insurance 3

The authority of an agent is of three types

express, implied, or apparent

Waiver

is defined as the intentional and voluntary giving up of a known right.

Agency Law Principles

An understanding of the law of agency is important because an insurance company, like other companies, must act through agents.

Contract Elements

Contract law dictates the formation and enforcement of legal contract rights. A contract is a legal agreement between two or more parties promising a certain performance in exchange for a valuable consideration. Under the law, the following elements are necessary for the formation of a valid contract: Agreement (offer and acceptance) Consideration Competent parties Legal purpose

Impersonation

Impersonation means assuming the name and identity of another person for the purpose of committing a fraud. The offense is also known as false pretenses. In the case of life insurance, an uninsurable individual applying for insurance may ask another person to substitute for him to take the physical examination.

Parts of the Insurance Contract

Policy face (title page) Insuring clause Conditions Exclusions

Parol (Oral) Evidence Rule

The parol evidence rule limits the impact of waiver and estoppel on contract terms by disallowing oral evidence based on statements made before the contract was created. It is assumed that oral agreements made before contract formation were incorporated into the written contract. An oral statement may waive contract provisions only when the statement occurs after the contract exists.

Contract Characteristics

Utmost Good Faith,Aleatory,Adhesion

exclusions

a basic part of the contract, and a complete knowledge of them is essential to a thorough understanding of the agreement. Certain risks must be excluded from insurance contracts because they are not insurable. Such risks include war and acts of war, self-inflicted injuries, and certain hazardous occupations or avocations, such as sky diving, scuba diving, and auto racing.

agent

a person authorized to act on behalf of another person, who is called the principal. In the field of insurance, the principal is the insurance company and the sales representative or producer is the agent. Contracts made by the agent are the contracts of the principal. Payment to the agent, within the scope of the agent's authority, is payment to the principal. The knowledge of the agent is assumed to be the knowledge of the principal.

Agency

a relationship in which one person is authorized to represent and act for another person or for a corporation.

commingling

mixing personal funds with the insured's or insurer's funds.

Agreement (Offer and Acceptance)

There can be no contract without the agreement or mutual assent of the parties. The parties to an insurance contract are the insurance company and the applicant, who may become the insured or may name another person to be insured.

Legal Purpose

To be valid, a contract must be for a legal purpose and not contrary to public policy.

Unilateral

after the insured has completed the act of paying the premium, only one party of the contract is legally required to do something. For example, the insurer promises to pay the death benefit in the event of a loss.

Conditions

are provisions that apply to the insured and insurer.

warranty

becomes part of the contract itself and is a statement that is considered to be guaranteed to be true. Under a strict interpretation, any breach of warranty provides grounds for voiding the contract.

Express authority

is the explicit, definite authority which the insurer has given the producers under the terms of the agent's written contract.

Void and Voidable Contracts

often incorrectly used interchangeably

Company's Responsibility to the Agent

the company must recognize all of the provisions of that contract. In addition, the company must pay the agent the compensation agreed upon in the contract, must reimburse the agent for proper expenditures made on behalf of the principal, and must indemnify the agent for losses or damages suffered without fault on the part of the agent but occurring on account of the agency relationship.

Collection of Premium

All premiums received by an agent are funds received and held in trust. The agent must account for and pay the correct amount to the insured, insurer, or other agent entitled to the money. Any agent who takes funds held in trust for personal use is guilty of theft and will be punished as provided by law. An agent may establish an account separate from a personal account to deposit the trust funds. All trust funds may be deposited into the single separate account. However, the agent's records must clearly distinguish the funds held for each individual.

Acceptance

An acceptance must be unconditional and unqualified. (A qualified or conditional acceptance rejects the offer and may constitute a counter offer.)

Agent's Responsibility to Insured/Applicant

An agent has a fiduciary responsibility to the insured, the applicant for insurance, and the insurer

aleatory

An insurance contract is said to be an aleatory contract because performance depends upon an uncertain event. Each party may not give and receive the same value. An insured who has a loss may receive a greater payment than was paid in premiums, while an insured who never has a loss will pay premiums and not receive a monetary return.

