Legal Concepts of the Insurance Contract (3)

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.

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.

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.

Insurable Interes

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. NOTE: Insurable interest only needs to exist at the time of the application (the inception of the contract).

Concealment

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

Health insurance

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

• Life insurance

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

Void and Voidable Contracts:

A void contract is an agreement that doesn't 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.

Legal Purpose:

An insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void.

Offer and Acceptance

An offer is made when the applicant submits an application and money for insurance to the insurance company. The offer is accepted after it has been approved by the insurance company's underwriter and issues a policy. If no money is given, the applicant is making an invitation.

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.

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. If there is an ambiguity in the contract, the courts always favor the insured over the insurer.

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. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling

Consideration:

Consideration is something of value that each interested party gives to each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit.

Insurance policies are legal contracts.

Contract law defines a contract as a legally binding agreement between two or more parties where a promise of benefits is exchanged for valuable consideration. The purpose of an insurance policy is to indemnify (make whole) the insured when a covered loss occurs

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.

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. • Consideration may be unequal • The outcome depends on chance or uncertain event • A legal bet is considered an aleatory contract

Conditional Contract:

Insurance contracts are conditional because certain conditions must be met by all parties in the contract. This is needed when a loss occurs in order 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.) You cannot profit from an indemnity contract.

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.

Waiver:

Waiver is the voluntarily giving up of a known right.

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.

Express

Express authority is the explicit authority granted to the agent by the insurer as written in the agency contract.

Representations

Statements made by the applicant believed to be true - (height, weight

Warranties:

Statements made by the applicant guaranteed to be true - (name, DOB)

Estoppel

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

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).