CHAPTER 1 Contract Law, Producers, and Types of Insurance

Contract Law

According to the law of contracts, elements MUST BE PRESENT in order for any contract to be legal and enforceable in a court of law include: 1. AGREEMENT 2. CONSIDERATION 3. COMPETENT PARTIES 4. LEGAL PURPOSE

Example of Concealment & Fraud

Assume that an insured possesses a combustible piece of machinery, a wood burning stove or utilizes guard dogs on his commercial property at night. In all of theses situations the RISK OR EXPOSURE IS INCREASED. The policy requires that the insurer be notified of this increased exposure and conceals this information from the insurer because he knows that the premium will increase. Even though no specific question was asked on the application concerning these exposures, the insured has concealed them from the insurer. Later a file loss occurs and in its investigation the insurer discovers the concealment. It may deny the claim and void the policy. The insured should have known (and probably did) that this information involved material facts, and intentionally withheld them, which could affect not only the risk, but the premium as well.

Declarations

The dec page "PERSONALIZES" the policy and provides an assortment of information regarding the property or exposures being insured. Much of the information and facts appearing in the declarations section are derived from the insurance application & include but are not limited to: 1. Name and address of the NAMED INSURED 2. A description of the TYPE OF PROPERTY to be insured. 3. The LOCATION OF THE PROPERTY 4. The COVERAGE LIMIT PROVIDED (COVERAGE AMOINT OR LIMIT OF LIABILITY) 5. The AMOUNT OF THE ANNUAL PREMIUM 6. A DEDUCTIBLE, if any 7. THE POLICY PERIOD (12:01 am ON THE INCEPTION TO EXPIRATION DATE) 8. The name of the MORTGAGEE, if any 9. A POLICY NUMBER 10. A COMPANY OFFICER NAME, SIGNATURE OR STAMP

Legal Capacity

The parties (applicant and insurer) arriving at an agreement must posses the legal capacity to enter into that contract. A competent person possesses such capacity. Most people (and insurers) are considered competent to enter into a contract with some exceptions including but not limited to: 1. Anyone considered a MINOR under the age of majority. (However, minors who enter into agreements for food, clothing, shelter and other necessities do possess legal capacity. 2. Legally INSANE PERSONS 3. Individuals UNDER THE INFLUENCE of any type of drug or alcoholic beverage at the time of application. 4. Persons COERCED OR FORCED to enter a contract under duress. 5. Enemy aliens 6. Convicts (based on state law)

Estoppel

The principle of estoppel may also be involved when an insurer attempts to deny a claim payment. It generally involves A FALSE STATEMENT MADE BY ONE PARTY WHICH IS RELIED ON BY ANOTHER PARTY. LATER, the party making the statement prefers not to abide by it. In other words, the first party breaks his or her promise. Example: Mr Williams applies for commercial property insurance with rsc mutual. The policy is issued with a special cause of loss form and during delivery Mr Williams notifies his producer that he must installed a small steam boiler in the basement of his 2 story building. The producer states that this is covered and completes delivery. Eight months later a steam boiler explosion occurs causing damage to the property and Mr Williams files a claim. The insurer denies the claim since damage caused by a steam boiler is excluded under the special cause of loss form. Three characteristics of ESTOPPEL are present in this case: 1. THERE WAS A FALSE STATEMENT MADE BY THE PRODUCER WHO SAID THE STEAM BOILER WAS COVERED 2. MR WILLIAMS REASONABLY RELIED ON THE PRODUCERS STATEMENT THAT THERE WAS COVERAGE FOR THE STEAM BOILER 3. FINANCIAL HARDSHIP OR DAMAGE WILL OCCUR TO MR WILLIAMS IF THE CLAIM IS DENIED. SINCE THESE THREE REQUISITES ARE PRESENT, THE INSURER WOULD BE "STOPPED" or "ESTOPPED" from denying the claim.

Sections of an Insurance Contract D.I.C.E.

The structure of a property and casualty insurance policy consists of four basic sections of coverage including: 1. DECLARATIONS 2. INSURING AGREEMENT 3. CONDITIONS 4. EXCLUSIONS Acronym- DICE

Waiver Aka: The intentional abandonment or voluntary relinquishment of a known right as found in the policy

