Fundamentals of Insurance Planning Chapter 6

The wording in an endorsement to your client's insurance policy conflicts with the terms of the policy itself. What is the significance of this conflict for your client?

As a general legal principle, if wording in an endorsement or rider conflicts with the term of the policy, the endorsement or rider takes precedence.

subrogation

provides an insurer that has paid a claim under a contract of indemnity takes over any rights of recovery that the insured might have against the party responsible for the loss

Teddy your client's son, says he has heard that if he has an accident with his old car, the insurance company will buy him a new car. How does Teddy's insurance work as a contract of indemnity?

Insurance provides compensation for a covered loss, but only to the extent of the financial loss. Insurance will not buy a new car. However, it will pay an amount of money reflecting the cost of repairing or replacing the vehicle that was damaged or destroyed, minus deductible.

What is the difference between concealment and misrepresentation by an applicant for insurance?

The difference between concealment and misrepresentation is that the applicant conceals if a silence is maintained when there is an obligation to speak; he or she misrepresents if a statement is made that is not true.

Your client, Maria, complains that buying insurance is just like buying a new car in that you shop around, trying to get the best deal but you don't get to enjoy the new car until you actually close the deal and drive it home. What unique aspects of an insurance contract differentiate it from other goods and services?

Unlike most physical goods--like a car--that are purchased for immediate use, insurance provides future benefits when loss payments are made. However, the relief from anxiety and freedom from worry about financial losses are immediate and continual benefits through the period of protection.

contract of adhesion

a contract prepared in all its details by one party, contrasted to a bargaining contract which is negotiated between two parties, insurer prepares all the details

Your client sue litigator, would like to know her rights concerning the following situations: a. Sue claims that one of the provisions in the insurance is unclear. b. Sue wants to ignore a portion of the contract that she did not read. c. Sue claims that the insurance agent told her something that contradicts the language of the contract.

a. as a general rule the benefit of doubt in insurance contract goes to the insured if the terms are unclear. b. Sue is bound by the contract whether she read it or not. Planner should take great care to ensure client understands contract. c. under the parol evidence rule, oral evidence cannot be used to modify the contract.

What is the purpose of each of these components of a typical insurance contract? a. declarations b. definitions c. insuring agreements d. exclusions e. conditions

a. declarations-factual statements that identify the specific person, property or activity being insured and the parties to the insurance transactions; the also provide descriptive information about the insurance being provided. b. definitions- defines terms used in the policy, ambiguities in the contract are likely to be construed against the insurer, this section helps make the insurer's intentions precise c. insuring agreements-basic promises of the insurance company d. exclusions-situations insurer does not cover, certain perils, types of losses, types of property, or activities e. conditions-agreement is not absolute promise with no strings attached, promise is qualified, enforceable only if policy-owner fulfills a number of conditions spelled out in the policy

Define the following legal requirements of an enforceable contract: a. offer and acceptance b. legal purpose c. competent parties d. consideration

a. offer and acceptance: legally binding agreement, or contract requires both an offer by one party and an acceptance by another party; insurance offer is usually made in request for coverage by prospect or applicant; before a contract is effective, acceptance is necessary; P&L agent has authority to bind/accept offer even without payment from applicant; life insurance written application and first premium payment usually considered offer to insurer; acceptance occurs if the applicant meets normal underwriting requirements b. legal purpose: legally binding contract must have a legal purpose or object. courts will not enforce a contract with an illegal purpose or contrary to public policy c. competent parties: contracts require that the party making the offer and the one accepting the offer be legally competent to make the agreement, most issues arise in connection with applicants under the legal age of majority, insane or intoxicated. Insurers too must be competent to enter into a legal contract by meeting state charter and license requirements d. consideration: final requirement for valid contract is some consideration exchanged by both parties, right or something of value given up, or obligation assumed. insurance, applicant makes a premium payment, insurer agrees to provide coverage for specified losses

Define the following legal characteristics of an insurance contract: a. unilateral nature b. personal nature c. conditional nature

a. unilateral nature: insurance contract is unilateral because only one party, the insurer, makes a legally enforceable promise. If company fails to fulfill its promise, insurer may be held legally liable for breach of contract. Insured makes no such promises after the contract comes into force b. personal nature: insurance contract is personal and covers the person, rather than the property. Insurance provides repayment of a loss arising out of an undesired happening by indemnifying the person who has incurred the loss. c. conditional nature: obligation to perform on the part of one of the parties to an agreement may be conditioned upon the performance of the second party. a clause ina n insurance contract requiring such performance is called a condition, failure to perform relieves the other party of their obligaiton

