Chapter 2 - The Insurance Contract

ambiguity

in the case where the contract is not perfectly clear, the courts usually resolve any ambiguity in favor of the insured

contract

is a legal agreement between two or more competent parties that promises a certain performance in exchange for a certain consideration

offer

is a promise that requires an act or another promise in exchange

unilateral contract

means "one- sided" where only the insurance company is legally bound to perform its part of the agreement but the insureds can stop paying premiums and is not legally obligated to pay

adhesion

means that one party has greater power over the other party in drafting the contract. The insurer has greater power over drafting the contract and the nsured simply adheres to the policy terms

offer and acceptance

means that the contract must involve at least two parties: one who makes an offer and one who accepts it. This is also called an agreement

utmost good faith

means the insurance company relies on the truthfulness and integrity of the applicant when issuing a policy. In return, the insured relies on the company's promise and capability to provide coverage and pay claims

acceptance

occurs when the other party agrees to the offer or does what was proposed in the offer

declarations

the part of a policy which are almost always on the first page, that contain information such as the name of the insured, the address, the amount of coverage provided, a description of the property, if property is involved and the cost of the policy

definitions

this section clarifies the meanings of certain terms used in the policy

competent parties

A contract is not valid unless it is made between parties who are considered competent under the law. In most cases, a person who is a minor, insane, or under the influence of alcohol or drugs is considered incompetent

example of principle of indemnity

Suppose that Ben and Jerry, who are cousins, each own 50% of a $200,000 duplex, and Ben purchases a $200,000 insurance policy in his name only. If the property is totally destroyed by fire, Ben would only be entitled to collect $100,000, the extent of his insurable interest

insurance contract

When an insurance company agrees to pay for an insured's losses in exchange for a certain premium, the two parties have entered into a contract

exclusions

describe the losses for which the insured is not covered. If an excluded loss occurs, the insured will not be indemnified

insuring agreements

is the "heart" of the policy, state in general what is to be covered or, in other words, the losses for which the insured will be indemnified. This section also describes the type of property covered and the perils against which it is insured

insured consideration

is the premium payment

insurer consideration

is the promise to pay for certain losses suffered by the insured

contract of indemnity

one of the most important characteristics of an insurance contract is that it is a contract of indemnity

conditions

state the "ground rules" for the policy. They describe the responsibilities and the obligations of both the insurance company and the insured

indemnified to the extent

principle of indemnity states that when a loss occurs, an individual should be restored to the approximate financial condition he or she was in before the loss or only indemnified to the extent he or she was before

principle of indemnity

states that when a loss occurs, an individual should be restored to the approximate financial condition he or she was in before the loss

example of aleatory

the insured pays premiums, and the insurance company only makes a promise to pay benefits if a loss occurs. If no loss occurs, no benefits are paid but if a large loss occurs, the insurance company may pay benefits to the insured that far exceed the amount of money he or she paid in premium

legal purpose

a valid contract is that it be formed for a legal purpose. A contract that is against public policy or in violation of the law is not enforceable

insurance policy

Although a contract of insurance can be oral, it is usually written in the form of an insurance policy

personal contract

An insurance contract does not insure property; it insures the person who owns the property. This means that it is a personal contract

legally enforceable

Insurance contracts must exhibit certain characteristics to be legally enforceable. These characteristics are competent parties, legal purpose, offer and acceptance, and consideration

aleatory

one party's performance depends on an uncertain event, which means that the exchange of value might appear to be unequal

parts of the insurance contract

because an insurance policy is a legal contract, it must be very specific about the agreements between the insured and the insurer. Most policies must contain five parts: declarations, insuring agreements, conditions, exclusions and definitions

example of conditional

if a covered loss occurs, the insured must notify the insurer about the loss, and the insurer must use the valuation methods specified in the policy to settle the loss

consideration

is a thing of value exchanged for the performance promised in the contract

conditional contract

means the insurance policy includes a number of conditions that both the insured and the insurer must comply with