Ch. 1 - World of Insurance

The Insurer's consideration

The insurer's promise to indemnify in the event of a loss is its consideration, as is specified in the insuring clause of the policy.

National Association of Insurance Commissioners (NAIC)

The regulatory support organization created and governed by the chief insurance regulators and commissioners from the 50 states, D.C., and five U.S. territories. The NAIC provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. Members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws. The primary goal of the association is to promote state uniformity.

Insurance Agencies

Are independent sales organizations that provide service and distribute insurance policies to consumers

Dividends issued by mutual insurance companies:

Are non-taxable refunds (returns) of unused or surplus premiums Since the policyowners also own the company, any policy dividends are being paid back to those who paid them in the first place; therefore, they are non-taxable refunds rather than taxable income.

The ____________ has the power to issue rules and regulations to help enforce insurance statutes.

Commisioner

The insurance industry

Consists of companies, agencies, producers, and organizations that provide support and services to the general public and, more specifically, the consumers who buy insurance

Foreign Insurer domicile

An insurer placing business anywhere within the United States OTHER THAN the state, district, or territory in which it was organized and incorporated is considered a foreign insurer in that jurisdiction. Example: An insurer incorporated in New York is considered foreign to Kansas.

Fraternal insurance companies are owned by:

The ownership of fraternal insurance companies rests with the members of the fraternal benefit society, that own policies.

When the exchange of value is unequal, the contract is considered:

In an Aleatory Contract, the exchange of value is unequal. For example, premium payments are smaller than the benefit amount in the event of a loss. A Unilateral Contract is one in which only the insurer makes a promise of future performance. The insured is free to cancel the contract.

All of the following are essential elements of a legal contract, EXCEPT:

Representation is not one of the four essential elements of a legal contract. (Offer and Acceptance is the fourth essential element.)

If a life insurance applicant's answers on the application indicate that he/she is in good health, when in fact the applicant has a disease that he/she is not aware of, the statement on the application is considered:

Representations are statements which are 'true and complete to the best of one's knowledge.' Warranties are statements that are guaranteed to be true. Concealment occurs when known information is not communicated.

___________ manufacture and sell insurance coverage in the form of policies or contracts of insurance.

Insurers. Insurers manufacture and sell insurance policies through agencies and producers to applicant/insureds.

Principle of Indemnity

Insurance is designed to restore an insured to the same physical or financial condition which existed prior to the loss, without a profit or gain.

Insurance industry regulations

Primarily at the state level through the legislative, judicial, and executive branches.

Characteristics of an Insurance Contract

Contract of Adhesion, Aleatory Contract, Unilateral Contract, Conditional Contract

Insured

The person or entity that has insurance protection under a policy for a covered loss

A statement that a person makes and guarantees to be true is a:

Warranties are statements of absolute truth. Representations are statements made to the best of one's knowledge and belief.

USA Patriot Act (USAPA)

Helps detect and prevent this illegal activity of money laundering. As part of the Act, financial institutions and insurance companies are required to provide anti-money laundering (AML) training to their producers, since insurance products are now being used to give legitimate appearance to money financed by and for illegal activities.

Illegal purchase of insurance or payment of a claim

Lack of insurable interest makes the purchase of insurance or payment of a claim illegal, since benefiting from the policy without suffering a financial or economic loss would allow for a person to profit from the loss.

Insurance Agents or Producers

Licensed individuals representing an insurance company when transacting insurance business

A _____ insurance company is owned by its policyholders.

Mutual

Type of policy issued for Mutual insurance

Mutual insurers typically issue participating policies.

Mutual Insurance Company

Owned by Policyholders aka members. The policyholders are considered the owners, but do not directly manage the company

Competent Parties

Parties to a contract must have the legal capacity to enter into a contract. Parties are assumed to be competent if they are of legal age and know what they are doing.

Mutual insurance companies are owned by:

Policy owners

Insurers (Insurance companies or Carriers)

Provide insurance coverage by issuing particular insurance policies or contracts

Under the Fair Credit Reporting Act, which of the following statements is correct?

The FCRA is designed to protect the public and requires the reporting agency to investigate disputed information. The applicant has the right to request a copy of the report from the reporting agency. This act protects confidential information.

A(n)____________ is the person or entity that is covered by an insurance policy.

The insured is the person whose life is being used for insurability purposes for a life and/or health insurance policy.

In a legal sense, premium functions as the insured's _______.

The premium paid by the insured represents their consideration--a required element of a legal contract.

Premium

Amount you pay monthly, quarterly, semiannually or annually to purchase different types of insurance

Insurance Contract

An insurance policy is a legal contract between two parties, purchased by the insured and stating that the insurance company promises to make payment for a loss arising from an unexpected event. The contract involves the exchange of a relatively small and definite expense (known as premium) for the promise of payment for a large uncertain loss.

