Insurance Providers

Representation and Misrepresentation

A representation is a statement made at the time the contract was formed. This statement persuades a party to enter into the contract. However, a representation does not become a part of the contract. That is, it is not guaranteed by the maker to be true. It is believed to be true to the best of the maker's knowledge.

Warranty

A warranty is stronger than a representation. A warranty guarantees that something is true and will remain true. For example, a jewelry store owner might warrant that a burglar alarm system will always be in operation. The insurer may deny paying a claim if the alarm system is not in operating condition when a burglary takes place.

Competent Parties

All parties to a contract must be deemed legally competent. To be considered legally competent, a person must be: mentally sound not under the influence of drugs or alcohol of legal age

Conditional Contracts

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

Domestic, Foreign, and Alien Insurers

An insurer is a domestic company in the state where it is domiciled (i.e., headquartered). An insurer is a foreign company in every state outside of its state of domicile. A company that is domiciled outside the United States is an alien company in every U.S. state where it is admitted.

Which of the following is an example of misrepresentation on an insurance application? 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. Karen is not asked, and does not mention, that she was found guilty of insurance fraud 15 years ago. Bill answers "no" to a question asking if he has ever declared bankruptcy, knowing that eight years ago he filed for bankruptcy protection. 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

Express Authority

Express authority is explicitly stated in the insurer's agency agreement which sets forth the activities the producer is expressly authorized to perform in the course of his or her job.

Fraud

Fraud is the deliberate act to deceive with the intent to gain something of value. Fraud is often an act of concealment or misrepresentation. An insurer may void a contract if, for example, an applicant has committed fraud in procuring the policy or a policyholder provides false or misleading information in connection with a loss.

E&O Insurance

Despite a producer's best efforts, mistakes can be made. Like other professionals, insurance producers can buy errors and omissions (E&O) insurance that protects them from liability that arises from professional services a producer renders or fails to render.

Personal Contracts

Property and casualty insurance policies are personal contracts between the insurer and the policyowner. An insurer agrees to financially protect the person who owns the building, not the covered building. In deciding whether to accept an application for property insurance, the insurer evaluates the applicant as well as the property to be covered.

Reimbursement contracts and valued contracts in insurance:

Reimbursement contracts: include medical and property insurance. Valued contracts: include life insurance.

Rescission

Rescission is 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.

valued contracts

The insurer agrees to pay a specified sum of money upon the death of the insured person. If a life insurance contract is issued for $1 million in coverage, that amount will be paid when the insured dies. The "value" of the insured is irrelevant.

Consideration

The third requirement of a valid contract is that there must be an exchange of consideration by each party. Consideration essentially means something of value given by one party to the other. the insurance company's promise to pay benefits as specified in the contract is its consideration the applicant's initial premium payment is his or her consideration

Legal Purpose

To be legally enforceable, a contract must serve a legal purpose. For example, a contract to insure an international shipment of stolen firearms would be unenforceable. Insurance is presumed to serve a legal purpose.

Contracts of Indemnity

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

Acceptance

Upon receipt of an application (offer), the insurer (offeree) has three options: accept the offer by issuing the policy as applied for, or reject the offer by declining coverage, or counteroffer by offering the applicant a sub-standard policy (with either a higher premium or reduced coverage)

Reinsurance Companies

When insurers underwrite especially large insurance policies, they typically spread the risk with other insurers to minimize the risk they face should a loss occur. Called reinsurance, this is done through a formal agreement in which both the risk and the premium are shared with one or more reinsurance companies.

Contracts of Adhesion

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 contract of adhesion.

Estoppel

a party that waives its right to enforce a certain contract provision cannot subsequently enforce that right.

An insurance producer's business relationship to an insurance company is defined in a(n):

agency agreement

The relationship between an insurance company and the producer it appoints to represent its products is defined by the:

agency agreement

Producer's Responsibilities to Applicants and Policyholders

disclosing all pertinent information concerning a proposed policy not misrepresenting the terms or conditions of a proposed policy making suitable recommendations that fit the customer's needs and circumstances submitting applications only to financially sound, solvent insurance companies applying for and delivering the policy that the applicant intended

Self-insurers

establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company

Utmost Good Faith

insurance contracts are considered contracts of uberrimae fidae or utmost good faith. Failure to disclose critical information usually gives the other party the right to void the contract.

