Chapter 3 (Legal Concepts of the Insurance Contract)

Unilateral

A Unilateral contract is a one sided agreement. In which only one party, the insurance company, is legally bound to do anything. The policy owner is under no legally binding promise to pay premiums. However, the insurance company is legally bound to pay losses covered by the policy. Please note, if the policy owner doesn't pay their premiums, the insurance company doe have the right to terminate the insurance policy.

What is Consideration?

A consideration is something of value that each party gives to the other. The consideration on the part of the insured is the premium. The consideration on the part of the insurance company is a promise to pay in the event of loss.

What is a waiver

A waiver is the act of voluntarily giving up a legal right, claim or privilege.

What is adhesion?

Adhesion is also known as, "Take it or leave it" agreements, because they're prepared by only one party, the insurance company. They are accepted or rejected by the other party, the applicant, with no negotiations or changes.

Competent Parties

All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not under the influence of drugs or alcohol.

Agent's Authority

An agent is a licensed insurance producer, whose been appointed to represent an insurance company. As a representative of the insurer, agents are given certain authority to perform acts on behalf of the insurance company. In the insurance business, an agent is always considered to be acting on the behalf of the insurance company, also referred to as the principal.

What is Legal Purpose?

An insurance contract must be legal and not against public policy. If an insurance contract has a insurable interest and the insured has provided written consent, it has legal purpose.

What is Offer & Acceptance

An offer is made when the applicant submits an application for insurance to the insurance company. The offer is accepted after it has been approved by the insurance company's underwriters.

Apparent Authority

Apparent authority is the appearance or the assumption of authority given based on the actions or words of the principal. For example, when an insurance company furnishes an agent with a rate book, applications and sales literature the insurance company cannot later deny that a relationship existed.

Concealment

Concealment is a legal term for the intentional witholding of information, which is crucial in making a decision. With insurance, concealment is a witholding of information by the applicant that results in an inaccurate underwriting decision and can void the policy.

What is Estoppel

Estoppel is the legal process used to prevent a party from reclaiming a right or privilege that was already waived. Estoppel is a legal consequence of the waiver.

What is express authority

Express authority is the authority granted to the agent by the principal, which is the insurance company, as written in the agency contract.

What is implied authority

Implied authority is authority not expressed or written into the agent contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.

Insurable Interest

Insurable interest is the most important aspect for establishing a legal insurance contract. To purchase insurance, the policy owner must face the possibility of losing money or something of value when a loss happens. In life insurance, insurable interest must exist between the policy owner and the person being insured at the time of application. Please note, that insurable interest only needs to exist at the time of the original application, but doesn't need to exist throughout the remainder of the policy.

Personal Contract

Insurance Contracts are personal contracts between an individual and the insurance company, and cannot transfer ownership without the insurance company's written consent.

What is Aleatory?

Insurance contracts are aleatory, which means that there is not an equal exchange of value. The premiums paid by the insured are small in relation to the amount that will be paid by the insurance company, in the event of a loss. (i.e. If you purchased a life insurance policy worth $100,000 dollars and your payments were $50 per month, you die 3 months later. You have only paid the insurance company $150 dollars, but they will give your beneficiary $100,000.

Conditional

Insurance contracts are conditional, because certain conditions must be met by all parties when a loss occurs, otherwise the contract would not be legally enforceable. If the policy owner is past due on his payments and the insured dies. The insurance company does not have to pay the death benefit because a condition was not met.

What is an Insurance Contract?

Insurance policies are legal contracts. Contract law defines a contract as a legally binding agreement between two or more parties, where a promise of benefits is exchanged for a consideration. In order for an insurance contract to be legally binding it must have 4 essential elements (Offer & Acceptance, Consideration, Legal Purpose, and Competent Parties).

Valued or Indemnity

Life insurance is a valued contract, which pays a stated amount, regardless of the actual loss incurred. Health insurance is an indemnity contract. It only pays the amount equal to the loss. With Health Insurance you are not allowed to make a profit.

Representation

Representations are statements believed to be true, to the best of one's knowledge, but they aren't guaranteed to be true for insurance purposes. Representations are the answers the applicant for insurance gives to the questions on the insurance application. Untrue statements on the application are considered misrepresentations and could void the contract.

What is Parol Evidence Rule?

The Parol Evidence Rule prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract.

Utmost Good Faith

Utmost good faith implies that there'll be no fraud, misrepresentation or concealment, between the parties as it pertains to insurance policies. Both the insurance company and the policy owner must be able to rely on the other for relevant and accurate information. The policy owner is expected to provide accurate information on the application for insurance. The insurance company must clearly and truthfully describe policy features and benefits, and they must not conceal or mislead the insured.

Warranties

Warranties are statements that are guaranteed to be true and are a part of the legal contract.