Producers and General Rules of Agency and Contracts

Distinct Characteristics of an Insurance Contract

A contract is a binding agreement between two or more parties, legally enforceable to do certain things. In an insurance contract, the insured agrees to pay a monetary premium and abide by certain agreements in exchange for the insurer agreeing to indemnify the insured in case of loss.

Conditional Contract

Both parties must perform certain duties to make the agreement enforceable. The insured pays premiums and follows certain policy conditions. The insurer pays claims according to policy terms.

Fraud

Deceit, intentional misrepresentation, or the concealment of material facts with the intention of causing injury to another party.

Indemnity

The concept of restoring someone to the same financial position they were in before a loss occurred. Compensating or reimbursing someone for a suffered loss.

Estoppel

The concept that, once a fact has been admitted to be true by a previous action, it can no longer be denied to be true.

Aleatory Contract

Unequal amounts of money are exchanged. The premium that the insured pays is less than the potential benefit he or she will receive in the event of a loss.

1- Offer and Acceptance

Agreement An insurance policy is the written statement of the terms of the contract. There must be both an offer and an acceptance:| Offer-the applicant submits an application along with the correct premium Acceptance-the insurer issues the policy. If the applicant does not submit money with the application, it is not an offer, but it is an invitation to the insurer to make an offer, and the agent cannot bind coverage.

3- Competent parties

All parties concerned must have legal capacity to enter into a contract. This is probably best shown by defining those who do not have legal capacity to enter into a contract. This includes: minors those legally declared incompetent people under the influence of drugs or alcohol. In the case of minors, the insurer may be required to uphold the terms of the contract while minors may not be

Fiduciary

An individual who holds a position of public trust and confidence. Insurance agents are fiduciaries to both the companies they represent and their client. As fiduciaries, agents are expected to be professional and to act ethically.

Law of Agency

Any act on the part of an agent of the company is the same as if the company itself did the act. An agent represents the company through several types of authority or directives:

Ambiguities in a Contract of Adhesion

Any doubt or ambiguity found in an insurance policy will be found in favor of the party that did not draw up the contract-the insured.

Utmost Good Faith

Applicants and insureds are expected to make a full, fair and honest disclosure of facts. Insurers are expected to promptly indemnify the insured in the event of loss according to the contract.

Apparent

Authority neither expressly given nor implied, but exists because the agent has used it in the past without the insurer stopping him or her from doing so, or it is authority that a reasonable person would assume an agent to have. For example, If the agent has paid minor claims in the past and been reimbursed by the insurer, it is apparent he or she has the authority to do so.

Responsibilities to the Applicant/Insured

For risks covered by the policy, the insurer must pay all sums up to the policy limits that the insured becomes legally liable to pay; in other words, the insurer pays the lower of the claim (loss) or the policy limits. Deductibles will be applied to any property claims, but there is no deductible for medical or liability claims.

Redlining

Redlining is a discriminatory practice in which insurance companies refuse or limit insurance within certain geographic areas, especially inner-city neighborhoods.

Representations/Misrepresentations

Representations are statements made by one party that are believed to be true. The insured's misrepresentation will not affect the insurance contract or policy unless it affects the conditions under which the policy would be issued or not. Therefore, it is material to the risk. An agent's misrepresentation, whether intended or not, is more likely to void a policy. For example, an agent may falsely represent that certain coverage is contained in the policy, when in fact it is not.

Rebating

Returning a portion of the premium or the agent's/broker's commission on the premium to the insured or other inducements to place business with a specific insurer.

4- Legal purpose

The insurance policy owner must have an insurable interest in the property or person being insured. Insurable interest is defined as having a financial interest wherein the insured could lose financial position if the property were damaged or destroyed, or if the person was injured or died.

Warranties

The insured's guarantee that facts as stated are correct in reference to the risk, or that specified conditions will be fulfilled to maintain the contract. Property Insurance Example: The insured states there is a sprinkler system in the building and that it will be kept in working condition.

Waiver

The voluntary abandonment of a known or legal right or advantage.

2- Consideration (Exchange of Consideration)

The applicant's consideration is the premium, and the insurer's consideration is the promise to indemnify the insured in the event of a loss.