Interpretation in Favor of Valid Contract

Because the courts assume that when people make a contract they intend for it to be valid, the courts will, if possible, render an interpretation of the contract that makes it valid rather than invalid.

Competent Parties

For a contract to be binding, both parties must have the legal capacity to make a contract. The insured or applicant must be of legal age and be mentally competent to make an insurance contract. Applications of minors usually must be signed by an adult parent or guardian.

Personal Contract

Generally, insurance policies are personal contracts between the insured and insurer. With few exceptions, once a policy is formed it cannot be transferred to another person (insured) without the consent of the insurer. However, it is possible to assign ownership of a life policy to another person, for example, to be used as collateral for a loan.

Presumption of Agency

If a company supplies an individual with forms and other materials (signs and evidences of authority) that make it appear that he is an agent of the company, a court will likely hold that a presumption of agency exists. The company is then bound by the acts of this individual whether or not he has been given this authority.

Written Contracts

If a contract contains unclear or inconsistent material between printed, typed, or handwritten material in the contract, the typed or handwritten material will determine intent. Where there is a discrepancy between typed material and handwritten material, the handwritten material will determine the intent. This procedure is used because printed material is standard and for general use, but typed or handwritten material is added to the existing printed material and is a better indication of the parties' intent.

Unclear Contract of Adhesion Interpreted Against the Insurer

If a contract contains wording that is unclear, the courts will interpret the language used against the writer of the contract unless the wording used is required by law to be stated in a specific manner. Insurance contracts are contracts of adhesion, which means the insured had no part in determining the wording of the contract. Therefore, the courts will interpret the contract in favor of the policyholder, insured, or beneficiary.

Plain Language and Word Definitions

If the language of the contract is clear, the courts do not have to interpret the meaning of the contract. The courts give the words in the contract their ordinary meaning. In cases where ordinary words have been used in a technical capacity, the technical meaning of the word is accepted.

Conditional

Insurance policies are conditional contracts because when a loss occurs certain conditions must be met to make the contract legally enforceable. For example, a policyholder might have to satisfy the test of having an insurable interest and satisfy the condition of submitting proof of loss.

Agent's Responsibilities to the Company

The agent's contract or agency agreement with the insurer will specify the agent's duties and responsibilities to the principal. In all insurance transactions, the agent's responsibility is to act in accordance with the agency contract and for the benefit of the insurer. If the agent is in violation of the agency agreement, the agent may be held personally liable to the insurer for breach of contract. In accordance with the agent's fiduciary obligation to the insurer and his agency agreement, the agent has a responsibility of accounting for all property, including money that comes into his possession. The agent must not embezzle or commingle these funds. It is important that pertinent information be disclosed to the insurer, particularly with regard to underwriting and risk selection. If the agent knows of anything adverse concerning the risk to be insured, it is his responsibility to provide this information to the insurer. In accordance with agency law, information given to the agent is the same as providing the information to the insurer. It is the agent's responsibility to obtain necessary information from the insurance applicant and to accurately complete the application for insurance. A signed and witnessed copy of the application becomes part of the legal contract. Finally, the agent has a responsibility to deliver the insurance policy to the insured and collect any premium that may be due at the time of delivery. The agent must be prepared to provide the insured with an explanation of some of the policy's principal benefits and provisions. If the policy is issued with changes or amendments, the agent also will be required to explain these changes and obtain the insured's signature acknowledging receipt of these amendments.

Entire Contract

The courts look at the entire contract to determine the intent of the parties. They do not consider material added to the basic contract, nor do they take only parts of the contract to make a determination.

