which part of an insurance policy covers claims-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, or defense expenses?
Additional Coverage *The additional coverage portion of a policy provides an additional amount of coverage for specific loss expense, at no additional premium.
A person who is not named as an insured on the Declaration page of a policy but is protected by the policy is known as the....
Additional Insured * An additional insured is usually added by endorsement and is not named on the declaration page, but is protected by the policy.
When a disagreement occurs as to how to settle a loss in a "fender bender" between two cars, what procedure is followed?
Arbitration through the court *Arbitration is a low-cost alternative to a full-blown lawsuit.
An applicant is purchasing a homeowners policy. A producer comes to her home, fills out the paperwork, and tells the applicant that her home will be covered as soon she signs all of the paperwork, and that she will receive a new policy in the mail in 5 business days. Even though the policy is not issued, the applicant's home is temporarily covered until then. What makes that possible?
Binder *A binder is a temporary agreement issued, usually in writing, but may be oral, by a producer or insurer providing temporary coverage until a policy can be issued.
An insurance contract must contain all of the following to be considered legally binding EXCEPT A) Consideration. B) Competent parties. C) Beneficiary's consent. D) Offer and acceptance.
C) Beneficiary's consent *The four essential elements of all legal contracts are offer and acceptance; consideration; competent parties; and legal purpose.
The Declarations of the Homeowners policy provides all of the following information EXCEPT A) The amount of premium charged for each coverage. B) The insured's address. C) What deductible amount applies to each loss covered by the policy. D) A statement that earthquake damage is not covered.
D) A statement that earthquake damage is not covered *The Declarations provides information as to who is insured; where they are located; when the policy provides coverage; how much coverage and the amount of deductible applied to a loss. The statement that earthquake damage is not covered is found in the policy form.
Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT A) Legal purpose. B) Offer and acceptance. C) Conditions. D) Consideration.
D) Conditions Conditions are part of the policy structure. Consideration is an essential part of a contract.
Examples of from coverage in a property policy
Earth movement and water damage 1) earth movement is excluded if caused by an earthquake, mudflow, or volcanic eruption 2) for water damage is exclusion the following perils are not covered: flood or subsurface water, water that backs up through sewers and drains or overflows from a sump pump, or water below ground that seeps through basement walls
The section of an insurance policy that details what perils are not insured against and what persons are not insured is known as the
Exclusions *The exclusions section of an insurance policy details what perils are not insured against and what persons are not insured.
Under the professional liability loss settlement provision, what must an insurer do before offering to pay a claimant to settle a claim?
Get the insured's consent
The policy conditions define
How Parties to the contract must act following a loss *Conditions is an essential part of a policy structure. Conditions define what each party to the policy is required to do contractually in the event of a loss.
In insurance, an offer is usually made when...
The application is submitted *In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.
All of the following are *conditions commonly found in the insurance policy EXCEPT insuring agreement cancellation and nonrenewal subrogation apprasial
insuring agreement *insuring agreement provides information on the policy's coverages. Conditions state the legal obligations and duties of the parties to the contract.
In the event of a loss covered by the policy, if the insurer requests a signed sworn proof of loss, the named insured is required to submit it within
A Specified Time *In the event of a loss covered by the policy, the named insured is required to submit to the insurer a signed sworn proof of loss within the allotted time (usually 60 days, but may vary).
All of the following are conditions commonly found in the insurance policy EXCEPT A) Insuring agreement. B) Cancellation and nonrenewal. C) Subrogation. D) Appraisal.
A) Insuring Agreement * Insuring agreement provides information on the policy's coverages. Conditions state the legal obligations and duties of the parties to the contract.
Which of the following is NOT the consideration in a policy? A) The application given to a prospective insured B) Something of value exchanged between parties C) The premium amount paid at the time of application D) The promise to pay covered losses
A) The application given to a prospective insured *Consideration is something of value that is transferred between the two parties to form a legal contract.
The part of the insurance contract that describes the covered perils, and the nature of coverage of the contractual agreement between the insurer and the insured is called the
Insuring Agreement *The insuring agreement is the part of the policy structure that describes the insured perils and the method of indemnification.
The part of the policy that sets forth the rules of conduct, duties, and obligations of the parties is called the
conditions
Bob insists that the insurer owes him $10,000 for liability damages, while his insurer asserts that they owe him no more than $7,000. Which of the following would most likely describe the type of claim settlement that they might pursue?
Arbitration *When an insured and insurer cannot agree on how to settle a claim, arbitration is often used. The settlement is submitted to an arbitrator(s) whose decision may or may not be binding on both parties dependent on state law.
Which of the following is a mandatory part of an insurance policy that varies with each individual policy? A) Insuring agreement B) Declarations C) Conditions D) Exclusions
B) Declarations *Because the declarations tell who, what, when and where, this information is different in each contract.
Which of the following protects consumers against the circulation of inaccurate or obsolete personal or financial information? A) Consumer Privacy Act B) The Fair Credit Reporting Act C) Unfair Trade Practices Law D) The Guaranty Association
B) Fair Credit Reporting Act * The purpose of the Fair Credit Reporting Act is to protect consumers against the circulation of inaccurate or obsolete information, and to ensure that consumer reporting agencies are fair and equitable in their treatment of consumers.
The ABC Corporation has $100,000 of coverage on its building through insurance Company A, and $50,000 of identical coverage on the same building through insurance Company B. Assuming coinsurance is not an issue, when a $24,000 loss occurs and the pro rata method is used, how much will each insurer pay?
Company A will pay $16,000; Company B will pay $8,000. * Each policy pays its pro rata share of the loss based upon each policy's share of the total amount of coverage.