Insurable Interest

A financial or economic hardship in the event of a loss due to an accident, sickness, or death of the insured. Insurable interest must exist between the person buying the insurance, the policyowner, and the person insured under the policy. Most family relationships qualify as insurable interest. Each person also has an unlimited insurable interest in his/her own life.

Executive Branch

Enforce the existing statutes that have been put in place. Ex. The Commissioner, Director, or Superintendent of Insurance represents the executive branch and has the power to issue rules and regulations to help enforce these statutes.

Currency Transaction Report (CTR) & Financial Crimes Enforcement Network (FINCEN)

Financial institutions are required to report any activity they believe or even have reason to suspect is an effort to launder money. CTR must be filed with FINCEN (Financial Crimes Enforcement Network) through the Department of Treasury for every cash transaction that exceeds $10,000 and wire transfers in excess of $3,000.

Insurer Domicile

Refers to the location, or jurisdiction (state, district, territory, or country), where an insurer is formed or incorporated. The three kinds of insurer domicile are domestic, foreign, and alien.

A contract that is drafted by an insurer and receives no input or alteration from the insured, is considered a(n):

A Contract of Adhesion is submitted on a take it or leave it basis.

An applicant completes the application and submits it to the insurer along with a premium check. When is the applicant's offer considered accepted?

An application accompanied by a premium check is a legal offer. The offer is accepted when the insurer issues a policy.

Types of Insurers (companies or carriers)

Are structured depending on the type of insurance they provide, the type of regulations they are subject to, and the way they distribute profits (if any).

When does the insurable interest exist

In the case of life and health insurance, contract law requires that insurable interest must exist at the time of the application**, not the time of the loss.

Dividends issued by Stock insurers are paid to:

stockholders

Stock insurance companies are owned by:

stockholders

What gives an insurer the authority to operate within this state?

A Certificate of Authority from the Department or Division of Insurance grants an insurer the right to operate within a state.

Legal Purpose

Insurance may not be issued for illegal activity or an immoral purpose. Intentional acts that cause a loss to collect from a policy, such as arson or murder, remove the legal aspect of purchasing insurance. Since an insurable interest must exist between the applicant and the insured, a contract must be issued in good faith that the owner is not looking to gain from a loss. (purposely kill someone)

Agreement example

The initial premium paid (offer) and the issued policy is delivered (acceptance) together form the agreement.

Consideration

Two parties exchange something to make the legal contract binding.

Legislative Branch

Writes and passes state insurance laws, or statutes, designed to protect the insuring public. (make laws)

Restricted parties

*Minors - For the purposes of insurance, a minor is a person under age 16. *Mentally incompetent *Under the influence of drugs or alcohol

Post-notification

If an adverse action is taken, such as denial of coverage, the insurer must provide post-notification to the applicant by stating the reasons for the adverse action and the right to request a copy of the credit report. The insurer must provide the information as to how the applicant can request a copy of the report from the consumer agency that compiled the report (the info doesnt come from the insurer or producer).

Insurer Authorization

Whether the insurer is approved to transact insurance in the state. This authorization is not related to the insurer's domicile.

Foreign

Which of the following is an insurance company that is organized under the laws of a different state within the United States?

Insurers that are incorporated in another state, but doing business in this state, are considered:

An insurer operating in this state but incorporated in another state is referred to as foreign.

Alien Insurer Domicile

An insurer placing business within the United States which was organized under the laws of another country is considered an alien insurer within the U.S. jurisdiction. Example: An insurer incorporated in Ontario, Canada, is considered alien to New York.

When it comes to life insurance, insurable interest on one's own life is:

The insurable interest on one's own life is generally regarded as unlimited.

Admitted (Authorized) Insurer

The insurer is approved to transact insurance in a given state if it has been granted a Certificate of Authority from that state's Department of Insurance.

Pre-notification for credit report

The insurer must give pre-notification to the insurance applicant (consumer) that a credit report may be requested as part of the insurer's underwriting requirements, and must have pre-authorization by obtaining the applicant's written consent to request the report. The producer will obtain the signature at the time of application.

Which of the following best describes a Conditional Contract?

A Conditional Contract is one in which both parties to a contract must perform certain duties to make the contract enforceable.

Fair Credit Reporting Act (FCRA) (15 USC 1681-1681d)

Protects the consumer's right to the privacy of credit and financial information, ensuring that all collected data is confidential, accurate, relevant and properly used. Under the FCRA, credit reports may be obtained only to determine the financial and moral status of an applicant, such as for employment screening or loan approval, or to assist in underwriting by an insurer.

