Chapter 1: Contract Law, Producers and Types of Insurers
Agreement
"Offer and Acceptance" - An offer is a proposal by one party that if accepted by another, will create an agreement - Insured submits their risks in an offer (application), insurer accepts/declines those risks based on underwriting criteria and will issue a policy accordingly -I.E. Pool with diving board no fence counter well if you put a fence up "a insured submits an app what is this known as?"
Acceptance
- Company/Insurer issues a policy
Profitability
- Monitor income/ expenses to determine underwriting success on profitability - Loss Ratio, Expense Ratio, and Combined Ratio
Competent Parties
-Applicant + insurer must posses "legal capacity" to enter into a contract - Must be old enough, knows what they are doing and not under influence of alcohol or drugs (has to be mind altering)
Producer/Insurer Relationship
-As a producer/agent job is to do what is in the best interest of the insurance company/principal/insurer -According to the general rules of agency, an agent represents the insurer
According to Domicle "where home is"
-Domestic Insurer -Foreign Insurer -Alien Insurer
Reciprocal
-Insurance that is a result of agreements of indemnity between subscribers is known as
What must be present for any contract to be legal + enforceable? (ACCL)
1. Agreement 2. Consideration 3. Competent Parties 4. Legal Purpose
Judgement Rating
Rating used by underwriters to rate one-of-a-kind risks
Utmost Good Faith
The insurance company must be able to rely on the honesty and cooperation of the insured, and the insured must rely on the company to fulfill its obligations in good faith
Homeowners Policy
- Primary or Secondary home you own and occupy - Covers theft - Extras often available (Water, backup, jewelry, art) - Limited suite of coverage - HO3 or HO5
Concealment and Fraud
- "Failure to disclose material facts" is c - Insured is required to disclose any other material fact concerning the exposure to be insured, even if the insurer did not ask questions regarding it - Insurer may void the contract if intentional and material (fraud is committed when individual intentionally/deliberately deceives another
Insuring Provision/Insuring Agreement
- "Summary of the Agreement" - Identifies the parties to the contract - Identifies perils covered - Promise to pay of the insurer - Essence of the policy it's what says we will cover you if this happens/ contains the promise to pay...has the promise, perils, parties, policy period
Adhesion Contract
- "When 2 opposites come together" - One party has substantially more power than the other in setting the terms of the contract - A contract offered to one party by another requiring the second party to accept or reject the contract in total without having the opportunity to bargain over the wording - Insurer has to stick to what they said and insured has to stick to all or none of it in contract (a take it or leave it basis) - Any language that is confusing, unclear or ambiguous that later becomes apparent may be decided by a court in favor of the insured
Unilateral Contract
- (adj.) - having only one side - Developed by one party (the insurer) - "Act in exchange for a promise" or a "Promise in exchange for an act already performed" - Insurer is the one making the promise (assumes insured already paid premium) - Already paid waiting for promise to pay standby - One-sided promise and only the insurer is legally bound to do anything
Terrorism Risk Insurance Act of 2002
- A US law that after a certain deductible provides US businesses government insurance coverage for the risk of terrorism - Does not apply to personal insurance - Not mandatory - Not necessarily paid either - Everyone has to offer it, consumer does not need to buy it (only in commercial)
Fire-Resistive Construction
- A class of construction that has exterior walls, floors, and roofs of masonry or other fire-resistive material with a fire-resistance rating of at least two hours - Best rate - "Joisted Masonry" - only the roof, flooring and some interior are combustible aka modified fire-resistive - J.M. Has both frame and masonry Ex. Strip mall / joist floors and roof are combustible
Waiver
- A decision by insurer granting insured permission to violate a law or rule that would otherwise apply to it (i.e. Paige and Kellie) - The concept of this is related to doctrines of concealment and misrepresentations. Insurance companies possess the right to deny coverage for a claim in certain circumstances. The concept of this helps an insured prevent such a denial if the insurer has made this. - An insured leaves a question blank on insurance app but the ins com issues the policy anyways the insurance com has " " their right to that answer; so not allowed to hold it against you - Ex: John not disclosing girlfriend lives with him & drives his car bc she has DUI's (if agent knows this and submits policy anyways then agent performed this) - Ex: Insurer mistakenly issues policy and applications incomplete - Ex: If an insurer neglects to cancel a policy after an insured fails to pay premium, it has engaged in a " " by silence - Knowing something as agent and submitted policy anyway - To voluntarily give up a known right
