Chapter 1
agent/producer
- a legal representative of an insurance company - producer usually includes agents and brokers - agents are the agents of the insurer
field underwriter
- agent is the company's front line, because it is usually the one who has solicited the potential insured. - can be considered the most important source of information available to the company underwriters
contract
- an agreement between two or more parties enforceable by law - general law of contracts had to be modified to fit the needs of insurance
substandard risk
- applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits - these policies are also referred to as "rated" because they could be issued with a premium rated-up, resulting in a higher premium
declined risk
- applicants that are rejected - risks that the underwriters assess as not insurable are declined - risk may be declined: - no insurable interest - applicant not medically unacceptable - potential loss is so great it does not meet the definition of insurance - insurance is prohibited by public policy or is illegal
general information (application)
- application includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. - inquires about the existing policies and if the proposed insurance will replace them. - identifies the type of policy applied for an the amount of coverage, and usually contains information concerning the beneficiary
willfully violates fair credit reporting act
- constitutes a general pattern or business practice will subject to a penalty of up to $2,500
declined or modified policies because of information obtained from consumer or investigative report
- consumer must be advised and provided with the name and address of the reporting agency - consumer has the right to know what was in the report - has the right to know the identity of anyone who has received a copy of the report during the past year - if the consumer challenges any of the report, the reporting agency is required to reinvestigate and amend the report, if warranted. - if report is found to be inaccurate and is corrected, agency must send the corrected information to all parties to which they had reported the inaccurate information within the last 2 years
fair credit reporting act
- established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. - law also protects consumers against the circulation of inaccurate or obsolete personal or financial information
use and disclosure of insurance information
- every applicant for a life insurance policy must be given a written disclosure statement that provides basic information about the cost and coverage of the insurance being solicited. - disclosure statement must be given to the applicant no later than the time the application for insurance is signed
preferred risks
- individuals who meet certain requirements and qualify for lower premiums than the standard risk - these applicants are in superior: - condition - lifestyle - habits
warranty
- is an absolutely true statement upon which the validity of the insurance policy depends. - breach of warranties can be considered grounds for voiding the policy or a return of premium. - by strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.
agent's report
- provide the agent's personal observations concerning the proposed insured - does not become part of the entire contract, although it is part of the application process
medical information (for higher amounts of coverage)
- raised additional questions concerning the prospective insured's health - underwriter may require a medical examination of the insured
underwriting
- risk selection process - underwriter's responsibilities include selecting only those risks that are considered insurable and meet the insurer's underwriting standards - purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss)
investigative consumer report (underwriting information)
- supplemental information on the application - underwriter may order an inspection report on an applicant from an independent investigating firm or credit agency, which covers financial and moral obligation - contains general reports on: - applicant's finances - character - work - hobbies - habits COMPANIES THAT USE INSPECTION REPORTS ARE SUBJECT TO THE RULES AND REGULATIONS OUTLINED IN THE FAIR CREDIT REPORTING ACT
consideration
- the binding force of any contract - is something of value that each party gives its each other ex of insured: payment of premium and the representations made in the application ex of insurer: the insurer is the promise to pay in the event of loss
application
- the starting point and basic source of information used by the company in the risk selection process. - applications are not uniform and may vary form one insurer to another
offer and acceptance
- there must be one definite offer by one party, and the other party must accept this offer in its exact terms. ex: in insurance, applicant makes the offer when submitting the application - acceptance takes place when an insurer's underwriter approves the application and issues a policy
insurance
- transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the cost of unexpected losses to many individuals. - if there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss
required signatures (application)
1. agent 2. proposed insured if the proposed insured and the policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sign the application EXCEPTION to the proposed insured signing the application would be in the case of an adult, such as a parent or guardian, applying for insurance for a minor child
4 Elements of insurance to be legally binding
1. agreement - offer and acceptance 2. consideration 3. competent parties 4. legal purpose
basic components of an application
1. general information 2. medical information
insurance policy
a contract between a policy owners (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Applicant (proposed insured)
a person applying for insurance
insured
a person covered by the insurance policy; may or may not be the policy owner
consequences for knowingly violating fair credit reporting act
a person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses may also be fined and/or imprisoned for up to 2 years
beneficiary
a person who receives the benefits of an insurance policy
agent's report (underwriting information)
allows agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process
legal purpose
contract must be legal and not against public policy ex: to ensure legal purpose of a life insurance policy, it must have both: - insurable interest - consent A CONTRACT WITHOUT LEGAL PURPOSE IS CONSIDERED VOID, AND CANNOT BE ENFORCED BY ANY PARTY.
