Legal Concepts of the Insurance Contract

Q purchases a $500,000 life insurance policy and pays $900 in premiums over the first six months. Q dies suddenly and the beneficiary is paid $500,000. This exchange of unequal values reflects which of the following insurance contract features? A. Aleatory B. Adhesion C. Unilateral D. Consideration

A. Aleatory In that amount the insured will pay in premiums is unequal to the amount that the insurer will pay in the event of a loss.

Utmost Good Faith

Implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies.

Fraud and Misrepresentation

Intentional Misrepresentation or concealment of material fact made by one party in order to cheat another party out of something that has economic value. *An insurer made void an insurance policy if misrepresentation on the application is proven to be material

Subgrogation

Is the right for an insurer to pursue a 3rd party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss.

Valued vs. Indemnity

Life insurance contracts are valued contracts, which means it will pay a stated amount. Health insurance contracts are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.) You cannot profit from an indemnity contract.

Contract of Adhesion

ONE author: Insurance Company No negotiation Courts favor insured over insurer "Take it or Leave it"

Unilateral Contract

One (UNI)-sided agreement where ONLY the insurer (insurance company) is legally bound

Insurable Interest

Requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Exists ONLY at the time of the application.

Parol Evidence Rule

Rule that prevents parties in a contract from changing the meaning of a written contract by introducing oral or written evidence made prior to the formation of the contract but are not part of the contract.

Representations

Statements made by the applicant BELIEVED to be true (height, weight) are not part of the contract and need to be true ONLY to the extent that they are material and related to the risk.

Warranties

Statements made by the applicant that are guaranteed TRUE (name, DOB) becomes part of the contract and if found to be untrue, can be ground for revoking the contract.

Aleatory Contract

The exchange of value is unequal. Outcome depends on chance tor uncertain event A legal bet is considered an aleatory contract

Estoppel

The legal process of preventing one party from reclaiming a right that was waived.

Concealment

The withholding of known facts by the applicant (smoker, diabetes), which, if material, can void a contract.

Commingling

When an agent mixes premiums collected from an applicant with their own personal funds

Agent Authority

express, implied, apparent

Waiver

is the voluntary act of relinquishing a legal right, claim or privilege.

Consideration

something of value exchanged for something else of value Insured: pays premium Insurer: promise to pay in the event of loss

Fiduciary Responsibility

An ethical and legal obligation to perform a person's duties in a trustworthy manner.

When third-party ownership is involved, applicants who also happen to be the stated primary beneficiary are required to have: A. All statements be warranties B. Insurable interest in the proposed insured C. The agent complete a third-party application D. All those involved be family-related

B. Insurable Interest in the proposed insured

Insurance policies are considered aleatory contracts because... A. They are "take it or leave it" contracts B. Both parties consent to the contact C. Performance is conditioned upon future occurrence D. The contract is voidable upon proof of fraud

C. Performance is conditioned upon future occurrence This means there is an element of chance and potential for unequal exchange of value or consideration for both parties. Conditioned upon the occurrence of an event.

Life and Health insurance policies are: A. Multi-lateral contracts B. Bilateral contracts C. Unilateral contracts D. Non-lateral contracts

C. Unilateral contracts ...because one party makes a promise, and the other party can only accept by performance

When must insurable interest be present in order for a life insurance policy to be valid? A. When the insured dies B. Within the incontestability period C. When the application is made D. Before the insured dies

C. When the application is made

Conditional Contract

Certain conditions must be met by all parties to the contract when a loss occurs in order for the contract to be legally enforceable.

Elements of a Contract

Consideration, Legal Purpose, Offer & Acceptance, and Competent Parties

Personal Contract

Contract between an individual and insurer, which is not transferrable to another person without the insurer's consent.

Insurance contracts are known as _____ because certain future conditions or acts must occur before any claims can be paid. A. Consideration B. Unilateral C. Aleatory D. Conditional

D. Conditional

Insurance policies are offered on a "take it or leave it" basis, which make them: A. Conditional Contracts B. Aleatory Contracts C. Unilateral Contracts D. Contracts of Adhesion

D. Contracts of Adhesion

Taking receipt of premiums and holding them for the insurance company is an example of: A. Commingling B. Misappropriation C. Theft D. Fiduciary responsibility

D. Fiduciary responsibility

If a contract of adhesion contains questionable language, to whom would the interpretation be in favor of? A. Insurer B. Beneficiary C. Reinsurer D. Insured

D. Insured

Which of these arrangements allows one to bypass insurable interest laws? A. Concealment B. Indemnity contract C. Contract of adhesion D. Investor-Originated Life Insurance

D. Investor-Originated Life Insurance

A life insurance arrangement which circumvents Insurable interest statutes is called: A. A contract of adhesion B. An indemnity contract C. Key Person Insurance D. Investor-Originated Life Insurance

D. Investor-Originated Life Insurance (IOLI) This is done when an investor (or stranger) persuades an individual to take out life insurance specifically for the purpose of selling the policy to the investor. The investor compensates the insured and makes the premiums, then collects the death benefit when the insured dies.

Stranger Originated Life Insurance (STOLI) has been found to be in violation of which of the following contractual elements? A. Consideration B. Competent Parties C. Offer/Acceptance D. Legal Purpose (Insurable Interest)

D. Legal Purpose (Insurable Interest)

A policy of adhesion can only be modified by whom? A. The agent B. The applicant C. The primary beneficiary D. The Insurance Company

D. The insurance company

The Consideration clause of an insurance contract includes: A. The buyer's guide B. A summary of the coverage provided C. The named beneficiaries D. The schedule and amount of the premium payments

D. The schedule and amount of the premium payments