Estoppel
- A legal theory under which a person is barred from asserting or denying a fact because of the person's previous acts or words -Involves a false statement made by one party, which is relied on by another party - Ex: Insurer tells insured boiler is covered, 8 months later boiler explodes, turns out not actually covered so insurance company denies claim and so the insurer would be "stopped or estopped" from denying the claim because insured advised how agent said there was coverage - Expect company to come back @ you to pay them back - The right to enforce that right in the future is no longer available
Elements of Insurable Risks
-Due to chance, definitie and measureable, statistcally predictable, not catastrophic and large loss exposure
Risk Retention Group
- A liability insurance company owned by its members, which are exposed to similar liability risks by virtue of being in the same business or industry - A group captive that can write any type of liability coverage except employers' liability, workers compensation, and personal lines - Such groups provide general and other liability coverage or cannot secure insurance protection for the more hazardous aspects of their business - Like an investment group
Error and Omissions Insurance (E&O)
- A producer who has made an unintentional error or honest mistake has committed a tort or an " " - Independent producers or agents purchase their own " " coverage
Merit Rating
- A rating plan by which class rates are adjusted upward or downward based on individual loss experience (i.e. good driver) (we see in auto)
Warranty
- A statement that becomes part of the insurance contract that is made by the applicant/insured that is guaranteed to be true in all respects - A promise made by the insured upon which coverage is based - Example of a bank adding crime coverage, but bank must guarantee in writing ( " " ) they'll install a new alarm system and have a guard on duty - An absolutely true statement on a application
According to Authorization / Admitted Market
- Admitted Insurer - An " " is permitted to operate within this state if satisfies state requirements and demonstrates solvency, therefore issued a "Certificate of Authority"
Implied Authority
- An agent's authority to do things not specifically authorized in order to carry out express authority - Authority not expressly written in contract that assumes agent will handle certain things - I.E. it is implied that an agent who solicits insurance is allowed to sign the app - I.E. it is implied that the producer may ask an applicant questions concerning the health history of the proposed insured
Domestic Insurer
- An insurance company that conducts business in the state of incorporation (Within the state) - Where an insurance company is headquartered and only rights insurance in that state. Think one state.
Foreign Insurer
- An insurer licensed to operate in a state but incorporated in another state - An insurance company not headquartered/incorporated in that state, but are selling insurance in that state. Think two states
Alien Insurer
- An insurer that is chartered by a foreign country, but is licensed to operate in the state (from another country) - An insurance company that is headquartered in another country. Think other country.
Mutual Insurer
- An insurer that is owned by its policyholders/policy owners and formed as a corporation for the purpose of providing insurance to them - Owned by policy owners. By buying a policy you become an owner of that company, there are no pieces of the company to buy, only participating policies to buy. If you get a dividend, it is a return of unused premium, and it is not taxable.
Stock Insurer
- An insurer that is owned by its stockholders/shareholders and formed as a corporation for the purpose of earning a profit for the stockholders -They bought a stock/piece of the company and now they own the company according to that stock/piece they bought. They do not participate in the ownership by buying a policy. When get dividend it is income, so it is taxable.
Material Misrepresentation
- An untrue statement made by the applicant (insured) that had it been known by the insurer at the time of the app, would have caused the insurer to reject the app - Policy may be void by the insurer if proven true - By law it allows company to not be responsible - Think very important " " if insurance company had known would've made a different decision
Surplus Lines
- Any type of insurance for which there is no available market within the state, and the coverage must be placed with a non admitted insurer - Must sign affidavit to verify attempts were made to secure coverage in voluntary market - Excess Market - This Insurance is placed with an insurer that is neither licensed nor authorized in a particular state. SL Brokers use an export list which identifies certain kinds of coverages in classes of business operations that have been deemed to be insurable through surface lines, and that are usually rejected via voluntary or admitted market.