Does you client have an insurable interest in the following situations: a. your client lent a large amount of money to a friend who is starting a business? b. your client owns and drives a fancy red sports car c. your client owned a precious stone that was destroyed soon after he gave it to his girlfriend

a. yes, client may suffer financial loss if debtor friend dies before repaying loan b. yes, owner/driver can sustain losses to car by collision, theft or other perils c. no, client did not own the stone at the time of destruction

conditional contract

agreement in which one party has an obligation to perform only if the other party meets certain conditions specified in the agreement; insurance is conditional because the insurer is obligated to pay claims only if the insured has complied with policy conditions

endorsement rider

aka rider in life insurance; provision added to the policy, extra premium charge, by which scope of its coverage is clarified, enlarged or restricted

warranty

answers to specific questions on the application may be considered warranties; if false they make the policy voidable by the insurer regardless of their materiality

exclusions

apply to certain perils, types of losses, types of property or types of activities, types of claims the insurer does not cover

11. What is the major distinction between a non-cancelable policy and a guaranteed renewable policy?

both guaranteed and non-cancelable policies give the policyowner the right to renew the coverage at each policy anniversary dates, possibly limited to some age; non-cancelable policy guarantees future rates for the period of coverage in the contract; guaranteed reneable policy, insurer does not guarantee future rates for broad classes of insureds,

voidable contract

caused by misrepresentation or concealment; may be affirmed or rejected at the option of one of the parties, although binding to the other; insurance applicant concealed or misrepresented, insurer may have option not to honor contract

Cheryl Eng, a client of yours, was responsible for an auto accident that damaged the other driver's car. Cheryl was pleased to hear that the other driver had insurance that paid for the damage to his car. Cheryl has just learned that the other driver's auto insurance company has asked Cheryl's company for reimbursement. Can they do that?, she asks you. How does the doctrine of subrogation apply to insurance contracts?

common-law doctrine of subrogation gives the insurer whatever rights the insured possessed against the responsible third part. basically a process of substitution, with the other driver's insurance taking over the legal rights of it's insured to recover from Cheryl

fraud

concealment and misrepresentation involve fraud, applicant commits fraud in procuring policy, policy may be voidable by insurer,

unilateral contract

contract in which one party to the contract makes a binding promise that, if broken, gives rise to an action against that party for breach of contract; insurance is unilateral because only one party (the insurer) makes a promise that is enforceable

insuring agreement

core of any insurance policy, spells out the basic promise of the insurance company,

definitions

explain the key policy terms and are a major help in precisely defining the insured's intentions

declarations

factual statements identify specific person, property, activity being insured and parties to the insurance transaction

concealment

failure to affirmatively disclose relevant information; ex. applicant for property insurance knows that the building is collapsing, but does not disclose this fact to the insurance company

non-cancelable

give policy owner right renew coverage at each policy anniversary date

void contract

has no legal effect, neither party may enforce

representation

incidental statement preceding the contract, although it may be an inducement to agree to the contract, to make a contract voidable, a warranty only needs to be false; to make a contract voidable a representation needs to be false and material

contract of indemnity

insurer agrees, if covered loss occurs, to pay an amount directly related to the amount of the loss; most P&L contracts

parol evidence rule

legal principal that oral contemporaneous evidence may not be used to contradict or vary the terms of a valid written contract.

guaranteed renewable

less certainty for policy owner, most commonly health insurance policies, gives policyowner right to renew coverage at each policy anniversary date

optionally renewable

most P&L, give insurer unilateral right to refuse to renew a policy at the end of any period for which premiums have been paid

misrepresentation

occurs when an insurance applicant makes a false statement of a material fact; applicant who owns collapsing building would be guilty of misrepresentation if she stated building was structurally sound

After her accident prone cousin's second car accident within 2 months, your client, Julie, asks you if she could buy insurance on the cousin's new car. Julie thinks this might be a good investment because the cousin is such a bad driver that she will probably have another accident and the insurance company will then have to pay Julie if Julie insured the car. You tell Julie that she cannot insure somebody else's car. What are the three reasons for requiring an insurable interest in insurance contracts?

purpose of requiring insurable interest are to: prevent gambling, decrease moral hazard and to help measure actual loss

insurable interest

right or relationship with regard to the subject matter of the insurance contract such that the policyowner would suffer financial loss from its damage, loos, or destruction

valued contract

specifies the amount the insurer will pay in the event of a specified loss-usually a total loss; life insurance is most common example