Legal Interpretations Affecting Contracts Ambiguities in a Contract of Adhesion

Warranty

Absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.

Ambiguities in a Contract of Adhesion

Because only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Utmost Good Faith

Implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.

Fraud

Intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Concealment

Intentional withholding of information of a material fact that is crucial in making a decision. In insurance, it's the withholding of information by the applicant that will result in an imprecise underwriting decision. May void a policy.

Reasonable Expectations

It is not always practical or necessary to state every direct and indirect provision or coverage offered by an insurance policy. If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could reasonably expect coverage.

Estoppel

Legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. The legal consequence of a waiver.

Indemnity (sometimes referred to as reimbursement)

Provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss. Life and Health Example: Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount of insurance). Know This! Indemnity means insureds cannot recover more than their loss.

Representations

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

Material Misrepresentations

Untrue statements on the application that could void the contract. A untrue statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if untrue statements are intentional, they are considered fraud. Know This! Representations are statements believed to be true. Insured's statements on the application are representations.

Waiver

Voluntary act of relinquishing a legal right, claim or privilege.