4. general insurance-general insurance principles-insurance contracts
Under an indemnity contract, when a covered loss occurs, the benefit payable is related to the amount of the loss. The benefit cannot exceed the lesser of:
the value of the loss or the maximum benefit limit specified in the policy
Which of the following correctly identifies three elements that must be present to create an enforceable contract? consideration, offer, and written documentation offer, written documentation, and acceptance written document, acceptance, and consideration acceptance, consideration, and offer
acceptance, consideration, and offer
A legal doctrine restraining a party from contradicting its own previous actions if those actions have been reasonably relied on by another party. For example an insured that has repeatedly excepted late premium payments from an insured may be _____ from later canceling the policy on the basis of nonpayment because the insured has been reasonably led to believe that late payments are acceptable
estoppel/estopped
In a standard insurance sales transaction involving an applicant, a producer, and an insurance company, which party is the offeree? producer applicant insurer beneficiary
insurer In the typical insurance transaction, the applicant (offeror) makes the offer to the insurance company (offeree) through a signed application plus a premium deposit.
If an insurance applicant submits an application to an insurer without a premium payment, the applicant has: invited the insurer to make an offer to the applicant made an offer to the insurer made a counteroffer to the insurer formally requested a proposal from the insurer When an applicant submits an application without the first premium, the applicant is inviting the insurer to make an offer.
invited the insurer to make an offer to the applicant When an applicant submits an application without the first premium, the applicant is inviting the insurer to make an offer.
Melanie becomes intoxicated at a party and then Pierre persuades her to sell her car to him for $25. Pierre puts the terms in writing and both of them sign the document. The next day, Pierre goes to Melanie's house with the money and demands that she deliver the car to him. The agreement he made with her is: unenforceable because one of the parties was incompetent enforceable because it was signed by both parties unenforceable because it was made for an illegal purpose enforceable because it was in writing To be enforceable, a contract must be made for a legal purpose between competent parties. Since Melanie was intoxicated when she signed the contract, she did not have the capacity to understand the significance of her actions: she was incompetent.
unenforceable because one of the parties was incompetent To be enforceable, a contract must be made for a legal purpose between competent parties. Since Melanie was intoxicated when she signed the contract, she did not have the capacity to understand the significance of her actions: she was incompetent.
uberrimae fidae means:
utmost good faith
Insurance can only work when the parties to the contract are completely honest with each other. That's why insurance contracts are what kind of contracts? adhesion concealment indemnity utmost good faith
utmost good faith Insurance contracts are considered contracts of the utmost good faith because the insured relies on the insurer to fulfill its promises, and the insurer relies on information provided by the insured.
The surrender of a right or privilege
waiver
Upon receipt of an application (offer), the insurer (offeree) has what three options?
1. accept the offer by issuing the policy as applied for 2. reject the offer by declining coverage, or 3. counteroffer by offering the applicant a sub-standard policy (with either a higher premium or reduced coverage) *In the case of a counteroffer it would be up to the applicant to accept or decline the counteroffer.
explain aleatory contracts.
As aleatory contracts, insurance policies may provide huge benefit payments in proportion to the premiums received. aleatory contracts that involve an exchange of potentially unequal values In an insurance contract, a policyholder may receive a benefit that is entirely out of proportion to the consideration (premium) given. So for an aleatory contract to make sense, the possibility of receiving the disproportionately large benefit must depend on the occurrence of a CHANCE event. It is the uncertainty of loss that permits the insurer to support an aleatory contract.
the act of declaring that an insurance policy was never in effect. An insurance company that rescinds a policy states that it provides no coverage for a claim. Rescission usually occurs when the insurance applicant knew of a potential claim and intentionally concealed it from the insurer, or when the application for coverage or an important document attached to it contains information that is materially false, so that if the insurer knew the truth, the insurer would not agree to insure the risk.
Rescission An insurance company that rescinds a policy states that it provides no coverage for a claim. Rescission usually occurs when the insurance applicant knew of a potential claim and intentionally concealed it from the insurer, or when the application for coverage or an important document attached to it contains information that is materially false, so that if the insurer knew the truth, the insurer would not agree to insure the risk.
An insurance company declines an application for insurance as applied for and instead proposes to issue a rated policy with a higher premium. What is that rated policy legally called? an offer a proposal a counterproposal a counteroffer
a counteroffer An insurer's offer to issue a policy that is different from what the applicant applied for constitutes a counteroffer.
When completing an insurance application, Dusty intentionally lied about his age in order to obtain a lower rate. What is Dusty's lie technically considered? estoppel concealment a waiver a misrepresentation
a misrepresentation A false statement of a material fact is a misrepresentation.
