State Insurance Exam Chapter 3

Four elements must be present in every contract to be valid and legally enforceable. These elements include:

Offer and acceptance, Consideration, Competent parties, and Legal purpose.

Contract of Adhesion

Take it or leave it agreements, where the insured has no say in the contract terms and conditions. Insurer is the one author.

Insurance contracts may be made orally or in writing; however, due to their inherent complexity, they are always made in writing. Life and health insurance contracts have four main components:

The policy face, Insuring clause, Conditions, and Exclusions.

Personal contract

is a contract between an individual and the insurer. Personal contracts normally cannot be transferred to another individual without the insurer's written consent. Most insurance is considered a personal contract. Life insurance is not considered a personal contract because a policyowner has no stake in the risk assumed by the insurance company. A policyowner has ownership of their life insurance contract and can give it away (a process called assignment), if they so choose.

Voidable Contract

is a valid binding contract that can be voided at the request of a party with the right to reject. For example, an insurance company may void a life insurance contract if material misrepresentation is discovered within the first two years of policy issue, during the contestable period. After the contestable period, the insurer cannot void the policy or deny benefits because of material misrepresentation, concealment, or fraud.

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.

Consideration

is an exchange of value between parties of the contract. The insurance company provides consideration by promising to pay a covered loss. The insured provides consideration, as well as an offer to buy, through the statements on the application and payment of premium.

Why are life and health insurance contracts said to be contracts of adhesion? Select one:

(a.) Because the insurer writes the contract, to which the insured must adhere b. Because only the insurer is bound to the promises made in the policy c. Because one party has the potential to receive more than the other d. Because certain conditions must be met by all parties of the contract in order for it to be a legally binding contract

____________ 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. Select one:

(a.) Fraud b. Concealment c. Recission d. Subrogation

Benefits under a medical expense policy are provided through which of the following methods? Select one:

(a.) Indemnity b. Cash payment c. Valued d. None of the above

All of the following are required components of a legal contract, EXCEPT: Select one:

(a.) Invitation to offer b. Acceptance c. Offer d. Consideration

What are the basic elements of a legal contract? Select one:

(a.) Offer, acceptance, consideration, competent parties and legal purpose b. Acceptance and consideration c. Policy face, insuring clause and adhesion d. Competent parties, acceptance and reasonable expectations

Policy Face The policy face, also referred to as the title page, typically is the first page of the contract and contains the following information:

-The named insured, -Policy number, -Policy issue date, -Policy limits, -Premium amount, -Premium due dates, -A right of examination statement (right to return the policy), and -Signatures of the insurer's secretary and president are also part of the policy face.

Insurable interest in life insurance policies is present in the following:

-The purchaser is also the person insured under the policy -Marriage or blood relationship (e.g., spouses have insurable interest in each other; parents and children have insurable interest in each other) -Business partners -Creditor-debtor relationship

Offer and Acceptance

Agreement occurs when a definite, unqualified offer is proposed by one party and accepted by another. The applicant makes an offer to the insurance company when he or she submits the completed application with the initial premium to the insurance company.

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. Insurable interest must exist at the time of application. The insured must provide written consent if the applicant is someone other than the proposed insured.

Reasonable Expectations

An insured can reasonably expect that the insurer will provide coverage as indicated in the insurance policy, even if every detail regarding the coverage is not stated.

Jude completes an application for a health insurance policy. His statements on the application were made to the best of his knowledge and are: Select one:

a. Warranties b. Misrepresentations (c.) Representations d. Concealment

Ambiguities in a Contract of Adhesion

If the insurance contract not clear, the courts will rule in favor of the insured because the insurer wrote the contract, to which the insured adheres. Insurers strive to use plain language in the contract to prevent the need for interpretation by the courts.

Counter-offer

If the insurer receives an application and initial premium, but issues the policy with modified coverage or premium.

Conditional Contract

Insurance contracts are conditional because all parties to the contract must meet certain conditions when a loss occurs in order for the contract to be legally enforceable. An example of a condition in a life insurance contract is submitting the insured's death certificate to the insurance company for payment of the death benefit. Conditional contracts can be thought of as "if-then" contracts: if a loss occurs, then the insurance company will pay benefits.