The concept of waiver is related to doctrines of concealment and misrepresentations. Insurance companies possess the right to deny coverage or w claim in certain instances. The concept of waiver helps an insured prevent such denial if the insurer has made a waiver. Example: assume John applied for an auto policy and states on the application that no other person will be driving the car, when in fact Johns live-in girlfriend uses it to drive to work every day. To compound matters, johns girlfriend does not possess a valid drivers licensed since she has been convicted twice of a DUI. IF THE AGENT TAKING THE APPLICATION KNOWS THE ENTIRE STORY AND STILL SUBMITS THE APPLICATION TO THE INSURER, THE KNOWLEDGE POSSESSED BY THE AGENT IS. PRESUMED TO BE KNOWLEDGE POSSESSED BY THE INSURER.... Therefore, the agent has preformed a WAIVER. He or she has knowingly and voluntarily WAIVED THE INSURERS RIGHT TO DENY COVERAGE for this concealment in part of the application. The lrincple of waiver, as related in BLACK'S LAW DICTIONARY, is the "intentional abandonment or voluntary relinquishment of a known right as found in the policy" or the voluntary relinquish of a known right. Example: when an insurer mistakingly ISSUES A POLICY BASED UPON AN INCOMPLETE APPLICATION. It has given up the right to deny a legitimate claim it it makes such a mistake. A waiver can also occur if an insurer FAILS TO ENFORCE s provision on the policy. If an insurer neglects to cancel a policy after an insured fails to pay the required premium, it had engaged in a "WAIVER BY SILENCE"

Agreement Aka: Offer & acceptance

A valid offer and unconditional acceptance must be present in order for a contract to be enforceable. In an insurance contract the offer is generally made by the applicant for insurance. The insurer either accepts or declines (rejects) the offer based on its UW criteria. If accepts the offer=agreement (demonstrated by the insurer issuing or the producer delivering the policy) There must be genuine assent between the parties which means that neither party must be under duress nor any undue influence. If an applicant submits app without an initial premium, he/she is making an INVITATION. Offer is not complete unless the premium is included. If the insurer makes a COUNTEROFFER, the original offer made by the applicant has been rejected by the insurer. The original offer is off the table, no contract will exist unless the applicant accepts the insurers counteroffer.

Warranty Aka: Statement that is guaranteed to be absolutely true & a PROMISE MADE BY THE INSURED UPON WHICH COVERAGE IS BASED.

A warranty is a statement made by the applicant/insured that is TOTALLY AND UNEQUIVOCALLY TRUE. Such a representation is made part of the contract and then becomes a warranty- a PROMISE MADE BY THE INSURED UPON WHICH COVERAGE IS BASED. As stated in "BLACK'S LAW DICTIONARY", a warranty is a "STATEMENT THAT IS GUARANTEED TO BE ABSOLUTELY TRUE" ****The statements made by an applicant/insured which are recorded on the application are representations and NOT warranties.**** For example, due to several robberies at a small branch office of a bank, an insurer informs the bank that it will not provide crime coverage unless the bank installs a new alarm system and hires a guard who will always be on duty during banking hours. In order to receive coverage, the bank WARRANTIES (GUARANTEES IN WRITING) that it will comply. The bank now has made a promise that they claim is absolutely true. The warranty is physically made part of the policy. If the bank is robbed when the guard left the premises to buy lunch, the insurer could deny coverage because the warranty was breached.

Concealment (failure to disclose) & Fraud (to intentionally and deliberately deceive)

An applicant for insurance is also obligated to voluntarily disclose any other material fact concerning the exposure to be insured, even if the insurer and its agent do not ask questions regarding it. The FAILURE TO DISCLOSE material facts is considered to be CONCEALMENT. An insured may not withhold any material facts that he should realize the insurer would want to know. Concealment may be fraudulent IF IT IS INTENTIONAL. An insurer MAY VOID THE CONTRACT IF THE CONCEALMENT IS INTENTIONAL AND MATERIAL. FRAUD is committed when an individual intentionally or DELIBERATELY deceives another such as an individual who filed a fraudulent claim.

Aleatory Aka: Coverage in return for a small fee

An insurance contract is an aleatory contract since one party may recover more in value than he or she has parted with based upon possible future event (death) The potential value (claim payment) received by the insured is generally greater than the value (premiums) received by the insurer. An insurance policy is considered to be aleatory in nature since the insurer promises to pay funds if a covered loss results. Performance is based upon an uncertain future event involving unequal bargaining value. An aleatory contract is one characterized by an UNEQUAL PAYMENT OR CONSIDERATION. This aleatory feature of an insurance contract involves a policy owner obtaining a lot of COVERAGE IN RETURN FOR A SMALL FEE.