Judicial Branch

Responsible for interpreting and determining the constitutionality of the statutes/law. (passes the laws)

Fraternal Insurers aka Fraternal Benefit Societies

They are primarily social organizations that engage in charitable and benevolent activities that provide primarily life insurance to its members. They are usually organized on a nonprofit basis. Membership is typically drawn from members of a given religious organization, lodge, order, or society.

______ are primarily social organizations that engage in charitable and benevolent activities consisting of members of a given faith, lodge, or order, and are usually organized as non-profits.

This question describes a Fraternal Benefit Society.

Acceptance example

In this case, acceptance takes the form of the approved application allowing the policy to be issued.

Agreement (Offer and Acceptance)

A legal contract requires an agreement 2-step process, which includes an offer and an acceptance. Typically, a person (the applicant or insured) makes an offer by submitting an application to the insurance company for insurance along with the initial premium. In this case, acceptance takes the form of the approved application allowing the policy to be issued. The premium and the issued policy together form the agreement.

Contract of Adhesion

Aka Insurance. The contract is written by one party, the insurance company, without any input from the applicant. The insurer prepares the contract and presents it to the applicant on a "take-it-or-leave-it" basis. Because the insured has no input regarding the terms of the contract, it is NOT negotiable.

Non-Admitted (Unauthorized) Insurer

An insurer not authorized by the state insurance department to do business within that state. Either by failing to comply with state requirements or by not seeking admission.

Domestic Insurer domicile

An insurer organized under the laws of a state in which it is placing business is considered a domestic insurer in that particular state. An insurer can only be domestic to the state in which it is incorporated. Example: An insurer organized under the laws of New York is considered domestic to New York.

What if the applicant challenges the accuracy of their credit report?

The credit reporting agency is required to reinvestigate the matter through the source that provided such information and correct the information if necessary. The applicant is entitled to be informed of anyone who requested a copy of the report in the prior 6 months.

The ___________ branch is responsible for interpreting and determining the constitutionality of the statutes.

The judicial branch is responsible for interpreting and determining the constitutionality of the statutes.

The ___________ branch writes and passes state insurance laws, or statutes, to protect the insuring public.

The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public.

How is mutual insurance company managed

A Board of Directors is elected by the policyholders to manage the company, but officers elected by the Board handle the day-to-day operations. When and if declared by the Board, policyholders may receive non-taxable dividends as a return of unused premium. These dividends are not guaranteed and are considered a return of premium based on any surplus at the end of the year once all claims and operating expenses have been paid.

Stock Insurance Company

A type of insurance company owned by stockholders/shareholders.

Aleatory Contract

Based on an uncertain event, or "by chance". It can't be known in advance whether the insurer will have to pay a loss during the policy term, or whether the insured will make premium payments without receiving anything in return. Both parties agree to the terms of the contract, despite the uncertainty. It is very likely that there will be an unequal exchange of consideration by either party, depending on if a loss actually occurs and to what extent.

A federal regulation called the ______________ protects consumer privacy.

Fair Credit Reporting Act

Tom submits an application and a premium check. Six days later, the insurer issues the policy as applied for and mails it overnight to Tom's producer. Tom picks up the policy at his producer's office the next day. When did Tom's coverage begin?

Since the policy was issued as applied for, the effective date of coverage is the date of application.

Type of policy issued for Stock insurance

Stock insurers issue "non-participating policies", since the policyholders are not entitled to dividends.

The State's __________ branch enforces the existing statutes that have been put in place.

The State's executive branch enforces the existing statutes that have been put in place.

Insured consideration

The insured's consideration is the payment of premium, along with an agreement to abide by the conditions of the contract.

For the most part, the highest authority for insurance regulation is:

The states. States have the authority to regulate insurance without interference from federal regulation, unless federal law specifically provides otherwise.

How is stock insurance company managed

The stockholders elect a Board of Directors to manage the company, but the Board then elects officers to handle the day-to-day activities. Stockholders share in the company's profits and may receive corporate dividends taxable as ordinary income IF declared by the Directors. These dividends are NOT guaranteed.

Legal contract

To be enforceable, a legal contract requires 4 essential elements and the absence of any of these elements may prevent a contract from being formed. Competent parties, Legal purpose, Agreement (offer/acceptance), and Consideration.

Indemnify

To compensate for loss, damage, or injury; reimburse; repay - to make whole again. In life and health insurance, it may not be possible to truly indemnify a person for all losses. Instead, indemnity takes the form of cash (a death or disability income benefit) or payments to physicians or hospitals for care and services provided to an insured who is injured or ill.

Offer example

Typically, a person (the applicant or insured) makes an offer by submitting an application to the insurance company for insurance along with the initial premium.