Formation of a Life or Health Insurance Contract

The formation of a life or health insurance contract differs from the formation of other insurance contracts in that the life or health producer usually does not have the authority to bind the insurer (put a policy into effect). The producer can solicit applications and collect initial premium payments from prospective insureds, but the application and premium must be sent to the insurance company underwriter, who determines whether the company will accept the risk. Life insurance policies are generally noncancelable, long-term contracts. A life insurance policy is contestable for a one- or two-year period. Life and health insurance underwriting decisions frequently rest on medical questions. The insurance company is in a much better position than the producer to evaluate the applicant's insurability.

utmost good faith

This means that each party is entitled to rely on the representations of the other, and each party should have a reasonable expectation that the other is acting in good faith without attempts to conceal or deceive

Offer

a proposal that creates a contract if accepted by another party. The offer may come from the insurer (company) or the applicant. If an applicant gives the insurer a completed application and pays the first premium, the application is an offer. If the policy is issued as applied for, the insurer accepts the offer. There is no offer if the applicant sends the application to the insurance company without payment of the premium. Such an application is merely an invitation to the company to make an offer. The insurance company makes an offer by issuing the policy. The applicant accepts it by paying the first premium.

representation

a statement believed to be true to the best of one's knowledge. An insurer seeking to void coverage on the basis of a misrepresentation usually has to prove that the misrepresentation is material to the risk. Under most state laws, an applicant's statements or responses to questions on an application for insurance (in the absence of fraud) are considered to be representations and not warranties.

misrepresentation

a written or oral statement that is false. Generally, for a misrepresentation to be grounds for voiding an insurance policy, it has to be material to the risk.

Fraud

an intentional act designed to deceive and induce another party to part with something of value. Fraud may involve misrepresentation, concealment, or both, but not all acts of misrepresentation or concealment are acts of fraud. If someone intentionally lies to obtain coverage or to collect on a false claim, it would be a matter of fraud. If someone misrepresents something on an application (perhaps a medical treatment the person is embarrassed to talk about) without intent to obtain something of value, no fraud has occurred.

Apparent authority

authority the agent seems to have because of certain actions undertaken by the agent, thereby giving members of the public reason to believe that the agent does indeed have such authority to conduct business. For example, business cards and rate books give the impression to the applicant that the producer works for and represents the company; the agent's words could appear to be the company's words

policy face

first page of the insurance policy. It includes the policy number, name of the insured, policy issue date, the amount of premium and dates the premium is due, and the limits of the policy. The policy face also includes the signatures of the secretary and president of the issuing insurance company. In addition, generally there are clauses required by law to give the insured information on the right to cancel and a warning to the insured to read the policy carefully.

Concealment

he failure to disclose known facts. Generally, an insurer may be able to void the insurance if it can prove that the insured intentionally concealed a material fact.

rules of construction

help to identify and establish the intent of the parties to the contract.

fiduciary

is a person in a position of financial trust. As a fiduciary, the agent has an obligation to act in the best interest of the insured.All premiums received by an agent are funds received and held in trust. The agent must account for and pay the correct amount to the insured, insurer, or other agent entitled to the money. The insured's premiums must be kept separate from the agent's personal funds.The agent must be knowledgeable about the features and provisions of various insurance policies and be able to explain important features to the insured.

Estoppel

means that one party who has given up a right may be blocked (or stopped) from changing conduct and reasserting the right, after another party has begun to rely upon it, if doing so would be to the detriment of the second party. Waiver and estoppel often occur together, but they are separate and distinct doctrines. For example, by repeatedly accepting late premium payments, an insurance company may have waived its right to cancel a policy for nonpayment of premium. In the future, the insurer may be legally estopped from making any prompt cancellation for nonpayment because the policyholder has begun to rely on the prior acceptance of late payments.

