Unit 2: Legal Concepts of Insurance Review

Unilateral Only one party (the ____) makes any kind of enforceable promise. Insurers promise to pay The insurer cannot require ______ but has the right to ______

insurer pay benefits upon the occurrence of a specific event, such as death or disability. the premiums to be paid;cancel the contract if premiums are not paid.

Gross negligence

involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm.

A "policy"

is a written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Personal Contract The owner (person) of the property _____, not ______. Life Insurance contracts are NOT

is insured; the property itself personal contracts.

Simple negligence

is the failure to act in a reasonable or prudent manner.

Parol Evidence Rule Parol evidence is The parol evidence rule states that when parties put their agreement in writing, ____

oral or verbal evidence or that which is given verbally in a court of law. all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Aleatory Contract

Insurance contracts - There is not an equal exchange of value. The premiums paid by the insured are small in relation to the amount that will be paid by the insurance company, in the event of a loss.

Reasonable expectations Reinforces the rule that ambiguities in insurance contracts should be It also states that an insured is entitled to coverage under a policy

interpreted in favor of the policyholder. that a sensible and prudent person would expect it to provide.

Insurance applicants are required to

make a full, fair, and honest disclosure of the risk to the agent and insurer.

Insurance contracts are aleatory. This means

means there is an element of chance and potential for unequal exchange of value or consideration for both parties.

Waiver To voluntarily Protects the consumer if If an insurer fails to enforce (waives) a provision of a contract, it cannot

relinquish or abandon a known right under an insurance contract. an insurer waives its rights under an insurance contract. later deny a claim based on a violation of that provision.

Warranty A statement made by the applicant Becomes part of the contract and, if found to be untrue ______ They are presumed to be _____ because they affect the insurer's decision to accept or reject an applicant. A warranty can be either ____ or _______, and may relate to the ____, the _______ or _______ or to any or all of these.

that is guaranteed to be true in every respect. can be grounds for revoking the contract. material express or implied; past, the present, the future

Subrogation Subrogation is the right for an insurer Subrogation is used to

to pursue a third party that caused an insurance loss to the insured. recover the amount of the claim paid to the insured for the loss

As it relates to insurance, a _____ is a statement made by the applicant that is guaranteed to be true in every respect.

warranty

What is legal purpose in an insurance contract?

A insurance contract must be legal and not against public policy. If an insurance contract has a insurable interest and the insured has provided written consent, it has a legal purpose.

Void versus Voidable Contracts Void contract is . Is missing . It cannot be enforced An insurer may void an insurance policy if a misrepresentation on the application is proven to be material. Voidable contract is Legally binding unless An insurance contract is voidable; the insurance company has the right to cancel if the policyowner The voluntary act of terminating an insurance contract is called

An agreement without legal effect. one of the elements specified by law for a valid contract by either party. a misrepresentation on the application is proven to be material. An agreement that, for a reason satisfactory to the court, may be set aside by one of the parties in the contract. the party with the right to reject it wishes to do so. stops paying the premiums. cancellation.

What is offer and acceptance in an insurance contract?

An offer is made when the applicant submits an application for insurance to the insurance company. The offer is accepted after it has been approved by the insurance company's underwriters.

A ______ is a statement made by the applicant that they consider to be true and accurate to the best of the applicant's belief.

Representation

There are several types of negligence

Simple negligence Gross negligence Willful and wanton

A ___ has the authority to seek insurance applicants for a company but does not have any authority to bind coverage on behalf of a company to a customer.

Solicitor

Representations

Statements believed to be true, to the best of one's knowledge, but they are not guaranteed to be true for insurance purposes. Representations are the answers the applicant for insurance gives to the questions on the insurance application. Untrue statements on the application are considered misrepresentations and could void the contract.

____ transactions are life insurance arrangements where investors persuade individuals (typically seniors) to take out new life insurance.

Stranger-Originated Life Insurance (STOLI)

Waiver

The act of voluntarily giving up a legal right, claim or privilege.