Unilateral Contract

Insurance contracts are said to be unilateral because they are one-sided. "Uni" means one, and "lateral" means side. Only the insurance company makes legally enforceable promises to pay benefits in the event of a covered loss. The applicant does not make any legally enforceable promises to the insurance company, not even the payment of premiums. However, if the applicant fails to pay premiums, the insurance company has the right to cancel the contract.

Rescission

Insurance contracts may be voided if one or more parties to the contract commit a material misrepresentation or concealment.

Competent Parties

This means that all parties must be of a legal age, mentally capable of understanding the terms of the contract, and not influenced by drugs or alcohol. The insurer must be legally authorized to sell insurance in the state, and the agent, if any, must also be licensed in that state. Note: Beneficiaries and insureds, if a person(s) other than the applicant, are not parties to the contract.

Janice applies for a life insurance policy. She submits the application with the initial premium for $100,000 whole life. The agent returns the policy with a higher premium and hazardous occupation exclusion. What has the insurer made? Select one:

a. Agreement b. Offer c. Invitation to offer (d.) Counter-offer

Which legal interpretation is represented by the following: roadside assistance is provided in an automobile policy, so it is reasonable for the insured to expect that the insurer will cover the cost of changing a flat tire? Select one:

a. Ambiguities in a contract of adhesion (b.) Reasonable expectations c. Utmost good faith d. Indemnity

A health insurance contract may be any of the following types of contracts, EXCEPT: Select one:

a. An indemnity Contract b. A reimbursement contract (c.) A valued contract d. Limited benefit contract

Timothy is trying to understand the difference between a warranty and a representation. He is concerned that he might inadvertently give a false statement on his insurance application. A representation is: Select one:

a. Any statement made on the application is absolutely true without any deviation (b.) Any statement made is true to the best of the applicant's recollection, but facts may not be exact c. An insurance company guarantees that all benefits will be paid promptly d. An insurance company will refund all premiums if the policyholder is not satisfied.

Benefits under a life insurance policy are provided through which of the following methods? Select one:

a. Cash payment b. Valued (c.) Both of the above d. Neither of the above

The __________ section of the contract states what the insurer will not do. This includes the risks that the insurer will not cover. Select one:

a. Conditions b. Policy face c. Insuring clause (d.) Exclusions

LMO Insurer is incorporated in New Hampshire, conducts business in all of the Eastern Seaboard states and in Germany. How is LMO Insurer classified in New York? Select one:

a. Excess and surplus lines b. Alien (c.) Foreign d. Domestic

Judy purchases a life insurance policy for her brother, James. The insurance agent, Jacob, uses Judy's premiums to pay his credit card bill. Who has committed fraud? Select one:

a. Judy b. James (c.) Jacob d. Jacob and James

The insurer does not include the suicide exclusion on Bob's policy. Bob commits suicide three months later, and the insurer refuses to pay the death benefit. Which of the following terms describes the insurer's inability to reclaim a waived right, and consequently the insurer's duty to pay the death benefit? Select one:

a. Parol evidence rule b. Recission c. Waiver (d.) Estoppel

Which of the following is not a primary component of an insurance contract? Select one:

a. Policy exclusions b. Policy face c. Policy conditions (d.) Aleatory contrac

Insurance contracts sometimes contain ambiguities. Which of the following has not been taken to court for further interpretation? Select one:

a. Reasonable expectations b. Ambiguities in a contract of adhesion c. Utmost good faith (d.) Subrogation

Which of the following terms is best defined as voluntarily surrendering a known right? Select one:

a. Recission b. Subrogation c. Concealment (d.) Waiver

Another term that means to void an insurance policy is: Select one:

a. Subrogation b. Waiver and estoppel (c.) Recission d. Parol evidence rule

All of the following statements are true regarding subrogation, EXCEPT: Select one:

a. Subrogation is the right of the insurer to assume the rights of the insured. (b.) Subrogation applies primarily to life and health insurance, and seldom to property and casualty insurance. c. Subrogation is the right of the insurer to sue the responsible third party for damages inflicted upon the insured. d. Subrogation allows the insurer to sue for damages of negligence.

