Ch 3 Legal Concepts of the Insurance Contract

What qualifies as acceptance of an insurance contract offer?

An issued policy

The payment of the first premium, the promise to pay a covered loss, and the agreement to abide by policy conditions are all examples of

Consideration (Consideration can be defined as the value given in exchange for the promises sought.)

Which of these is true regarding the exchange of consideration among parties involved in an insurance contract?

Can be unequal (Insurance contracts are aleatory. This means there is an element of chance and potential for unequal exchange of value for both parties.

Voluntarily terminating an insurance policy is also known as

Cancelation

The courts will normally interpret a policy in favor of the insured when the meaning of the policy is not clear. This is because an insurance policy is a(n)

Contract of adhesion (In a case where the meaning of an insurance policy is not clear, a court of law will usually interpret the policy in favor of the insured because an insurance contract is a contract of adhesion.)

The powers directly given to a producer in an agency contract are called

Express (A producer's powers directly stated in the agency contract are considered express authority.)

Statements made by an insured on an accident and health insurance application are considered to be

Representations

An insurance company can be liable for a producer's unauthorized acts

When the agency contract is unclear concerning the authority given.

These statements correctly describe an aleatory contract

- A legal wager is considered an aleatory contract - Potential unequal exchange of value for both parties - Element of chance is involved (Only one party makes any kind of legally enforceable offer) is not correct.

Which of the following situations would an insurance agent need to guard against liability for professional errors and missions?

Making a recommendation to a potential insured to replace existing coverage.

An insured is entitled to coverage under a policy that a prudent person would expect it to provide. This principle is called

Reasonable Expectations

Ambiguities in insurance contracts are typically interpreted in favor of the insured. This rule is referred to as

Reasonable Expectations (Reasonable expectations is a legal principle that reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder.)

A producer working for an insurance company may be personally liable for

Acts performed which are prohibited in the agency contract.

An agreement is reached when an insurance contract is formed. Which of the following is NOT considered to be an element of an agreement?

Equity (Meeting of the minds, Offer, and Acceptance, are all considered to be an element of an agreement.)

The unwritten authority given to a producer to carry out necessary incidental acts of the agency agreement is called

Implied authority (Implied authority is authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the principal.)

What happens when an initial offer is answered with a counteroffer?

Initial offer is void (When an offer is answered by a counteroffer, the first offer is void.)

In what way are insurance policies said to be aleatory?

Insurance contracts are considered to be aleatory because the exchange of values may be unequal.

Greg applies for insurance and makes a false statement on the application that will influence whether or not the insurer will accept the risk. Greg's false statement is called a(n)

Material misrepresentation

Which of the following would NOT have a restricted ability to enter into a contract

Small employer

The following are all elements of a valid contract

- Consideration - Offer and acceptance - Competent Parties (Written Evidence - A valid contract requires all of these things except written evidence.)

Which situation would not require the insured's consent when a life insurance policy is issued?

A policy is purchased by a parent for a minor child.

The insurer's obligation to pay a claim depends on whether the insured or beneficiary has compiled with all policy conditions. This makes the policy a(n)

Conditional Contract (The insurer's obligation to pay a claim depends on whether the insured or beneficiary has compiled with all policy conditions, making the policy a conditional contract.)

Which of the following relationships demonstrates insurable interest in the absence of economic interest?

Marriage partners

An insurance contract may be voided if a misrepresentation found on the application is determined to be

Material (An insurer can void an insurance policy if a misrepresentation on the application is found to be material.)

Which element of a contract constitutes a definite and unqualified proposal by one party to another?

Offer (A proposal of contract terms by one party to another is called an offer.)

Insurable interest involves what assumption?

One person benefits from another person's continued life.

What is the insurer responsible for when a producer is acting within the scope of authority granted in the agency contract?

Responsible for acts by the producer that are authority only (The significance of authority , whether express, implied, or apparent, is that it ties the company to the acts and deeds of its producers. The law will view the producer and the company as one and the same when the producer acts within the scope of his/her authority.)

Under the Law of Agency, the principal is considered to be

The insurer (According to the Law of Agency, the insurer is considered to be the principal.)

When a producer acts within the scope of his/her contractual authority, which of the following is legally responsible for these actions?

The insurer (When a producer acts within the scope of his/her contractual authority, the insurer is legally responsible for these actions.)

Giving up a known right on a voluntary basis is called a(n)

Waiver (Waiver is defined as the intentional and voluntary giving up of a known right.)

An insurance company's failure to enforce a contract's provision is called a(n)

Waiver (When an insurance company does not enforce a contract's provision, it's known as a waiver.)

During the application process, a statement made by an applicant that becomes part of the contract is considered to be a(n)

Warranty (A warranty is a statement made by the applicant that is guaranteed to be true in every respect and becomes part of the contract.

A contract is considered void EXCEPT

When consideration is unequal (An aleatory contract involves the possibility of unequal consideration and does not make it voidable.)

A contract is considered void in all of the following situations

- When one party is a minor - When consideration is incomplete - When agreement cannot be reached between parties.

An agent whose actions exceeded the authority granted by contract is

Not backed by the insurer (An agent whose actions exceed the authority granted by the contract is not backed by the insurer)

Use of XYZ Insurance Company brochures, business cards, and rating guides is an example of

Apparent Authority (Apparent authority is what a third party(such as a member of the public)assumes an agent has, based on the actions or words of the principal. By supplying the agent with business cards, brochures, and rating guides, the insurance company has given the impression that it supports the words and actions of its agent.

An insurance application requires an applicant to make a full accurate disclosure of the risk factor involved. Using this criteria, and insurance policy is considered what type of contract?

Contract of utmost good faith

Christopher is issued an insurance policy that contains an attached agreement which alerts the terms of the policy. This attached agreement is called a(n)

Endorsement (An endorsement is a written form attached to an insurance policy that alters the policy's coverage, terms, or conditions. Sometimes called a rider.)

An appointed producer's implied authority is derived from

Express authority (By the very nature of what producer's are authorized to do, express authority, producers have the implied authority to act on behalf of the principal (insurer).

XYZ Insurance Company gives direct authority to its producers to sell insurance through an agency contract, but nothing is stated regarding the collection of premiums. Which authority grants the producer the right to collect premiums?

Implied authority (Implied authority is authority not specifically granted to the agent in the agency contract.)

When must insurable interest exist for a life insurance contract to be valid?

Inception of the contract (Insurable interest must only exist at the inception of the contract.)

Which of these do NOT indicate the presence of insurable interest in a life insurance contract?

Lifelong friendship (Marriage, Blood-related, and co-owning a business all indicate the presence of insurable interest in a life insurance contract.)

An arrangement where an individual is authorized to act on behalf of another person or company is established through

The law of agency (An agency is a situation where an agent has the power to represent and act for another person or company.)