Life Insurance CH 3

Subrogation

The right for an insurer to pursue a third party that caused an insurance loss to the insured - Is done as a means of recovering the amount of the claim paid to the insured for the loss EX: If an insured driver's car is totaled through fault of another driver; the insurance carrier will reimburse the covered driver as described in the policy and take legal action against the driver-at-fault to recuperate the cost of that claim

Implied Authority

The underwritten authority of a producer to perform incidental acts necessary to fulfill the purpose of the agency agreement (otherwise unwritten in contract EX: Since you are authorized to solicit applications and collect premiums, it is implied that you are authorized to set appointments

Waiver

The voluntarily giving up of a known right EX: if an insurer chose to approve an application and issue a policy without requesting a medical exam, they cannot later request a medical exam for that policy in the future

Cancellation

The voluntary act of terminating an insurance contract

Concealment

Withholding of information or facts by the applicant (smoker, diabetes).

insurance policies

legal contracts where a promise of benefits is exchanged for valuable consideration (Premiums). - Contracts of insurance are binding and enforceable. - All parties are subject to specific legal requirements. -There are TWO parties to an insurance contract: The insured and the insurer

AGENT AUTHORITY

- A relationship in which one person is authorized to represent and act for another person or company is established through the law of agency - In applying for law of agency, the insurance company is the principal - An agent/producer will always be deemed to represent the insurance company, not the applicant

Competent Parties

All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol

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 - Without legal effect, the contract would be null and void. Said differently, the contract cannot be for an illegal purpose

Fraud

An intentional misrepresentation or concealment of material fact made by one party to cheat another party out of something that has economic value - An insurer may void an insurance policy if a misrepresentation on the application is proven to be material

Offer and Acceptance

An offer is made when the applicant submits an application and initial premium for insurance to the insurance company - The offer is accepted by the insurer after it has been approved by the insurance company's underwriter and a policy is issued - If no money is given, the applicant is making an invitation - If an offer is answered by a counteroffer, the first offer is void

Unilateral Contract

One sided agreement, where only the insurer is legally bound - Only the insurance company is legally bound to do anything (pay claims) - The insured does not make a promise to pay premiums, however, if premiums are not paid the insurer has the right to cancel the contract

Valued vs. Indemnity

- Life insurance contracts are valued contracts, which means it will pay a stated amount - Health insurance contracts are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc....) - The Principle of Indemnity is to restore the insured to the same financial condition as that which existed prior to the loss - You cannot profit from an indemnity contract

Four elements of a contract

1. Consideration 2. Legal Purpose 3. Offer and Acceptance 4. Competent parties

Types of Agent Authority

1. Express 2. Implied 3. Apparent

Brokers

A broker or independent agent may represent several insurance companies under separate contractual agreements

Stranger-Oriented Life Insurance (STOLI)

A consumer purchases a life insurance policy with the agreement that a third-party agent/broker or investigator with purchase the consumer's policy and receive the proceeds as a profit upon the consumer's death - Differs from a standard insurance policy because a 3rd party OWNER will be the one benefiting from the death of the insured - These policies are typically illegal as the violate insurable interest requirements

Authorized Agent

A person who acts for another person or entity and has the power to bind the principal to contracts. - Agents are granted authority by the insurer through the agency contract to transact insurance or adjust claims on their behalf Common tasks agents authorize include soliciting applications, collect premiums, render services to prospects, and describe the company's insurance policies

Professional Liability Insurance (Errors and Omissions)

A professional liability where producers can be sued for mistakes of putting a policy into effect - Under the insurance, the insurer agrees to pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render

Parol Evidence Rule

A rule that prevents parties in a contract from changing the meaning of a written contract by introducing oral or written evidence made prior to the formation of the contract, but are not part of the contract

Void and Voidable Contracts

A void contract is Agreement that does not have legal effect, and therefore is not a contract - Not enforceable by either party - A Voidable contract is a valid, binding contract which can be voided at the request of a party with the right to reject

Endorsement

A written form attached to an insurance policy that alters the policy's coverage, terms, or conditions

Contract of Adhesion

Because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion - There is only one author - the insurance company - Insurance carriers are responsible for assembling the policy forms for insureds - If there is ambiguity in the contract, the courts always favor the insured over the insurer - The terms must be accepted or rejected in full - The customer must adhere to the insurer's contract without any input of their own

Fiduciary Responsibility

Because the agent handles money of the insured and insurer, they have a fiduciary responsibility - A fiduciary is someone in a position of trust and confidence

Apparent Authority

Deals with the relationship between the insurer, the agent, and the customer - The appearance of authority based on the agent-insurer relationship - A situation where the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal EX: Since you have all the insurance application forms and business cards, it is apparent to the customer that you can help them apply for insurance

Express Authority

Express authority is the explicit authority granted to the agent by the insurer as written in the agency contract EX: Solicit applications and collect premiums

Utmost Good Faith

Implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies - Insurance applicants are required to make full, fair, and honest discloser of the risk to the agent and insurer - Agents and insurers are required to accurately explain the policy's features, benefits, advantages, and possible disadvantages to an applicant

Aleatory Contract

Insurance contracts are aleatory, meaning there is an unequal exchange - The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss - EX: Tony paid one month's premium of $50, when she dies one month later, her beneficiary received the whole $50,000 face value of Tony's policy

Conditional Contract

Insurance contracts are conditional because certain conditions must be met by all parties in the contract - Benefits depend on the occurrence of an event covered by contract - This is needed when a loss occurs for the contract to be legally enforceable

Personal Contract

Most insurance contracts are personal contracts between the insurance company and the insured individual and are not transferable to another person without the insurer's consent - Life insurance is an exception because the owner of the policy has no bearing on the insurer's assumed risk - Therefore, people who own life insurance are called policyowners rather than policyholders and may transfer or assign ownership by notifying the company

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 and would be considered a wagering contract Insurable interest only needs to exist at the time of the application

Representations

Statements made by the applicant believed to be true (name, DOB) becomes part of the contract and need to be true only to the extent that they are material and related to the risk

Warranties

Statements made by the applicant deemed to be true (name, DOB) becomes part of the contract and if found to be untrue, can be ground for revoking the contract

Reasonable Expectations

The insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide - Reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder

Estoppel

The legal process of preventing one party from reclaiming a right that has been waived

Consideration

something of value that each interested party gives each other. - The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit. The applicant says, - "PLEASE CONSIDER me for insurance. Here's my initial premium, my completed application, as well as how much and how often I agree to pay."

Health insurance

the insurance company agrees to pay a percentage of the insured's medical bills (or benefit) in exchange for considerations (premiums)

Life Insurance

the insurance company agrees to pay a predetermined amount - the face amount (or benefit), in exchange for the insured's consideration (premium).