For an insurance offer to be complete, an application must be accompanied by a what?
a premium deposit *note: If an applicant submits an application without the first premium, the applicant is inviting the insurer to make an offer. If the insurer issues a policy, it then becomes the applicant's responsibility to accept the offer by paying the first premium. Or, the applicant may reject the offer (and the policy).
Zenith Insurance Company issues a policy to Best Manufacturing Company. A dispute arises between Zenith and Best on the meaning of an ambiguous clause in their contract. The matter goes to court, which can be expected to interpret the clause in a manner that: favors Best Manufacturing favors the public favors Zenith Insurance favors both parties equally
favors Best Manufacturing In most cases, the insurer writes the insurance contract. Policyholders have little or no opportunity to influence the terms of the policy. Therefore, courts generally interpret any ambiguities in a manner that favors the policyholder.
Randall and Russell make a contract to rob a tourist. They agree that Randall will lead the tourist near a dark alley where Russell will take her purse. They promise to share any money and jewelry they acquire. This agreement is not a valid contract because: it has an illegal purpose it is not in writing it did not include an offer it involves more than one person
it has an illegal purpose A valid contract must have a legal purpose.
To be considered legally competent, a person must be:
mentally sound not under the influence of drugs or alcohol of legal age
Although the policyholder must pay premiums to keep an insurance policy in force, the policy is considered a unilateral policy because: both the policyholder and the insurer make enforceable promises only the insurer makes an enforceable promise neither the policyholder nor the insurer makes an enforceable promise the policyholder is making an enforceable promise
only the insurer makes an enforceable promise Insurance contracts are unilateral contracts in which only one party-the insurer-makes a promise that can be enforced. Although the policyholder agrees to pay the premium, the policyholder is not obligated to do so. Of course, if he or she stops paying the premium, the insurer will cancel the policy.
Stephanie keeps valuable hobby supplies in a self-storage warehouse. The policy was just renewed, and the new policy imposed new limits for property in a self-storage facility, which Stephanie's agent did not point out to her. If a fire destroys the warehouse, Stephanie might be able to collect in full under what doctrine? reasonable expectations misrepresentation adhesion unilateral change
reasonable expectations Courts sometimes agree to apply the reasonable expectations doctrine to provide protection an insured might reasonably expect in a case where the insured was uninformed that coverage had changed when a policy was renewed.
In the typical insurance transaction, between the applicant and insurance company, who is "offeror" and who is "offeree"
the applicant is the offeror the insurance company is the offeree In the typical insurance transaction, the applicant (offeror) makes the offer to the insurance company (offeree)
Because the agreement between these two parties is personal, a property and casualty insurance policy cannot be transferred to a third party without whose consent?
the insurer's consent.
Insurance contracts are: bilateral unilateral
unilateral
Which of the following is an example of misrepresentation on an insurance application? Karen is not asked, and does not mention, that she was found guilty of insurance fraud 15 years ago. Joe answers "no" to a question asking if any member of his household has had a moving violation ticket in the past two years, not knowing his wife actually received a speeding citation a year ago. Bill answers "no" to a question asking if he has ever declared bankruptcy, knowing that eight years ago he filed for bankruptcy protection. Carol answers "yes" to the question asking if her home has a carbon monoxide detector when it doesn't, because she believes the smoke detectors serve that purpose.
Bill answers "no" to a question asking if he has ever declared bankruptcy, knowing that eight years ago he filed for bankruptcy protection. A misrepresentation is a false statement of a material fact, while concealment is the deliberate withholding of material facts. Intentionally giving a wrong answer to a question is a misrepresentation; simply not mentioning something relevant is concealment.
When Devon sells his boat to Pat, he offers to include not only the boat trailer but also his boatowners insurance policy. If Pat accepts the offer and subsequently submits a claim to the insurer, the insurer will deny the claim because: a property insurance policy is a unilateral contract a property insurance policy is a contract of adhesion a property insurance policy is an aleatory contract a property insurance policy is a personal contract
a property insurance policy is a personal contract Property and casualty policies are personal contracts between the insurer and the policyowner. They cannot be transferred to another party without the insurer's consent.
Hazel's store has an automatic sprinkler system that will be activated by a fire. In exchange for a reduced fire insurance premium, she signs a document stating that the automatic sprinkler system will always be in operating condition. What is this statement? a representation a guaranty a waiver a warranty
a warranty A warranty, which is stronger than a representation, guarantees that something is true and will remain true.
With insurance contracts: the insurance company's promise to pay benefits as specified in the contract is its what? the applicant's initial premium payment is his or her what?
consideration
With respect to requirements for a valid contract, a policyowner's payment of the policy premium is called a(n): acceptance offer counteroffer consideration
consideration Consideration means something of value that both parties to a contract exchange. With an insurance contract, the applicant's premium payment is the applicant's consideration.
