Chapter 1 World of Insurance

Conditional Contract

is one in which both parties must perform certain duties to make the contract enforceable -The insured can only collect if there has been a covered loss, and the insurer has a list of conditions stated in the contract that must be met before a claim will be paid.

Aleatory Contract

is one that is based on an uncertain event, or "by chance". -CANNOT be known 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.

In a legal sense, premium functions as the insured's _______. A. Consideration B. Tender C. Fee D. Credit

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

Alien Insurer

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 Ex: An insurer incorporated in Ontario, Canada, is considered alien to New York

Stock insurer

An insurer that is owned by its stockholders and formed as a corporation for the purpose of earning a profit for the stockholders.

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

Commissioner, Superintendent, or Director -The chief insurance regulatory official of each state, which may be called the Director, Superintendent, or Commissioner, has the power to issue rules and regulations to help enforce insurance laws.`

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

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

An insurer authorized to do business in State A, which was incorporated in State B, is considered what type of insurer in State A? a. Alien b. Stock c. Foreign d. Domestic

Foreign -The insurer would be domestic in State B and foreign in State A.

A nonprofit corporation without capital stock formed solely for the benefit of its members is a:

Fraternal benefit society -A fraternal benefit society is a nonprofit organization formed solely for the benefit of its members and transacts insurance only for its members.

Which principle states that an insured may be reimbursed up to the amount of the actual loss?

Indemnity -The Principle of Indemnity states that the insured should not profit from an insurance transaction, but should be restored in whole or in part to their prior condition.

Insurance Contract

Insurance Policy -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.

How does insurance work simplistically?

Insurance allows us to transfer the risk of a potential loss to the insurance company

Types of Insurers?

Insurance companies/Carriers

How is insurance regulated at the state level?

Is regulated primarily at the state level through legislative, judicial, and executive branches (each with their respected roles)

Representations

Statements made by the applicant on the application -The applicant is required to make statements that are substantially true, or believed to be true, to the best of the applicant's knowledge at the time of application.

Material vs. Immaterial Representations

Statements that impact the acceptance of an insurable risk—whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk—are considered to be material. Immaterial representations do not affect the acceptance or rating of the risk.

Admitted or Authorized

is approved to transact insurance in a given state if it has been granted a Certificate of Authority from the state's Department of Insurance...This authorization is not related to the insurer's domicile

USA PATRIOT Act and Anti-Money Laundering (AML)

was passed to help detect and prevent this illegal activity (the increase of drug trafficking and acts of terrorism, the desire and demand for laundered money has also increased.) -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.

Authorization

-Admitted or Authorized insurer -Non-admitted or Unauthorized

Elements of a Legal Contract

-Competent Parties -Legal Purpose -Agreement (Offer and Acceptance) -Consideration

Characteristics of an Insurance Contract

-Contract of Adhesion -Aleatory Contract -Unilateral Contract -Conditional Contract

Federal Regulations

-Fair Credit Reporting Act (15 USC 1691-1681d) -USA PATRIOT Act and Anti-Money Laundering (AML)

Contract Law

-Insurance Contract -Principle of Indemnity -Insurable Interest

The Insurance Industry

-Insurers -Insurance Agencies -Insurance Agents or Producers

Is it possible in life and health insurance, to truly indemnify a person for all losses?

-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

Legal Interpretations Affecting Contracts

-Representations -Material vs Immaterial Representations -Misrepresentations -Warranties

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

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

Insurance companies (also called carriers)

are structured in a number of different ways, depending on the type of insurance they provide, the type of regulations they are subject to, and the way they distribute profits (if any)

Judicial

is responsible for interpreting and determining the constitutionality of the statutes

Indemnity

means to compensate for a loss, or to make one whole again

Insured

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

Legislative

writes and passes state insurance laws or statutes, designed to protect the insuring public

Foreign Insurer

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 Ex: An insurer incorporated in New York is considered foreign to Kansas

Dividends issued by mutual insurance companies: A. Represent a share of company profits for stockholders B. Are non-taxable refunds (returns) of unused or surplus premiums C. Are considered guaranteed member benefits D. Are taxable distributions to policyholders

B. 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 National Association of Insurance Commissioners (NAIC): a. Requires each legislature to accept recommendations b. Has no legal authority over insurance regulation c. Enacts legislation and policy d. Requires only 30 Commissioners to be members at any time

Has no legal authority over insurance regulation -The NAIC does not have legal authority over insurance regulation, but promotes uniformity in the interpretation of insurance legislation and regulation.

An insurer NOT authorized to do business within this state is considered what type of insurer?

Non-Admitted -An insurer NOT authorized to do business in this state is referred to as "non-admitted." Foreign, domestic, and alien refer to where an insurer is domiciled. Domicile is not the same as admittance.

Whom represents the executive branch?

The Commissioner, Director, or Superintendent represents the executive branch and has the power to issue rules and regulations to help enforce these statutes

Are there many types of losses that can be covered?

Yes, but the most common are life, health, property, and casualty (also known as liability?