Utmost Good Faith continued

An insurance contract may also be described as a contract of utmost good faith. Trust by both parties is important when finalizing the agreement. The applicant for insurance must provide to the insurer, full and fair disclosure of the exposure being insured. In other words, the risk or exposure that the insurance company is assuming must be the exact risk or exposure that the insured is transferring. Therefore, the insured should make truthful statements on the application and refrain from concealing any important information from the insurer. Additional principles regarding utmost good faith of applicant/insured for insurance coverage include but are not limited to: 1. Representations 2. Misrepresentations -Material Misrepresentations 3. Warranty 4. Concealment and Fraud 5. Waiver 6. Estoppel

Adhesion

An insurance policy is a contract of adhesion. Drafted by the insurer and accepted by the applicant. The insurer "draws up" all the contract language and the applicant (if desires coverage) must act accordingly to the language of the agreement. The applicant has the option of purchasing it or not purchasing it. Since the insurer drafts the language of the contact, any language that is CONFUSING, UNCLEAR OR AMBIGUOUS that later becomes apparent may be decided by a court in favor of the person who did not draft the language (the insured) The possibilities of AMBIGUITIES arising in a contract of adhesion involve legal interpretations affecting contracts. Example: a common legal interpretation of this situation entails the doctrine of REASONABLE EXPECTATIONS. According to this doctrine, a court of law will generally state that an insurance contract may be interpreted by a "reasonable" consumer to mean what the producer or insurer has indicated it means or what he or she has interpreted or expected it to mean.

Personal Contract

An insurance policy is a legal contracy between two parties. Theses parties generally include the insurer and the policyowner. The policyowner is also the insured in property and liability insurance. A property and liability policy is a PERSONAL CONTRACT owned by the policyowner/insured party. Each party to the cotract promises to perform in a special manner.

Conditional

An insurance policy may also be described as a conditional contract since its function is conditional upon the performance of the parties arriving at an agreement. The insurers promise or performance (paying claims) is conditional upon the payment of premiums to keep coverage in force. Also "conditional" since it requires that both the insured and insurer satisfy SPECIFIC CONDITIONS IN ORDER TOR THE CONTRACT TO BE EXECUTED.

Consideration Aka: The binding force of the policy

For an agreement to be binding, both parties must provide each other with something of value. The exchange of values between parties makes the agreement binding. The applicants/insureds consideration is the premium paid & the representations (statements) he or she makes on the application. The insurers consideration is the promise to pay legitimate claims for coverage provided during the policy period. Sometimes a consideration is referred to as a BARGAINED-FOR EXCHANGE. The consideration is the BINDING FORCE of the policy. For coverage to remain in effect the consideration will be PERPETUAL.

Utmost Good Faith

Insurance agreements between a policy owner and an insurer. These parties must enter into the agreement in good faith. Each party must tell the truth. The insurer and the insured rely on the statements of one another. In other words, the INSURER RELIES ON THE STATEMENTS MADE BY THE INSURED & THE INSURED RELIES ON THE PROMISE MADE BY THE INSURER. If the insured intentionally conceals information that would influence whether or not coverage is provided, the insurer may possess grounds for voiding the contact since the insured has not acted in good faith.

Unilateral Aka: One-sided contract "act in exchange for a promise" "promise in exchange for an act already performed"

Insurance policy is a unilateral contract since its language is developed by one party= the insurer. An offer for a unilateral contract generally requires the performance of an act in order for the contract to be binding. The "promise" by the insurer to provide coverage and pay valid claims has been exchanged for an act already performed (the paying of the initial premium) This also means that it is a contract where ONLY ONE PARTY MUST PERFORM (the insurer makes the promise)

Material Misrepresentation Aka: A Lie

Involves an untrue statement that, had it been known by the insurer at the time of application, would have caused the insurer to reject the application. For instance, applicant to property insurance is asked on the application if he has suffered any property losses or filed any claims during the past five years. He answers no when in fact, he has filed and been paid for three claims in the past two years. This involves material misrepresentation. If the policy is issued and the insurer later learned of the material misrepresentation (the lie) the policy can be void. This means that in the insurers eyes there was never an agreement in existence. Insurers use this principle in varying degrees depending on their UW guidelines.

Representations Aka: Statements made by the applicant recorded on the application

These are statements made by an applicant for insurance that are recorded on the application. They are generally answers to specific questions on the application regarding the insured and the exposure (home, auto, etc) to be insured. A representation is a statement made by the applicant that is true. All statements recorded on an insurance application are (hopefully) true. Therefore, STATEMENTS MADE BY THE APPLICANT WHICH ARE RECORDED ON THE APPLICATION ARE REPRESENTATIONS, if true.

Misrepresentations Aka: Incorrect Statement, or False Fact

This is an INCORRECT STATEMENT made by an applicant. If an applicant incorrectly states his residence address on an application, this would be considered a misrepresentation- simply, A FALSE FACT. Misrepresentations generally do not affect coverage unless they are fraudulent in nature.

Legal Purpose

A contract must be created with the public interest in mind. Contractual arrangements may not be contrary to public policy and must be created in the best interest of the public. Therefore a contract to rob a bank is not valid nor is it in the best interest of the public.

Personal

A property and casualty contract is between an insurer and a named insured (person). Even though it provides protection for a home or a car, the agreement is with the company and a person.