The fact that insurance policy language is written by an insurance company and is nonnegotiable makes insurance policies: contracts of adhesion aleatory contracts unilateral contracts conditional contracts
contracts of adhesion Most insurance contracts are contracts of adhesion because the policy is drafted by the insurer and little if any negotiation is normally available with respect to the policy's wording.
Esther, an underwriter for QRS Insurance Company, is not able to provide the coverage requested in Benny's insurance application. Esther can reject the application, or she can: shred it for security reasons offer additional consideration make a counteroffer ask for a deposit premium An insurer's offer to issue a policy that is different from what the applicant applied for constitutes a counteroffer.
make a counteroffer An insurer's offer to issue a policy that is different from what the applicant applied for constitutes a counteroffer.
An insurance contract is conditional, which means the insurer's promise to pay benefits is conditional on specified events occurring, including:
making premium payments when due reporting losses promptly cooperating with the insurer in settling any loss
ambiguities in an insurance contract must be interpreted in which party's favor?
policyholder's
An enforceable contract must involve consideration by both parties. When an insurance company enters into a contract, what is the insurance company's consideration? an agreement to refund any unearned premium if the policy is canceled a promise to pay for losses as stipulated in the insurance contract legal status as a licensed insurer in the state where the transaction occurs a written insurance policy signed by the agent who sold it
a promise to pay for losses as stipulated in the insurance contract
Luke pays a $300 premium for a personal umbrella policy in which the insurance company promises to pay up to $1 million dollars for a liability claim against Luke. This mismatch between the size of the premium and the potential size of the insurer's obligations results because insurance policies are: unilateral contracts conditional contracts aleatory contracts personal contracts
aleatory contracts Aleatory contracts involve an exchange of unequal amounts, and in an insurance contract, one party may receive a benefit that is entirely out of proportion to the consideration (premium) he or she is giving.
The property insurance policy with a $500,000 limit that covers Logan's store is a contract of indemnity. If Logan's store is partially damaged by a covered peril, what is Logan's insurer obligated to pay? the full $500,000 whatever amount is awarded by the court as damages nothing, because it is only a partial loss an amount that is related to the value of the loss, not to exceed $500,000 When a covered loss occurs under a contract of indemnity, the benefit payable is related to the amount of the loss.
an amount that is related to the value of the loss, not to exceed $500,000 When a covered loss occurs under a contract of indemnity, the benefit payable is related to the amount of the loss.
In a standard insurance sales transaction involving an applicant, a producer, and an insurance company, which party is the offeror? producer applicant insurer beneficiary
applicant In the typical insurance transaction, the applicant (offeror) makes the offer to the insurance company (offeree) through a signed application plus a premium deposit.
Curt, age 40, has purchased a property insurance policy to cover an international shipment of firearms. The shipment is accidentally destroyed in transit, and during its investigation the insurer learns that the firearms were stolen. Which of the following correctly explains why the insurer would refuse to cover the loss? The contract is unenforceable because there was no offer and acceptance. The contract is unenforceable because the parties did not exchange any consideration. The contract is unenforceable because the policyowner is not legally competent. The contract is unenforceable because it served an illegal purpose.
The contract is unenforceable because it served an illegal purpose. Dealing in stolen merchandize is illegal; therefore, the insurance contract is unenforceable because it was purchased to serve an illegal purpose.
Which of the following correctly explains why insurance policies are contracts of adhesion? The premium is usually greater than the loss exposure. The loss exposure is usually greater than the premium. The insurance company determines the wording of the policy. Federal insurance regulators determine the wording of the policy.
The insurance company determines the wording of the policy. With an insurance contract, the insurer invariably determines the policy's wording, and the insurance buyer who wants that policy has to "adhere," or stick, to the policy's written provisions.
Rhonda's parents bought her a car for her sixteenth birthday and made her responsible for maintaining and insuring it. However, when Rhonda applied for auto insurance after getting her driver's license, she was told that she could not enter into a binding insurance contract because, according to the law in her state, a 16-year-old does not qualify as a(n): offeree offeror designated driver competent party
competent party Generally, minors are not considered competent to enter into a contract. However, some states (apparently not Rhonda's) permit minors over a certain age to enter into a binding contract for auto insurance.
When applying for a businessowners insurance policy, Brandy did not mention the hazardous and illegal activity that goes on in the backroom of her shop because she realized no insurer that knew about it would insure her business. What is Brandy's failure to disclose this activity considered? a waiver concealment misrepresentation estoppel
concealment The deliberate withholding of material facts is concealment.