Implied authority

not expressly granted under an agency contract, but it is actual authority granted to an agent in accordance with general business practices. Implied authority addresses the relationship between the producer and the company. For example, these authorities are not written into the contract but are necessary to conduct insurance business; for example, when the producer collects the initial premium from an applicant on behalf of the insurer.

void contract

simply an agreement without legal effect. In essence, it is not a contract at all, for it lacks one of the elements specified by law for a valid contract. A void contract cannot be enforced by either party. For example, a contract having an illegal purpose is void, and neither party to the contract can enforce it

Material information or a material fact

something that is crucial to acceptance of the risk. For example, if the correct information about something would have caused the insurance company to deny a risk or issue a policy on a different basis, the information is material. If a person misrepresents her age or gender, this may be considered material misrepresentation, and the policy could be voided as a result. However, the policy would only be voided if the company would not have issued the policy at all had the company possessed the correct information.

adhesion

the insurance company drafts the wording of the contract and the insured simply adheres to it. As a result, any ambiguity in the contract is usually resolved in favor of the insured. Courts will usually grant any reasonable expectation on the part of the policyowner or the beneficiaries from a contract that was drawn up by the insurance company.

Consideration

to an exchange of value. Each party to the contract must give valuable consideration such as statements, promises, and/or monetary payments. The applicant is giving the premium (as well as representation statements) and the insurer is giving its promise to fulfill its part of the contract; in other words, the insurer agrees to pay for any valid claim. Part of the applicant's consideration consists of the statements in the application. A great deal of importance is placed on the representations in the application because the insurance company bases its entire decision on whether to issue the policy on statements made in the application.

Suitability considerations

Before an agent takes an applica tion for insurance or an annuity product, the agent and the insurer should obtain information from the prospective applicant that will help determine if either an insurance or annuity product is an appropriate means of addressing the prospect's needs and, if so, what kind of product will best address those needs. An agent or insurer can obtain this information by asking questions like the following. Will the proposed insurance or annuity replace an existing insurance product or annuity? What other insurance policies or annuity contracts does the prospect have in effect? Specific questions that agents must ask are often mandated by a state's insurance regulations.

Potential Liabilities of Agent (Errors and Omissions Exposure)

Errors and omissions (E&O) insurance is needed by professionals who give advice to their clients. It covers negligence, error, or omission by the insurer or by the producer who is the insurer's representative. E&O policies protect producers who face an insured's claim that the producer provided incorrect advice (error) or failed to inform them of an important issue (omission). Producers must take special care to follow strict procedures (and train all employees to do the same) in taking applications, explaining coverages, collecting premiums, submitting changes to policies upon an insured's request, and submitting claims. All E&O policies have certain basic characteristics in common. The policy covers only losses resulting from negligence, error, or omission. For example, a producer who fails to tell a client that purchasing a new policy means that waiting periods have to be met again can be sued for this omission if a loss that was previously covered occurs and the insured finds that he is not currently covered. The policy usually has a high deductible, such as $500 or $1,000. The high deductible provides an added incentive for a producer to reduce errors. The coverage may be written with both a limit per claim and a limit for all claims during the policy period. Except for obvious exclusions, such as a producer committing unfair trade practices or intentional fraud, the policy has few other exclusions.

insuring clause

generally also appears on the policy face. It is a statement by the insurance company that sets out the essential element of insurance— the promise to pay for losses covered by the policy in exchange for the insured's premium and compliance with policy terms.

contract

is an agreement enforceable by law. It is the means by which one or more parties bind themselves to certain promises. With a life insurance contract, the insurer binds itself to pay a certain sum upon the death of the insured. In exchange, the policyowner pays premiums. Because contracts of insurance are binding and enforceable, certain legal concepts extend to the contract parties: the applicant and the insurer, as well as the agent who brings them together.

voidable contract

is an agreement which, for a reason satisfactory to the court, may be set aside by one of the parties to the contract. It is binding unless the party with the right to reject it wishes to do so. Say that a situation develops under which the policyholder has failed to comply with a condition of the contract: he ceased paying the premium. The contract is then voidable and the insurance company has the right to cancel the contract and revoke the coverage. This raises another possibility under a voidable contract. In the situation previously described, the insurance company may choose not to exercise its right to cancel the contract after the policyholder fails to pay the premium. The same possibility does not exist under a void contract.