XCEL Chapter 2: Legal Concepts of Insurance Contract

Reasonable Expectations

A concept which states that the insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide. Reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder.

Professional Liability Insurance

A professional liability for which producers can be sued for mistakes of putting a policy into effect. under the insurance, the insurer agrees to pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render.

Contract of Adhesion

Because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion. In a contract of adhesion there is only one author - the insurance company. Insurance carriers are also responsible for assembling the policy forms for insureds. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Under a contract of adhesion, the terms must be accepted or rejected in full. The customer must adhere to the insurer's contract without any input of their own.

Fiduciary Responsibility

Because the agent handles money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust and confidence. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling.

Fraud

Fraud is an 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 may void an insurance policy if a misrepresentation on the application is proven to be material.

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. Insurance applicants are required to make full, fair, and honest disclosure of the risk to the agent and insurer. Agents and insurers are required to accurately explain the policy's features, benefits, advantages, and possible disadvantages to an applicant.

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.

Waiver

Waiver is the voluntarily giving up of a known right. For example, if an insurer chose to approve an application and issue a policy without requesting a medical exam they cannot later request a medical exam to for that policy in the future.

Brokers

a broker or independent agent may represent a number of insurance companies under separate contractual agreements.

Authorized Agent

a person who acts for another person or entity and has the power to bind the principal to contracts.

Endorsement

a written form attached to an insurance policy that alters the policy's coverage, terms, or conditions.

Health insurance

the insurance company agrees to pay a percentage of the insured's medical bills (or benefit) in exchange for consideration (premiums).

Life insurance

the insurance company agrees to pay a predetermined amount - the face amount (or benefit), in exchange for the insured's consideration (premium).

Subrogation

the right for an insurer to pursue a third 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. For example, if an insured driver's car is totaled through the fault of another driver; the insurance carrier will reimburse the covered driver as described in the policy and take legal action against the driver-at-fault in an attempt to recuperate the cost of that claim.

Cancellation

the voluntary act of terminating an insurance contract.

Types of Agent Authority

* Express: Express authority is the explicit authority granted to the agent by the insurer as written in the agency contract. For example, solicit applications and collect premiums. * Implied: The unwritten authority of a producer to perform incidental acts necessary to fulfill the purpose of the agency agreement (otherwise unwritten in the contract). For example, since you are authorized to solicit applications and collect premiums, it is implied that you are authorized to set appointments. * Apparent: Apparent authority deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. Apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal. For example, since you have all of the insurance application forms and business cards it is apparent to the customer that you are able to help them apply for insurance.

Four elements must be present in every contract to be valid and legally enforceable. These elements include:

1. Consideration: The insured provides consideration with payment of premium; The insurer provides consideration by promising to pay the insurance benefit. 2. Legal Purpose: An insurance contract must be legal and not in opposition of public policy. 3. Offer and Acceptance: An offer is made when the applicant submits an application and initial premium for insurance to the insurance company. 4. Competent Parties: All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol.

Agent Authority

A relationship in which one person is authorized to represent and act for another person or company is established through the law of agency.

Void and Voidable Contracts

A void contract is an agreement that does not have legal effect, and therefore is not a contract. Void contracts are not enforceable by either party. Unlike a void contract, a voidable contract is a valid, binding contract which can be voided at the request of a party with the right to reject.

Stranger-Originated Life Insurance

In Stranger-Originated Life Insurance, or STOLI , a consumer purchases a life insurance policy with the agreement that a third-party agent/broker or investor will purchase the consumer's policy and receive the proceeds as a profit upon the consumer's death. This differs from a standard insurance policy because a 3rd party OWNER will be the one benefiting from the death of the insured. STOLI policies are typically illegal as they violate insurable interest requirements.

Aleatory Contract

Insurance contracts are aleatory, which means there is an unequal exchange. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss. For example, Tory paid one month's premium of $50, when she died one month later, her beneficiary received the whole $50,000 face value of Tory's policy.

Conditional Contract

Insurance contracts are conditional because certain conditions must be met by all parties in the contract. Hence, benefits depend on the occurrence of an event covered by contract. This is needed when a loss occurs for the contract to be legally enforceable.

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.). The Principle of Indemnity is to restore the insured to the same financial condition as that which existed prior to the loss. You cannot profit from an indemnity contract.

Personal Contract

Most insurance contracts are personal contracts between the insurance company and the insured individual, and are not transferable to another person without the insurer's consent. Life insurance is an exception to this standard as the owner of the policy has no bearing on the insurer's assumed risk. Therefore, people who own life insurance are called policyowners rather than policyholders and may transfer or assign ownership by notifying the company.

Unilateral Contract

One sided agreement, where only the insurer is legally bound. In an insurance contract, only the insurance company is legally bound to do anything (pay claims). Uni=one lateral=side, one side - the insurance company is legally bound. The insured does not make a promise to pay premiums, however, if premiums are not paid the insurer has the right to cancel the contract.

Insurable Interest

Requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Insurable interest only needs to exist at the time of the application (the inception of the contract). For example, spouses would typically have insurable interest on each other's life childhood friends typically would not have insurable interest on each other's life. An employer may have insurable interest on a key employee's life.

Warranties

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

Estoppel

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

Concealment

Withholding of information or facts by the applicant (smoker, diabetes).