Apparent Authority

The appearance, or the assumption of authority given based on the actions or words of the principal. For example when an insurance company furnishes a agent with a rate book, applications, and sales literature, the insurance company cannot later deny that relationship.

Express Authority

The authority granted to the agent by the principle, which is the insurance company, as written in the agency contract.

Implied Authority

The authority not expressed or written into the agent's contract, but which the agent is assumed to have in order to transact the business of insurance for the principle. It comes from the express authority, since not every single detail of an agent's authority can be spelled out in the agents written contract.

When an offer is answered by a counter-offer

The first offer is void.

What are the 2 parties to an insurance contract?

The insured and the insurer.

Estoppel

The legal process used to prevent a party from reclaiming a right or privilege that was already waved. Estoppel is a legal consequence of the waiver

Aleagory: There is an element of chance and potential for The benefits provided by an insurance policy may or may not exceed the premiums paid. Both insurance and gambling contracts are typically

Unequal exchange of value or consideration for both parties. exceed the premiums paid. considered aleatory contracts.

The voluntary giving up of a legal, given right.

Waiver

A void contract

an agreement without legal effect

Insurable interest

can be defined as the kind of financial interest a person must have in order to possess legally enforceable insurance coverage.

Estoppel The loss of Protects an insured if the insurer or its producers

defense. make an error, and later the insurer attempts to deny a claim.

An indemnity contract

is one that pays an amount equal to the loss

What is Consideration in an insurance contract?

something of value that each party gives to the other. The consideration on the part of the insure is the payment of premium. The consideration on the part of the insurance company is a promise to pay in the event of loss.

Warranties

statements that are guaranteed to be true and are a part of the legal contract.

Rescission means

the contract is made null and void.

Aleatory means

there is a potential for unequal exchange of value or consideration for both parties.

The concept of _____is to provide full compensation for proved harm.

tort law

Concealment

A legal term for the intentional withholding of information which is crucial in making a decision. With insurance, concealment is a withhold of information by the applicant that results in an inaccurate underwriting decision and can void the policy.

What is an Insurance Contract?

A legally binding agreement between 2 or more parties, where a promise of benefits is exchanged for consideration.

Agent

A licensed insurance producer, whose been appointed to represent an insurance company.

the failure or neglect by the applicant to disclose a known material fact when applying for insurance.

Concealment

An insurance contract is ______ because the insurer's promise to pay benefits depend on the occurrence of an event covered by the contract

Conditional

The applicant gives ____ in exchange for the insurer's promise to pay benefits.

Consideration

Types of Agent Authorities (3)

Express Authority Implied Authority Apparent Authority

the authority a principal deliberately gives to its agent.

Express authority

indemnity contract: What kind of insurance?

Health insurance is an indemnity contract. It only pays the amount equal to the loss. With health insurance, you are allowed to make a profit

The unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the principal.

Implied authority

Personal Contract

Insurance contracts are personal contracts between an individual ad the insurance company, and cannot transfer ownership without the Insurance company's written consent.

Parol Evidence Role

Prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract.

An agent is a person who acts for another person or entity known as the ______ with regard to contractual arrangements with third parties.

Principle

A policy rider or endorsement

a legal attachment amending a policy.

Utmost Good Faith Both the policyowner and the insurer must know There can be no attempt by either party to Insurance applicants are required to make a

all material facts and relevant information. conceal, disguise, or deceive. full, fair, and honest disclosure of the risk to the agent and insurer.

voidable contract

an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties to the contract.

Contracts of insurance

are binding legal agreements and are enforceable by law.

A valued contract

pays a stated sum regardless of the actual loss incurred.

Most insurance is considered to be a ________ between the insurer and the insured.

personal contract or personal agreement

Regardless of the insurance type, the policyowner pays _______

premiums in exchange for the insurer's promise to pay covered claims.