The primary regulatory activities that state insurance departments are engaged include:

insurer licensing requirements solvency regulation investment regulation rate regulation policy form regulation market conduct regulation

Aleatory Contracts

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.

Waiver

occurs when a party to a contract gives up a right that it knows it holds, either through its actions or failure to enforce the right.

4 requirements for any valid contract:

offer by one party and acceptance by a second party consideration by both parties competent parties legal purpose for the contract

mutual company

owned by policyholders

Maureen is an insurance agent who represents an insurance company. Under the common-law rules of agency, what is the insurance company she represents?

principal

Gus is an exclusive insurance agent and Patricia is an independent insurance broker, but they are collectively considered to be:

producers

Single owner captive

provide cost savings, cash flow benefits, and specialized loss control and claims services

reciprocal insurers

unincorporated groups of people that provide insurance for one another through individual indemnity agreements

Lloyd's Associations of America

Not related to London. Mainly fire and auto physical damage

fraternal benefit societies

Organizations of people who share a common ethnic, religious, or vocational affiliation. They may provide insurance to their members through fraternal insurers whose insureds are usually restricted to members of the society.

Stock Company

Owned by stockholders

Risk Retention Groups

The federal Risk Retention Act also authorizes the formation of purchasing groups. As with RRGs, members of a purchasing group must have similar businesses or activities, and one purpose of the group must be the purchase of liability insurance on a group basis. Purchasing groups purchase insurance from an insurer that issues the policies and serves as the risk bearer.

Offer

The first step in the formation of a legal contract is the making of an offer by an offeror to an offeree. In the typical insurance sales transaction, the applicant (offeror) makes the offer to the insurance company (offeree) through a signed application plus a premium deposit.

Lloyd's Associations

A forum where brokers may find individuals who are willing to help underwrite complex, unique, and large risks

Misrepresentation

A misrepresentation is a false statement of a material fact. A material fact is information that would affect an insurer's underwriting or claim settlement decision. For example, an auto insurance applicant might say he has a clean driving record when, in fact, he has had three speeding tickets within the past two years. If discovered by the insurer at any time, a misrepresentation is grounds to void the contract.

Concealment

Concealment is the deliberate withholding of material facts. If the concealed facts would have changed the insurer's decision to offer the insurance policy, then the insurer has grounds to void the insurance contract if the failure to disclose information was intentional.

In the typical insurance sales transaction, the insurance company makes the initial offer to the insurance applicant.

Correct. In the typical insurance transaction, the applicant is the offeror who makes an offer to the insurance company (the offeree) through a signed application plus the initial premium.

Agent (Producer) and Insurer Relationship

Insurers and their producers are bound by common-law rules of agency, which define basic rules that govern the relationship between an agent and principal. The principal is the party on whose behalf the agent acts.

county mutuals

Mutual companies that operate in a limited geographical area. They originally only sold property insurance, but now offer other types also.

Elements of a Legal Contract

an offer acceptance of the offer consideration by both parties competent parties legal purpose

Grades are assigned to each insurer based on various factors including: capital

capital liquidity management competitive advantages ability to raise capital to finance strategic plans

Unique attributes that define insurance contracts

contract of adhesion (no negotiation) aleatory contract personal contract unilateral contract conditional contract

Unique Attributes of Insurance Contracts

contracts of adhesion aleatory personal unilateral conditional

Implied Authority

Implied authority consists of actions that extend beyond what is explicitly provided in the agency agreement but are necessary to carry out the duties expected of the producer.

Unilateral Contracts

In a unilateral contract, only one party makes an enforceable promise. With an insurance policy, only the insurer makes a promise that can be enforced. It promises to pay benefits if an insured loss occurs. Of course, policyholders must pay premiums to keep their policies in force, but there is no legally enforceable obligation to do so. They may stop paying premiums at will, though doing so will result in lapse of the policy.

Apparent Authority

the agent's agreement does not provide the insurer does not intend appears to be granted by the insurer based on the producer's statements and the actions (or inactions) of the insurer