Conditional Contract
- Based on "Conditions" - A type of an agreement in which both parties must perform certain duties and follow rules of conduct to make the contract enforceable - Insured must pay premiums to keep coverage in force and for insurer to pay claims - Means both parties have rules and duties they must follow and do - Any increase in hazard need to tell insurer - Certain rules must be met by both parties
Fraud
- Cheat or deceive or lying to cheat the insurance company I.e. may lie about your info or submit a false claim -Intentionally or deliberately deceive another - If a material misrepresentation is intentional
Combined Ratio
- Combination or sum of the loss and expense ratios - In the event the ratio exceeds 100, the insurer is paying out more in expenses than premium earned - aka underwriting loss - Combination of both loss and expense ratios
Masonry Construction
- Consists of an outer layer of brick and an inner layer of brick which supports or holds up the house - Typically classified as non-combustible if the structure, including floors and roof are made of slow-burning materials - Rate is higher than fire-resistive and lower than frame - I.E. parking garage
Personal Contract
- Contract is between the insured and the insurer even though it provides protection for the home, car, etc. - Means the policy is between the insured and the insurer
Offer
- Customer/insured submits an application -The customer submits an application is known as the
Marketing Distribution System and Types of Insurers Continued
- Direct response insurers- these types of insurers do not market their products by utilizing agents or brokers. The products which they distribute our marketed through direct mail or through mass, media, such as newspapers, magazines, television, and radio. i.e. Progressive and Geico
Non-Certified Loss
- Domestic Terrorist - Following limitations apply: 1. Exclusions for acts of terrorism only apply if the acts of terrorism result in industry-wide losses exceeding $25 bil for related incidents within a 72 hour period 2. Exclusions for acts of terrorism are not subject to the limitations previously mentioned if the act involves the use of nuclear materials, the act is carried out by means of dispersal of pathogenic or biological materials and that is the intent
Frame Construction
- Exterior walls are constructed of wood or similar combustible materials - Rate is the highest (least fire-resistive)
Government Insurers
- Federal programs - provides coverage for high risk exposure's (i.e nuclear hazards or flood) - Social Security = Old Age, Survivors, and Disability Insurance (OASDI) • State programs - Unemployment insurance - Workers' program - Medicare - Medicaid - Military programs compensation benefits - State-run medical expense insurance plans - Are funded by taxes
Types of Construction
- Frame - Masonry - Fire-Resistive * Influences premium to be charged
Conditions
- Identifies responsibilities of each party to the contract - Insured is responsible for informing insurer of any changes (if insured doesn't comply, insurer can deny a claim/ not renew) - Primary condition of insurer is promise to pay (claim) - Identifies what an insured must do if loss occurs - A part of the policy that list the rules, duties, obligations, ways of behaving for both the insured and the insurer
Dwelling Fire
- Income, seasonal or unusual property - Theft of contents not covered - Extras not usually available - Wide range of coverage forms (DP-1, DP-2, or DP-3)
Financial Status (independent rating systems)
- Independent rating services help the consumer identify insurers, who are financially sound or unstable. Consumer should do business with insurer who are financially stable so that the possible claims can be paid if covered losses occur. The most common rating service operating today is A.M.Best report.
Private Insurers
- Insurance which offers coverage to people through the individual market - May be classified by types of insurance they solicit, their form of ownership, or the marketing system they utilize
According to Ownership
- Insurers may be defined according to their form of ownership including stock and mutual insurers
Concealment
- Is a form of fraud in which withholding or hiding information •if if intentional and material an insurers may void the contract would be fraudulent - Intentionally withholding information
"Act of Terrorism"
- Is defined as any act that is certified by the federal government must have the following characteristics: 1. it must be a violent act or an act that is dangerous to human life, property, or infrastructure; 2. it must have resulted in damage within the U.S., or to an air carrier as defined in the U.S. code; 3. It must have been committed by someone acting on behalf of a foreign person, or interest, as part of an effort to coerce the civilian population of the U.S., or to influence the policy, or affect the conduct of the government by coercion 4. It must produce property and casualty losses of $5 million or more, or result in a loss of 50 or more lives (or serious, physical injury, disfigurement of loss or impairment of bodily function.) an act will not be certified as terrorism, if it is committed as part of the course of war declared by Congress. And 2006 the $5 million threshold was increased to $50 million and then in 2007 in increased to $100 million.
Consideration
- Is the binding force of a policy. For coverage to remain in effect, this has to be perpetual - "Bargained-for-exchange" - Something of value exchanged for something else of value - Insured = app, statements on app + Premium paid - Insurer = Promise to Pay Valid Claims **if question mentions app + premium or just premium then this -A customer provides premium and an application - When both parties bring something of value
Insurer as Principal
- Is the insurance company from the perspective or eyes of the insurance agent. • Is responsible for insurance agents actions (as long as acting within bound of contract) they can be held legally liable for any actions you take
Underwriting
- Is the risk selection and classification process. Figuring out exactly how risky somebody is to ensure based off their driving record, their health record, etc. - Is known as the risk selection process. Insurance is the transfer of risk so it's important to fully assess how much risk a person has to transfer. A person with multiple accidents is more likely to have more claims, so they would be transferring more risk than a person with a clean, driving record.