Maria buys a life insurance policy for her husband, Fred. Of the following, which correctly describes the party legally bound to fulfill the policy's promise of paying benefits? Select one:

a. The insured (b.) The insurer c. The insurer and Maria d. The insurer and Fred

What is the consequence for an applicant who makes an unintentional misrepresentation on a life insurance policy? Select one:

a. The insurer will pay the entire death benefit. b. The insurer will void the policy. (c.) The insurer will pay the death benefit as long as the misrepresentation is not material to the risk. d. The insurer will pay one-half the death benefit.

John purchases a life insurance policy for his wife Jean. Which of the following best describes who is legally bound to the policy's promise of benefits? Select one:

a. The insurer, John and Jean b. The insurer and John c. The insurer and Jean (d.) The insurer

Insurance policies are based on: Select one:

a. Tort law (b.) Contract law c. Negligence law d. Legal liability law

Valued policies

apply to life insurance and disability income policies. Valued means the insurance contract pays a stated amount. The insured is paid a fixed periodic income while disabled. The periodic income is always less than the insured's income earnings to prevent profiting from loss. In life insurance, a stated amount (the death benefit) is payable upon the insured's death.

Misrepresentations (Lie)

are intentional misstatements made by the insured. Misrepresentations must be intentional and material to the risk in order for the insurer to void the contract. Misrepresentation occurs when an insured lies on a health insurance application by stating that they do not have a medical history of headaches, when in fact, they do.

Representations (Believes True)

are statements made by the insured, to the best of their knowledge. The insured's statements made in the application are held to the principle of representations because they are not guaranteed to be true. As long as the insured's statements are made in good faith, any statements the insurer deems misrepresentations must be shown to be material to the risk in order to void the policy.

Warranties

are statements that are guaranteed to be true and are part of the legal contract. Insurers are held to the principle of warranties. Breach of warranty is grounds for voiding an insurance contract.

Conditions of the policy

are the rights and responsibilities of all parties of the contract. All policy provisions are listed in the conditions section.

Aleatory contracts

are those in which there is an unequal exchange of value. Insurance contracts are aleatory contracts because payment of benefits is contingent upon the occurrence of an uncertain loss. One party has the potential to receive more benefit than the other. An example of this is the payout of a life insurance policy for a young healthy person who unexpectedly dies prematurely.

Cash payment

benefits are based on cash payment of the face amount stipulated in the policy.

Tort law

deals with legal liability for civil wrongs such as negligence. The purpose of an insurance policy is to indemnify (make whole) the insured when a covered loss occurs. In life insurance the insurance company agrees to pay a predetermined amount - the face amount, in exchange for consideration (premium).

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. An agreement must have both an offer and an acceptance.

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. Impersonation falls under the definition of fraud. Whether a person has committed fraud is a question to be determined by a court of law. The court will look at all the factors involved, including whether the concealed statement or misrepresentation was intentional or was material.

Indemnity Insurance

is defined as insurance that compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. The term indemnity means, "to make whole."

Waiver

is surrendering a known right. Waiver occurs intentionally and voluntarily.

Utmost good faith

is the expectation that all parties to the contract have acted in good faith, do not commit fraud, conceal or misrepresent facts. All relevant information must be exchanged between parties.

Insurable Interest

is the foremost doctrine for establishing a legal insurance contract. Insurable interest 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. The continued livelihood of the insured must have significant value over the insured's illness or death.

Insuring clause

is the insurer's promise to pay covered losses as long as the insured pays premiums and abides by the terms and conditions of the policy. The insuring clause is usually included on the policy face.

Estoppel

is the legal process of preventing one party from reclaiming a right that was waived. For example, an insurer that waives the right to exclude death caused by involvement in war cannot later go back and reaffirm the right. The insurer is said to be estopped from reasserting the waived right.

Subrogation

is the right of the insurer to assume the rights of the insured and sue the responsible third party for damages inflicted upon the insured. Subrogation primarily applies to property and casualty, and seldom to life and health insurance.

Concealment

is withholding information material to the risk. Insurers may void policies if the concealment is intentional and material to the risk.

Parol evidence rule

prevents parties to a contract from changing the meaning of a written contract by introducing oral or written statements made prior to the formation of the contract that are not part of the contract. Statements made after the formation of the contract, with the effect of modifying the contract, are not subject to the parol evidence rule.

Exclusions section of the contract

states what the insurer will not do. This includes the risks that the insurer will not cover.