A policy is

a written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Conditional Contract

Insurance contracts are conditional, because certain conditions must be met by all parties when a loss occurs, otherwise the contract would not be legally enforceable. If the policy owner is past due on his payments and the insurance dies. The insurance company does not have to pay for the death benefit because a condition was not met.

Legal Purpose: The object of the contract and the reason the parties enter into the agreement must be Insurance contracts are always considered to

Legal and in the publics best interest possess a legal purpose.

Valued Contract: What kind of insurance?

Life insurance is a values contract, which pays a stated amount, regardless of the actual loss incurred.

What are the 4 essential elements a contract needs in order to be legally binding?

Offer and Acceptance Consideration Legal Purpose Competent Parties

A legal contract MUST have:

Offer and Acceptance, Considerations, Competent Parties, and Legal purpose.

Competent Parties The insurer is considered competent if The applicant, unless proven otherwise, is presumed to be competent with three possible exceptions: Each state has its own laws governing the legality of minors and the mentally infirm entering into contracts of insurance. These laws are based on the principle that some parties

it has been licensed or authorized by the state(s) in which it conducts business. minors, the mentally infirm, and those under the influence of alcohol or narcotics. legality of minors and the mentally infirm entering into contracts of insurance. are not capable of understanding the contract.

Willful and wanton

negligence is considered even more severe.

For a contract to be legally valid and binding, it must contain

offer and acceptance, consideration, legal purpose, and competent parties.

For a contract to be legally valid and binding, it must contain certain elements

offer and acceptance, consideration, legal purpose, and competent parties.

The appearance or assumption of authority based on the actions, words, or deeds of the principal.

Apparent authority

The insurer is considered _____ if it has been licensed or authorized by the state in which it conducts business.

Competet

Any ambiguities or confusing language in a contract of adhesion

adhesion involve legal interpretations affecting contracts.

Unilateral Contract

A one sided agreement. Only one party, the insurance company, is legally bound to do anything. The policy owner is under no legally binding promise to pay premiums. However, the insurance company is legally bound to pay losses covered by the policy. NOTE: If the policy owner does not pay their premiums, the insurance company does have the right to terminate the insurance policy.

Insurance contracts are contracts of ____ because the contract has been prepared by one party (the insurance company) with no negotiation between the applicant and the insurer. Any ambiguities or confusing language in a contract of adhesion involve legal interpretations affecting contracts.

Adhesion

Agent's Authority

Agent's as a representative of the insurer, are given certain authority to perform acts on behalf of the insurance company. In the insurance business, an agent is always considered to be acting on the behalf of the insurance company, also referred to as the principle.

What are the special features of Insurance Contracts

Aleatory Contract, Adhesion Unilateral Personal Contract Conditional Contract

What is competent parties in an insurance contract?

All parties must be on legal competence; They must be of legal age, mentally capable of understanding the terms, and not under the influence of drugs or alcohol

adhesion contract

Also known as, "take it or leave it" agreements, because they're prepared by only one party, the insurance company. They are accepted or rejected by the other party, the applicant, with no negotiation or changes.

Valued or Indemnity Valued contract _____. Life insurance contracts are Indemnity contract ____ Accident, health, and property insurance policies are examples of

Pays a stated sum regardless of the actual loss incurred valued contracts. Pays an amount equal to the loss. Attempts to make the insured "whole again," return the insured to their original financial position. Should not make the insured better off than they were prior to the loss. indemnity contracts.

Insurable Interest

The most important aspect for establishing a legal insurance contract. To purchase insurance, the policy owner must face the possibility of losing money or something of value when a loss happens. This is called insurable Interest. In life insurance, insurable interest must exist between the policy owner and the person being insured at the time of application. Please note that insurable interest only needs to exist at the time of the original application but does not need to exist throughout the remaining of the policy.

Concealment The failure or neglect by the applicant to disclose If the purpose of concealing information is to defraud the insurer (that is, to obtain a policy that might not otherwise be issued if the information were revealed), the insurer may have Whether or not concealment is intentional or unintentional, the injured party has the right to Materiality means, The insurer must prove

a known material fact when applying for insurance. grounds for voiding the policy rescind the insurance contract (make the contract null and void). would the insurer have issued the exact same policy with the exact same terms had they have known the concealed facts at the time of application. concealment and materiality.