Insurance Agencies

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

Fraternal Insurers

are known as Fraternal Benefit Societies -primarily social organizations that engage in charitable and benevolent activities that provide primarily life insurance to its members -usually organized on a nonprofit basis -membership is typically drawn from members of a given religious organization, lodge, order, or society

Insurance Agents or Producers

are licensed individuals representing an insurance company when transacting business

Mutual Insurance Company

-mutual insurer is owned by policyholders, who may be referred to as members -Policyholders are considered owners, but not directly manage the company -BOD is elected by policyholders to manage company, but officers elected by the Board to handle 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 surplus at the end of the year once all claims and operating expenses have been paid -Mutual insurers typically issue participating policies

Competent Parties

Both parties in a contract must have the legal capacity to enter into a contract Assumed competent unless they are one of the following: -Minors (for insurance, minor is a person under age 16) -Mentally Incompetent -Under the influence of drugs or alcohol

In the case of life and health insurance, contract law required that?

insurable interest must exist at the time of the application, not the time of the loss -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.

Unilateral Contract

is one in which only one party is legally bound to the contractual obligations. -As long as all the conditions are met by the insured, the insurer makes an enforceable promise of future performance and can be charged with a breach of contract if those obligations are not met. -The insured has the right to cancel the policy at any time and cannot be legally forced to pay the premiums.

Insurance is designed to provide?

protection, usually in the form of a payment, in case there is an unforeseen event that causes a covered loss

Fair Credit Reporting Act (15 USC 1691-1681d)

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. -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.

Insurers (Insurance Companies or Carriers)

provide insurance coverage by issuing particular insurance policies or contracts

The insurance industry is primarily regulated at the _________ level. A. County B. Insurers C. State D. Federal

C. State -The states have primary responsibility for regulating the insurance industry.

Domicile

refers to the location, or jurisdiction (state, district, territory, or country), where an insurer is formed or incorporated ---three kinds of insurer domiciles: domestic, foreign, and alien

Insurable Interest

requires a financial or economic hardship in the event of a loss due to an accident, sickness, or death of the insured. -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.)

Insurance contracts are aleatory contracts. What does "aleatory" refer to?

An unequal exchange of value -Aleatory refers to the fact that, because of the uncertainty of risk, there will always be an unequal exchange of value between the parties. The insured's premium payments are less than the potential benefit in the event of a loss. But, if a loss never occurs, the total cost of premium payments is greater.

Stock Insurance Company

-stock insurer -stockholders elect a BOD (manage the company, but they elect officers to handle the day-to-day activities) -stockholders share the company's profits and may receive corporate dividends taxable as ordinary income IF declared by the Directors -these dividends are not guaranteed Traditionally, stock insurers issue non-participating policies, since the policyholders are not entitled to dividends

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

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

Misrepresentations

A false statement contained in the application is considered a misrepresentation. -If it is material to the issuance of coverage, meaning the insurer would not have issued a policy had the misrepresentation not been made, or premiums charged would have been higher, or coverage limited, coverage does not apply. A material misrepresentation may void the policy.

Agreement (Offer and Acceptance)

A legal contract requires an agreement, 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. If the premium does not accompany the application, the insurer may still issue a policy. In this case, the policy is considered the offer and the premium, when paid, becomes the acceptance.

The ___________ branch writes and passes state insurance laws, or statutes, to protect the insuring public. A. Legislative B. Judicial C. Executive D. Electoral

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

Domestic Insurer

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 Ex: An insurer organized under the laws of New York is considered domestic to New York

What is the correct term for a contract written by one party without input from or negotiation with the other party?

Contract of Adhesion -Insurance contracts are contracts of adhesion, meaning that one party (the insurer) writes the contract without input from the other party (the insured). The other party must adhere to the contract on a "take-it-or-leave-it" basis.

USA Patriot Act process

Financial institutions are required to report any activity they believe or even have reason to suspect is an effort to launder money. -A Currency Transaction Report (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.

Contract of Adhesion

Insurance is considered to be a contract of adhesion. -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.

The difference between a misrepresentation and a material misrepresentation is:

Material misrepresentations are issues that affect policy issuance -A misrepresentation is any false or misleading statement made by the applicant on the application. A material misrepresentation is a false or misleading statement that would have affected whether the policy was issued at all, and may void the policy.

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? a. The day the insurer issued the policy b. The day the insurer mailed the policy c. The day Tom submitted his application d. The day Tom picked up his policy at his producer's office

The day Tom submitted his application -Since the policy was issued as applied for, the effective date of coverage is the date of application.

Fair Credit Report Act Process

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. 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 insurer or producer does not provide a copy of the report to the applicant. If the applicant challenges the accuracy of information found in the 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.

An insurer issues a policy as "other than applied for," requiring an additional premium of $100. When would an agreement come into being? A. When the applicant accepts delivery of the policy and pays the additional premium B. When the insurer puts the policy into the mail C. When the applicant agrees to the terms D. When the producer receives the policy from the home office

When the applicant accepts delivery of the policy and pays the additional premium -This is how a counteroffer is accepted.

Warranties

is a statement guaranteed true in all respects and if later discovered to be false, the contract may be voided. are material statements in the application or stipulations in the policy that are guaranteed true in all respects. -If warranties are later discovered untrue or breached, coverage and the contract may be voided.

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

Non-Admitted or Unauthorized

insurer is not authorized to transact insurance in a given state, either by failing to comply with state requirements or by not seeking admission

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.

Consideration

is the exchange of value that makes a contract binding. The insured's consideration is the payment of premium, along with an agreement to abide by the conditions of the contract. 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)

is 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 ---provides resource, research, legislative, and regulatory recommendations and interpretations for state insurance regulators ---members may accept or reject recommendations ---Primary goal: to promote state uniformity

Executive

is to enforce the existing statutes that have been put in place

Legal Purpose

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 -Insurance may not be issued for an illegal activity or 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.