life insurance
coverage of human lives
acceptability of risk
determined by checking the individual risk against many factors directly related to the risk's potential for loss - two main sources: - consumer reports - investigative consumer reports - can only be used by someone with legitimate business purpose, including insurance underwriting, employment screening, and credit transactions
adverse selection
insuring of risk that are more prone to losses than average risk
unilateral contract
only one of the parties to the contract is legally bound to do anything - the insured makes no legally binding promises (they can cancel policy) - the insurer is legally bound to pay losses covered by a policy in force (cannot refuse benefit as long as long as the premiums are current)
lapse
policy termination due to nonpayment of premium
conditional contract
requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. ex: the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim
death benefit
the amount paid upon the death of the insured in a life insurance policy
insurer (principal)
the company who issues an insurance policy
premium
the money paid to the insurance company for the the insurance policy
policyowner
the person entitled to exercise the rights and privileges in the policy
premium receipt
type of receipt issued will determine when coverage will be effective
misrepresentations
untrue statements on the application, and could void the contract
medical information (application)
- application includes information on prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. - if the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information - that would be considered a nonmedical application. - for larger amounts insurer will usually require some sort of medical examination by a professional - it is the agent's responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicants's knowledge. - agent must probe beyond the stated misrepresenting or concealing information, or does not understand the specific questions asked - any information that is misleading, inaccurate or illegible may delay the issuance of the policy - if the agent feels that there is misrepresentation, the agent must inform the insurance company. - some insurers require that the applicant complete the application under the agent's watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions
HIPAA (hawaii insurance portability and accountability act)
- federal law that protects health information - provides protection of certain individually identifiable health information (such as demographic data that relates to physical or mental health condition, or payment information that can identify an individual
disclosure statement
- help the applicants to make more informed and educated decisions about their choice of insurance - when insurers plan to seek and use information from investigators, they must first provide the applicant/insured with a written Disclosure Authorization Notice - stating insurer's practice regarding collection and use of personal information - must be written in plain language, and must be approved by the head of the Department of Insurance.
what consumer reports cannot contain
- if report is requested in connection with life insurance policy or credit transaction of less than $150,000 - prohibited information: - bankruptcies more than 10 years old - civil suits - records of arrests - conviction of crimes - any other negative information that is more than 7 years old - negative information includes information regarding a customer's delinquencies, late payments, insolvency or any other form of default.
unknowingly violates fair credit reporting act
- liable in the amount equal to the loss to the consumer, as well as any reasonable attorney fees incurred in the process
stranger-originated life insurance (stoli)
- life insurance arrangement in which a person with no relationship to the insurance (a "stranger) purchase a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies - STOLIs are financed and purchased solely with the intent of selling them for life settlements - STOLIs violate the principle of insurable interest, in which that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured
collecting the initial premium and issuing the receipt
- most agents attempt to collect the initial premium and submit it along with the application to the insurer. - in addition, collecting the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued. - whenever the agent collects premiums, the agent must issue a premium receipt
conditional receipt
- most common type of receipt, which is used only when the applicant submits a prepaid application - the receipt says that coverage will be effective either on the date of the application or the date of the medical exam - as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for - this rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages
delivering the policy
- once underwriting process is completed, and the company issues the policy, the agent will deliver it to the insured - personal delivery is the best method of finalizing the insurance transaction, mailing the policy directly to the policyowner is acceptable - when insurer relinquishes control of the policy, policy is considered legally delivered - advised to obtain a signed delivery receipt
competent parties
- parties to a contract must be capable of entering into a contract in the eyes of the law - generally, requires that both parties be of: - legal age - mentally competent to understand the contract - and not under the influence of drugs of alcohol
privacy rule
- patients have the right to view their own medical records, as well as the right to know who has accessed those records over the previous 6 tears. - allows disclosures without individual authorization to public health authorities authorized by law to collect or receive the information for the purpose of preventing or controlling disease, injury, or disability
replacement
- practice of terminating an existing policy or letting it lapse, and obtaining a new one - to make sure that replacement is appropriate and in the best interest of the policyowner, policyowners make informed decisions
contract of adhesion
- prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). - insurance policies are not drawn up through negotiations, and insured has little to say about its provisions - insurance contracts are offered on a OFFERED ON A TAKE-IT-OR-LEAVE-IT basis by an insurer
insurable interest
- the policy owner must face the possibility of losing money or something of value in the event of loss - In life insurance, insurable interest must exist between the policyowner and the insured at the time of application; however, once life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists. - insurable interest is not required of beneficiaries - dependent upon the insured - beneficiaries' life is not the one being insured - beneficiary does not have to show an insurable interest for a policy to be purchased
changes in the application
- when an answer to a questions needs to be corrected, agents have the option, depending on which insurer they represent, or correcting the information and having the applicant initial the change, or completing a new application - NEVER ERASE OR WHITE OUT ANY INFORMATION ON AN APPLICATION FOR INSURANCE
risk classification
- will look at applicant's: - past medical history - present physical condition - occupation - habits - morals - if acceptable, underwriter must determine the risk or rating classification to used in deciding whether or not the applicant should pay a higher or lower premium.