Offer and Acceptance: A contract (agreement) involves A definite, unqualified proposal (offer) by one party and The offer of an insurance contract is made by the applicant when The insurance company accepts the offer when When an offer is answered by a counter-offer,

a meeting of the minds. the acceptance of its exact terms by the other. the application is submitted with the initial premium. it issues the policy as applied for. the first offer is void.

Tort Law Provide full compensation Tort law involves the concept of _____ by awarding monetary damages as compensation. Most _____ fall under tort law. Lawsuits involving contracts fall under ___

for proved harm. "righting a wrong" done to a person and provide relief from the wrongful acts of others civil court claims contract law

Utmost Good Faith

implies that there'll be no fraud, misrepresentation or concealment, between the parties as it pertains to insurance policies. Both the insurance company and the policy owner must be able to rely on the other for relevant and accurate information. The policy owner is expected to provide accurate information on the application for insurance. The insurance company must clearly and truthfully describe policy features and benefits, and they must not conceal or mislead the insured.

A policy rider or endorsement

is a legal attachment amending a policy. Additional benefits or a reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider.

Insurance Agent Errors and Omissions Professional Liability Insurance (E&O) E&O Insurance is professional liability insurance for insurance agents. The insurer agrees to Offered in the following types: Typical losses covered for the producer under an E&O policy include: Common exclusions.

pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render. Life agents Accident and Health agents Property and Casualty agents Not providing insurance coverage when the agent was supposed to Creating an administrative error Premium calculation errors Misstating insurance coverage Not effecting a policy change requested by the customer Not explaining the policy provisions properly Incorrect identification of client loss exposures Forwarding inaccurate or incomplete information about a client to a carrier Failing to recommend coverage Not handling a claim properly Intentionally acts; Dishonest acts; Malicious acts; Libel; Slander; and The intentional violation of any law, regulation, statute, or ordinance

Adhesion A contract of adhesion has been The contract can only be modified by The applicant adheres to the terms of the contract on Any ambiguities or confusing language in a contract of adhesion involve

prepared by one party (the insurance company) with no negotiation between the applicant and the insurer. the insurance company. a "take it or leave it" basis when accepted. legal interpretations affecting contracts.

Conditional The insurer's promise to pay benefits depends on The insurer's obligations under the contract are conditioned on specific acts by the insured or the beneficiary.

the occurrence of an event covered by the contract. conditioned on specific acts by the insured or the beneficiary.

Consideration Consideration is The applicant gives the premium and completed application in exchange for It also contains information such as

the value given in exchange for the promises sought. the insurer's promise to pay benefits. The schedule and amount of premium payments

Representation A statement made by the applicant that they consider Are used by the insurer to evaluate Unlike warranties, representations are ________ contract and need to be true ______ Statements made by applicants for insurance are considered to be Cannot qualify an express provision in a contract of insurance, but it may qualify _______ A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk is considered a _______

to be true and accurate to the best of their belief. whether or not to issue a policy. not a part of the contract; only to the extent that they are material and related to the risk. representations and not warranties. an implied warranty. material misrepresentation.

Fraud Under most contracts, fraud can be a reason Under some types of insurance contracts, an insurer has only a limited period of time ___ After that period, the insurer cannot

to void a contract. (contestability period) to challenge the validity of a contract. contest the policy or deny benefits based on material misrepresentations, concealment, or fraud.

Insurance contracts are ______. This means that only one party (the insurer) makes any kind of enforceable promise.

unilateral

Insurance is a contract

utmost good faith

An insurance contract is either a

valued contract or an indemnity contract.

Agent as a Fiduciary A fiduciary is a person Agents act in a fiduciary capacity when

who holds a position of financial trust and confidence. they accept premiums on behalf of the insurer or offer advice that affects a person's financial security.