Chapter 2: Contract Law

Policy

A contract between a policyowner (often the insured) and an insurance company which agrees to pay for loss caused by specified covered events.

lapsed policy

A policy that is terminated because of nonpayment of premiums

Application

A written request for coverage to an insurance company. It must truthfully represent the facts regarding the person or property to be insured. Otherwise the policy will be voided.

Six Specifications for Insurance Policies (CIC 381)

The parties to the contract; The persons or property being insured; A statement of the insurable interest that exists if the insured is not the owner; The risks insured against; The time period during which the policy will be in force or continue; and The stated annual, semi-annual, quarterly, or monthly premium or a statement of the manner in which a premium rate and total premium will later be calculated, if it can only be determined at the termination or expiration of the contract.

insurance rate

The price of insurance for each exposure unit

misrepresentations

Untrue statements on the application; could void the contract

Insurance policy

a contract between a policyowner and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Unilateral contract

a contract that legally binds only one party to contractual obligations (one-sided)

Misdemeanor

a minor criminal offense, considered less serious than a felony

tort

a private, civil, non-contractual wrong for which a remedy through legal action may be sought.: whether intentional or untenional.

warranty

a statement considered to be guaranteed to be true and becomes part of the contract;can either be expressed or implied.

aleatory (all insurance contracts are)

an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

personal contract

an insurance contract between the insurance company and an individual

intentional tort

any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party: not a breach of contract

Riders

are added to a policy to modify provisions that already exist (usually used in Life and Health insurance)

Endorsements

are printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages (usually used in Property and Casualty insurance).

Representations

are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true; the answers the insured gives to the questions on the insurance application.

Contracts

are written agreements that are legally enforceable by law. 4 essential elements of all legal contracts: Agreement: offer and acceptance; Competent parties; Legal purpose; and Consideration.

Fraud

intentional misrepresentations or deceit with the intent to induce a person to part with something of value

materiality

the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract.;is determined by the "probable and reasonable influence of the facts" that they would have on the party that needs the facts to make a decision, whether that party is the insurer or the insured.

Concealment

the legal term for the intentional withholding of information of a material fact that is crucial in making a decision.

premium

the payment required by the insured to keep the policy in force;is determined by multiplying the rate by the number of units of insurance purchased. (Rate x Units of Insurance)

unintentional tort

the result of acting without proper care. This is generally referred to as negligence

Rescission

the revocation of a contract (regardless of whether the concealment is intentional)

unearned premium

unearned premium is the portion of the premium the insurance company has collected but has yet to "earn" because it has not yet provided coverage for the insured.

Consideration

The binding force in any contract; something of value that each party gives to the other.

Legal Purpose

the contract must be legal and not against public policy: must have both: insurable interest and consent.

contract of adhesion

is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured).

Cancellation

is the act of revoking or terminating one's insurance policy. A policy that is

Renewal

is the continuance of an insurance policy beyond its original term.

Nonrenewal

is the discontinuance of an insurance policy beyond its original term.

grace period

is the period of time after the deadline or due date of a premium in which a late premium payment may be made without penalty, or without the policy lapsing

earned premium

is the portion of a premium that belongs to the insurance company for providing coverage for a specified period of time.

insurance policy

is the written instrument in which a contract of insurance is set forth.

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.

unilateral contract

only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises.

Lapse

policy termination due to nonpayment of premium

Reinstatement

refers to a provision that allows the policyowner to put a lapsed insurance policy back in force under certain conditions.

conditional contract

requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.

Consideration

something of value that each party gives to the other (binding force in any contract)

Acceptance

takes place when an insurer's underwriter approves the application and issues a policy