An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of
Concealment *In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision.
What term best describes the act of withholding material information that would be crucial to an underwriting decision?
Concealment *Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be crucial to underwriting decisions. For instance, if someone omitted a 10-year smoking history from a health insurance application, this person would be guilty of concealment.
The part of the policy that sets forth the rules of conduct, duties, and obligations of the parties is called the
Conditions *The conditions is the part of an insurance policy that sets forth the obligations and duties of the insurer and the insured.
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. What insurance principle has the insurer violated?
Consideration *The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.
The Gramm-Leach-Bliley Act was passed to
Protect private customer information filed with a financial institution * The Gramm-Leach-Bliley Act was passed to protect private customer information that is filed with a financial institution. Customers must be given two disclosure notices (one at the onset of business and one before information is disclosed), as well as a yearly updated disclosure notice.
All of the following are considered parts of the policy structure EXCEPT: Conditions Provisions Exclusions Insuring Clause
Provisions
Which of the following would NOT be considered a source of insurability information by an insurer? A) The applicant's marital status B) Interviews with the applicant's neighbors and friends C) Motor vehicle records D) Insurance history
A) The applicant's marital status *An insurer may inspect, with the applicant's written permission, the following: application form, motor vehicle records, interviews with neighbors, friends and employers, inspection of property, and inspection of insurance history.
Which of the following clauses establishes the procedure for determining the amount of a loss when the insurer and the insured cannot agree on the value of property or amount of loss?
Appraisal Clause *Either an insured or insurer can request an appraisal. Each hires an appraiser. The appraisers then select a disinterested third party (umpire). Disagreements between the appraisers are settled by the umpire whose decisions are usually binding on both parties.
For a contract to be enforceable by law, the purpose of the contract must be
Legal and not against public policy *The purpose of a contract must be legal and not against public policy for the contract itself to be enforceable by law (or legal).
An insured stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year for which she sought medical attention. What will explain the reason a death benefit claim is denied?
Material Misrepresentation *A material misrepresentation will affect whether or not a policy is issued. If the insured had been truthful, it is very likely that the policy would not be issued.
The other insurance provision that limits the liability of the insurer to a portion of the loss no greater than the amount the insurer bears to all the insurance covering the property is called
Pro Rata liability *To preserve the principle of indemnity, each policy pays a pro rata share based upon the share of the coverage. The insured cannot collect the full amount of loss from each policy.
Before an insurer will pay any loss under a policy, what is usually required from the insured?
Proof of loss * A sworn statement, called proof of loss, must usually be furnished by the insured to an insurer before any loss under a policy can be paid.
In forming an insurance contract, when does acceptance usually occur?
When an insurer's underwriter approves coverage *In insurance, the offer is usually made by the applicant, in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.
When a mortgagee is named in a mortgagee clause attached to a fire or other direct damage policy A) The loss reimbursement will be paid to the mortgagee as their interest may appear. B) The mortgagee's rights of recovery will not be defeated by any act or neglect of the insured. C) The mortgagee may bring a suit in their own name to recover damages to covered property. D) All of the above are true.
D) All of the above are true. * When a mortgagee is named in a mortgagee clause attached to a fire or other direct damage policy, the loss reimbursement will be paid to the mortgagee as their interest may appear; and, the mortgagee's rights of recovery will not be defeated by any act or neglect of the insured. The mortgagee is also given other rights, such as bringing a suit in their own name to recover damages.
Essential parts of the policy
Declarations Insuring Clause Conditions Exclusions
Bob insists that the insurer owes him $10,000 for liability damages, while his insurer asserts that they owe him no more than $7,000. What would most likely describe the type of claim settlement that they might pursue?
Arbitration *When an insured and insurer cannot agree on how to settle a claim, arbitration is often used. The settlement is submitted to an arbitrator(s) whose decision may or may not be binding on both parties dependent on state law.
What insurance policy provision defines how the policy will respond if there is more than one insurance policy written on the same risk? A) Primary and excess B) Other insurance C) Valid insurance D) Nonconcurrency
B) Other Insurance *Other insurance is a provision in an insurance policy that defines how the policy will respond if there is other valid insurance written on the same risk.
All of the following are considered parts of the policy structure EXCEPT A) Conditions. B) Provisions. C) Exclusions. D) Insuring clause.
B) Provisions *"Provisions" is a broad term used to refer to the sections or clauses of an insurance policy that communicates the policy's benefits, conditions, etc. The essential parts of the policy are declarations, insuring clause, conditions and exclusions.
In terms of parties to a contract, which of the following does NOT describe a competent party? A) The person must be mentally competent to understand the contract. B) The person must have at least completed secondary education. C) The person must not be under the influence of drugs or alcohol. D) The person must be of legal age.
B) The person must have at least completed secondary education. *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.
In return for premium, an insurance company must...
Be fair in underwriting and pay for covered losses *In return for premium, an insurance company must be fair and impartial in underwriting of risks and must pay claims made for all covered losses
Termination of an in-force insurance policy prior to the expiration date shown in the policy is known as
Cancellation * Cancellation is the termination of an in-force insurance policy by either the insured or the insurer prior to the expiration date shown in the policy. Termination may be voluntary, involuntary, or in mutual accordance with provisions contained in the policy.
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as what?
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.
Representations are written or oral statements made by the applicant that are
Considered to be true to the best of the applicant's knowledge *Representations are statements made by an applicant that they believe to be true.
The part of a property policy that shows the amount of insurance, premium, and policy term is the
Declarations *Who, what, when, where, and how much insurance and premium, all are stated in the declarations.