primary criteria for underwriters
1. applicant's health (current and past) 2. occupation 3. lifestyle 4. hobbies 5. habits - underwriter will use many different sources of information in determining the insurability of the individual risk - DIFFERENT CRITERIA FOR DIFFERENT INSURERS
sources of underwriting information
1. application 2. agent's report 3. investigative consumer report (inspection) - federal credit reporting act 4. medical information bureau (mib) 5. medical information 6. HIPAA 7. use and disclosure of insurance information
distinct characteristics of an insurance contract
1. contract of adhesion 2. aleatory contract 3. unilateral contract 4. conditional contract
two options for medical examination
1. insurer may only request a paramedical report which is completed by a paramedic or a registered nurse 2. underwriter may require an Attending Physician's Statement (APS) from a medical practitioner who treated the applicant for a prior medical problem - at the insurance companies expense
proper obtaining and handling of results
1. insurer must disclose the use of testing to the applicant, and obtain consent from the applicant on the approved form 2. insurer must establish written policies and procedures for internal dissemination of test results among its producers and employees to ensure confidentiality.
valid insurable interest
1. policyowner's life 2. the life of a family member (a spouse or a close blood relative) 3. the life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as a debtor and creditor)
field underwriter responsibilities
1. proper solicitation of applicants 2. helping prevent adverse selection 3. completing the application 4. obtaining the required signatures 5. collecting the initial premium and issuing the receipt, if applicable 6. delivering the policy
prospective insured three classifications
1. standard 2. substandard 3. preferred
standard risks
a person who, according to company's underwriting standards, are entitled to insurance protection with extra rating or special restrictions - representative of the majority of people at their age and with similar lifestyles - they are average risk
material misrepresentation
a statement, if discovered, would alter the underwriting decision of the insurance company - if the material misrepresentations are intentional, they are considered fraud.
medical information bureau (mib)
- a membership corporation owned b member insurance companies - nonprofit trade organization - receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals - a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered - MIB can only be used only as an aid in helping insurers know what areas of impairment they might need to investigate further. - applicant cannot be refused simply because some adverse information discovered through MIB
application (underwriting information)
- a person applying for insurance must submit an application to the insurer for approval for policy to be issued - the application is one of the main sources of underwriting information for the company
consumer reports
written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources
consequences of incomplete applications
- before a policy is issued, all questions on the application must be answered. - if the insurer receives an incomplete application, the insurer must return it to the applicant for completion - if a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question. - the insurer will not have the right to deny coverage based on any information that the unanswered question might have contained
investigative consumer reports
- similiar to consumer reports - primary difference is that information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer. - unlike consumer reports, these reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested - consumers must be advised that they have a right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide consumer with the additional information. - reporting agency and users of the information are subject to civil action for failure to comply with the provisions of the FAIR CREDIT REPORT ACT
insurance transaction
- solicitation - negotiations - sales (effectuation of a contract of insurance) - advising an individual concerning coverage or claims
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 insured gives to the questions on the insurance application
aleatory contract
- there is an exchange of unequal amounts or values. - premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss
investor-owned life insurance (ioli)
- where a third-party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon the death of the insured or annuitant