Elements of a Legal Contract

There are four principle elements that must be in every legal contract:

Express

Authority expressly given the producer, either orally or in writing in his contract. For example, the countersigning and delivering of policies. Express directive clauses are such things as scale of commissions, ownership of contracts sold, and contract cancellation procedures.

Personal Contract

Insurance policies are personal contracts. They cover the insurable interest of the individual insured and cannot be transferred or assigned to another individual-the exception is life insurance.

Unilateral Contract

Only one party is legally bound to perform any duties once the premium is paid. In an insurance contract, only the insurer makes any legally enforceable promises. The insured does not make a promise but pays a premium, which constitutes his or her part of the consideration.

Contract of Adhesion

Only one party to the contract, the insurer, prepares the contract and submits it to the other party, the insured, for acceptance. The insured cannot make any changes to the contract.

Difference between an Insurance Agent and a Broker

Superficially, an insurance agent and a broker look identical as both of them are selling insurance policies. The main difference between the two entities lies in the relation these persons have with the insurer. An insurance agent is designated by the insurance company to sell its products, whereas a broker works with several insurance companies and sells their products. Both need a license to carry out their business in a state and both get paid commission from the company.

Implied

The doctrine of "ostensible authority" gives agents unwritten authority to perform incidental acts that the public assumes the agent to have. For example, Exclusive Property and Casualty agents can bind insurance coverage. If the agent binds a particular risk, the company is bound to that risk and must pay for any losses until it cancels the contract.

Reasonable Expectations

The reasonable expectations of policy owners or beneficiaries will be honored even though the strict terms of the policy do not support these expectations

Concealment

The willful failure to disclose facts that are material to the risk. An applicant's concealment of information from the insurance company could affect the insurer's decision whether or not to insure the property and could void the policy. Casualty Insurance Example: A women says she is divorced or legally separated from her husband in order to get auto insurance. She actually is fully married and living with him, but he lost his driver's license due to a DUI and is not insurable.

Insurer as Principal

Insurance companies are principals of the insurance agent, which means that the insurer empowers the agent to act as a representative of the company. Legally, the acts of the agent are considered to be the acts of the principal, so the agents' acts extend the insurance company's liability.

Two Party Contracts

Insurance contracts are generally between two parties- the insured and the insurer. The insured suffers a loss of property, health, or life or is liable for someone else's losses. The insurer agrees to indemnify the insured for such financial loss. Insurers may pay money to a third party to whom the insured is liable (the insured has liability because they caused financial damage to another, or owe compensation to for services rendered to us- repair of our property or health).

Misappropriation of Funds

Misappropriation of funds means the intentional, illegal use of the funds of another person for one's own use or other unauthorized purpose. It is a punishable offense

Third Party Contracts

Sometimes, a third-party agreement is created to indicate that the performance of the contract will result in a benefit to a person that did not sign the contact. Benefits to third parties are usually expected, and left out of contracts, unless one of the signers wants to designate a specific benefit to a specific third-party. To be able to enforce the contract, a third-party must be able to prove that the contract was drawn for it's benefit. Otherwise, the benefit is considered incidental and the contract is only enforceable by the original signers. Banks and other mortgagors are common third parties because many contracts involve payment on property for which the mortgagor has a financial interest because of a loan.

Agency Agreement/Contract

The producer: is first and foremost the representative of the insurance company and has an ethical obligation to follow the rules of the insurer, to submit applications only for those risks that the insurer deems appropriate, and to service the policies of company customers. He or she is paid commission or salary by the company and is given authority to represent the company in conducting business on the company's behalf. acts as the representative go-between for the company and the insured, with primary responsibility to the company as the principal, while treating the customer in a fair and ethical manner. provides correct information to the customer about policy coverages. processes any requests for or cancellations of coverage in a timely fashion. has no authority beyond that which the insurer gives him or her.

Boycotting

To boycott is to stop buying or using the goods or services of a certain company or country as a protest. Boycotting in insurance is to stop buying from a particular business to force them to buy insurance from a particular source.

Intimidation

To force into or deter from buying insurance by inducing fear.