While it provides considerable coverage, a property and casualty insurance policy will not pay benefits unless specific actions defined in the policy are taken by the policyholder when submitting a claim, due to the fact that the policy is a(n): contract of adhesion unilateral contract conditional contract aleatory contract
conditional contract An insurance policy is a conditional contract because its force and effect-and often its continuation-depend on certain actions of the policyholder that are expressed in the policy's conditions.
In her insurance policy, Tracy discovers a number of provisions that she thinks should be worded more clearly and asks her insurance agent to change them. The agent explains that changes to the wording are not generally permitted because the insurance policy is a(n): personal contract contract of adhesion conditional contract aleatory contract
contract of adhesion Most insurance contracts are contracts of adhesion because the policy is drafted by the insurer and little if any negotiation is normally available with respect to the policy's wording.
With an insurance contract, however, the insurer determines the contract's terms. It is a take-it-or-leave-it proposition. This is an example of a what?
contract of adhesion.
If the courts find an ambiguity in an insurance policy, they will interpret it in the policyholder's favor because insurance policies are: indemnity contracts personal contracts contracts of adhesion aleatory contracts
contracts of adhesion Insurance contracts are contracts of adhesion, and if the courts find that a contract of adhesion is ambiguous, they will interpret it in favor of the party that did not write the contract.
Because the wording of a typical insurance policy is drafted by an insurance company and offered to insurance buyers on a take-it-or-leave-it basis, insurance policies are considered: aleatory contracts conditional contracts contracts of adhesion unilateral contracts
contracts of adhesion Most insurance contracts are contracts of adhesion because the policy is drafted by the insurer and little if any negotiation is normally available with respect to the policy's wording.
The fact that insurance policy language is written by an insurance company and is nonnegotiable makes insurance policies: aleatory contracts unilateral contracts contracts of adhesion conditional contracts
contracts of adhesion Most insurance contracts are contracts of adhesion because the policy is drafted by the insurer and little if any negotiation is normally available with respect to the policy's wording.
Like all contracts, insurance policies have unique attributes that define their character. Insurance contracts are:
contracts of adhesion unilateral conditional aleatory personal *C, U Cap
Esther, an underwriter for QRS Insurance Company, is not able to provide the coverage requested in Benny's insurance application. Esther can reject the application, or she can: shred it for security reasons offer additional consideration make a counteroffer ask for a deposit premium
make a counteroffer An insurer's offer to issue a policy that is different from what the applicant applied for constitutes a counteroffer.
The typical property and casualty insurance policy contains a provision expressly prohibiting the policyholder from assigning policy ownership to another party without the insurer's written consent because the policy is a(n): unilateral contract personal contract contract of adhesion aleatory contract
personal contract Because the property and casualty insurance policy is a personal contract, it cannot be transferred to a third party without the insurer's consent.
Tom's insurance company wanted to deny Tom's claim based on an exclusion in Tom's policy, but Tom and his lawyer convinced the court that the exclusion was ambiguous and did not clearly apply to Tom's case. Because the policy is a contract of adhesion, what will the court do? rule in Tom's favor rule in the insurer's favor use the appraisal process to settle the claim use the arbitration process to settle the claim
rule in Tom's favor If the courts find that a contract of adhesion is ambiguous, they will interpret it in favor of the party that did not write the contract. As the insurer wrote the contract, this means courts will rule against the insurer where the wording is deemed ambiguous.
Olen buys insurance on the inventory in his warehouse, which includes a sizable quantity of watches bearing the "Rolex" label, and Olen pays the insurance premium. After Olen reports a theft, the insurer's investigation reveals that the watches it had agreed to insure were illegal counterfeits. Olen's contract with the insurer is: enforceable because the elements of offer, acceptance, and consideration were present unenforceable because it was for an illegal purpose enforceable if it has been in force for more than 60 days unenforceable because Olen is not a competent party
unenforceable because it was for an illegal purpose For a contracting party to be able to enforce the terms of the contract, the contract must be for a legal purpose, and counterfeit merchandise is illegal.
An insurer that has a history of accepting premiums up to five days beyond their due date cannot deny a claim for a loss occurring the day after a premium was due for which of the following reasons? fraud indemnity waiver and estoppel concealment
waiver and estoppel Estoppel exists when a party cannot enforce a right that it has voluntarily waived by its past conduct-in this case, repeatedly accepting a late premium with no coverage lapse.
Which of the following is NOT a necessary element of a contract? acceptance of an offer offer consideration written terms
written terms The essential elements of a contract are an offer, acceptance of that offer, and an exchange of consideration (something of value to the parties). Although some types of contracts must be in writing, a contract may be formed on the basis of a verbal promise and in some cases, by the actions of the parties.
