Exam FX Insurance , Chapter 2 : Contract Law

An injured party is entitied to rescind the contract if any of the following occurs

1. A false material representation ( rescission is effective from the time the representation becomes false) 2. Concealment ( regardless of whether the concealment is intentional) 3.Violation of a material warranty or any other material provision of a policy.

Four elements of a contract

1.Agreement : offer and acceptance 2.Competent parties 3.Legal purpose 4. Consideration

Policy

A contract between an insured and an insurance company which agrees to pay the insured for lass caused by specific events.

MIsdemeanor

According to CIC 782, anyperson violating this provision is guilty of a misdemeanro punishable by amaximum fine of 25k USD, imprisonment in a county jail for aperiod no longer than 1year, or by both a fine and imprisonment. If the loss to the victim exceeds 10k USD the fine should not exceed three times the amount of the loss. In addition, the Commissioner may suspend the license of the agent for a maximum period of 3 years.

Unilateral contract

In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Material misrepresentation

Is a statement that if discovered would alter the underwriting decision fo the insurance company. Forthermore, if material misrepresentations are intentional they are considered fraud

An unintentional tort

Is the result of acting without proper care. This is generally reffered to as negligence

Changed or withdraw representation

KNow that the representation maybe changed or withdrawn prior to the effectuation of the policy, but not after. Misrepresentations that are pertinent to underwriting the insurability, level of risk, and dicisions of either party are grounds to void a contract. However, it must be determined that the information was given under a false pretense, done so with the intent to commit fraud, and was material in making the decision to enter the contractual terms

Disadvantages

Of paramount importance is the weight of disadvantages on either party. Disadvantages are always material information. Every contract has disadvantages for both parties, but they may not be compelling when it comes to deciding whether or not to accept the contract. Insurers are entitled to know material information about prospective insureds : have they been diagnosed or treated for cancer ,heart disease, or diabetes? have they ever been hospitalized ? do they fly an aircraft? have they ever been convicted of a felony?

Premium formula

Premium = rate x units of insurance

Misrepresentation

Untrue statements on the application are considered misrepresentations and could void the contract

The creation of the warranty will take place

at or before the execution of the policy and will be contained in the policy itself. The warranty is not limited by timel; therefore, it my relate to the past, the present, the future or any combinatin of these time frams. Violation of a materila warranty on either party entitles the other to rescind the policy.

An intentional tort

is any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party. For purpose of this definition, breach of contract is not considered an intentional tort

Conditional contract

requires that certain conditions must be met by the policy owner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

Premium

the payment required by the insured to keep the policy in force

Concealment is the failure to disclode known facts

An injured party is entitled to rescind the policy regardless of whether the concealment was intention or unintentional. Each party should have the reasonable expectation that the other is acting in good faith without attempting to conceal or deceive the other. Neither party of the contract is legally bound to provide information pertaining to matters of their own judgement or opinions, even in matters in question. The right to rescind the policy is permissible for an intentional and fraudulent omission on the part of either party.

Rate

The price of insurance for each exposure unit

An earned premium

is the portion of a premium that belongs to the insurance company for providing coverage for a specified period of time. The unearned premium is the portion of the premium the insurance company has collected but has yet to "earn" because it has not yet provided coverage for the insured.

Rescission

is the revocation of a contract

Insurance policy

is the written instrument in which a contract of insurance is set forth

A policy that is terminated because of nonpayment of premiums is known as a

lapsed policy

6 Specifications for Insurance Policies

1. The parties to the contract 2. The persons or property being insured 3. A statement of the insurable interest that exists if the insured is not the owner 4. The risks insured against 5. The time period during which the policy will be in force or continue; and 6. The stated annual, semi annual, quarterly, or monthly premium or a statement of the manner in which a premium rate and total premium will later be calculated, if it can only be determined at the termination or expiration of the contract.

Law of contracts

A great deal of the law that has shaped the formal structure of insurance and influenced its content is derived from the general law of contract. However, because of the many unique aspects of the insurnace transaction, the general law of contracts has had to be modified to fit the needs of insurance.

Competent parties

The parteis to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs of alcohol

The breach of an immateral provision

does not void the policy unless specified by the policy itself. In addition, if the policy contains a statement implying that there is an intention to do or not to do that which affects the risk, it will be taken as a warranty that such an act or omission will take place.

Representations in insurance contracts qualify as

implied warranties

Materiality

The concept of materiality is based on the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract

Special characteristics of an insurance contract

1. Contract of adhesion 2. COnditional contract 3. Aleatory 4. unilateral 5. personal

The following information does not need to be communicated in a contract

1. Known information 2.Information that should be known 3.Information that the other party waives 4.Information that is excluded by a warranty and not material to the risk 5. Information that is excepted from insurance and not material to the risk; and 6. Information based on personal judgment

Tort

A private, civil , non-contractual wrong for which a remedy through legal action may be sought. A tort can be either intentional or unintentional. Insurance generally will only respond to unintentional torts ( losses other than those acts by an insured that are deliberate and intenede to cause loss or damge.)

Legal purpose

The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, for example, it must have both: insurable interest and consent. A contract without a legal purpose is considered void, and cannot be enforced by any party.

Agreement

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application . Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Insurance is the transfer of risk from the insured to the insurance company

This is accomplished through a contractual arrangement under which the insurance company, in consideration of the premium paid by the insured and his or her promise to abide by the provision of the contract, promises to indemnify the insured or pay an agreed amount, int he event of the specified loss. The instrument through which this transfer of risk is accomplished in the insurance policy.

Policy riders

are added to the basic life insurance policy in order to add, modify or delete policy provision

Representation

are statements believed to be tru 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 ont he insurance application .

Contracts

are written agreement that are legally enforceable by law

The materiality of a given concealment determines

the importance of a misrepresentation.

Concealment

the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.

Application

A written request to an insurance company for insurance. It must honestly represent the facts regarding the person to be insured. Otherwise the policy will be voided.

Consideration

The binding force in any contract is the consideration. Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.

Personal contract

In general, an insurance contract is a personal contract because it is between the insurance company and an individual Because the company has a righe to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer's approval. Life insurance is an exception to this rule: a policy owner can transfer ( or assign ) ownership to another person. However, the insurer must still be notified in writing.

Aleatory contract

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Warrranty

is a statement considered to be guaranteed to be true and beocmes part of the contract > According tot he CAlifonia Insurance COde, a certain format of words is not necessary to create a warranty. Warranties can either be expressed or implied. Statements in a policy are considered express warranty. Every express warranty becomes part of the insurance contract. Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction.

Contract of adhesion

is prepared by one of the parties ( insurer) and accepted or rejected by the other party ( insured) . Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance contracts are offered on a " take it or leave it "basis by an insurer.

Cancellation

is the act of revoking or terminating one's insurance policy

Renewal

is the continuance of an insurance policy beyond its original term.

Nonrenewal

is the discontinuance of an insurance policy beyond its original term. The renewal or non renewal may occur on a date specified in the contract ( usually on the policy anniversary or premium due date)

Grace period

is the period of time after the deadline or due date of a premium in which a late premium payment may be made without a penalty or without the policy lapsing

The premium is determined by

multiplying the rate by the number of units of insurance purchased

Materiality is determined by

the "probable and reasonable influence of the facts" that they would have on the party that needs the facts to make a decision, whether that party is the insurer or the insured. Failure to disclose material information may entitle the "injured"party to rescind the contract.