Concept (Law) of Agency
- Legal relationship between 2 parties when one of the parties acts on behalf of another (relationship between insurer and producer) - Insurer = Principal (entity that the agent/ producer represents with regard to agreements with 3rd parties) - Producer = Agent (authorized representative of the principal - When the producer/ agent acts within the scope of his or her authority, the insurer is bound or responsible for such action - Says agent represents the insurer and the knowledge of the agent is knowledge of the insurer
Exceptions to Competent Parties
- Minor (unless for food/clothing/shelter + other necessities) - Legally insane Persons (court decided they're insane) - Individual under the influence during application - Persons coerced to enter into a contract under duress - Enemy Aliens - Convicts (based on state law) (current felon/ if was not anymore doesn't matter
Certified Loss
- One resulting from certified acts of terrorism (involves foreign person/ interest)
Legal Purpose
- Policy must be legitimate + in the best interest of the public - i.e. A contract to rob a bank is not valid nor in the best interest of the public - Any contract set up must be set up for legal reason, not breaking the law or hurting anybody, not against public policy - Cannot break law, not against public policy, has a lawful reason
Earned Premium
- Portion of premium that has been used during the policy period since the insurer provided coverage
Unearned Premium
- Portion of premium that has not been used and is returned to the insured if coverage is cancelled
Marketing Distribution Systems and Types of Agents
- Property and casualty insurance companies may be classified into two basic groups based on their distribution systems, including: 1. Insurers operating through the American Agency System (Independent agents write business through this. Can place business with several insurers. Owns the renewals. Represents Herself/himself and her client, but possesses a dual responsibility, since she also has an obligation to the insurer to whom she places business) 2. Direct writing insurers (operate through sale, representatives, known as controlled or captive agents. The captive agent represents the insurer, and may only place or write business within one sponsoring insurer. The business sold by the captive agent belongs to the insurer. The agent is paid a salary, commission, or a combination of the two in return for the solicitation of this business. Captive agent do not own the renewals or expirations.
Fair Credit Reporting Act of 1970
- Protects the rights of consumers for whom an inspection or credit report has been requested - Protects consumers against the circulation of inaccurate or obsolete, personal financial information. Any information that is negative and older than 7 years old cannot look at it. Bankruptcies that are over 10 years old cannot be used to determine a rate. - Applicants must be notified within 3 days that the report has been requested, they can request a summary within 5 days and if rejected they can ask the company to provide the name and address of the consumer reporting agency - If insurance company violates this looking at a $2500 fine -Main purpose is to protect against circulation of in-accurate/obsolete info
Expense Ratio
- Ratio of expenses incurred by the insurer in producing the business to premiums earned - Expenses by insurer to premiums written Expenses $20/ premiums $200= 10%
Loss Ratio
- Ratio of losses incurred to premiums earned - Loss incurred to premiums earned Loss$100/ premiums $200= 50% -(incurred losses + loss adjusting expense)➗earned premium=
Self-Insurers
- Retain risks and must have a large number of similar risks and enough capital to pay claims. However, they may save money if the loss experience is lower than the expected costs. - I.E. Workers Comp is a form of covg. where a business, is financially sound may be permitted to self insure (after 5 yrs) - Pool their own
Reasonable Expectations
- Say a customer can expect the coverage if an agent implied it during the sale
Declarations
- Section of an insurance contract that "personalizes" the policy - Mostly derived from the insurance application and include; 1. Name and Address of insured 2. Description of property to be insured 3. Location of property 4. Coverage limit (Coverage amount/ limit of liability) 5. Annual Premium 6. Deductible, if any 7. Policy Period 8. Mortgage, if any 9. Policy # 10. A company officer name, signature or stamp
Fraternal Associations
- Specialized types of mutual insurers - Generally non-profit - Makes insurance products available for the benefit of their members - Primarily life insurance - A membership organization you have to be a member to be a part of this - Are able to sell insurance but only to their members. Get to bypass some common rules and laws that other insurance companies have to follow since only selling to their members
Representations
- Statements made by the applicant on the insurance application that are believed to be true, but are not guaranteed to be true. True to the best of my knowledge - The statements made by an applicant/insured which are recorded on an application.
Apparent Authority
- The authority an agent is believed by third parties to have because of the behavior of the principal - AKA the authority is not given to the producer, but the public believes the agent already possesses it - Perceived authority. Assumed by insured, what they think you can do. -is the external view on what we are doing, what public proceeds, what they think you have the power to do
Actual or Express Authority
- This agreement specifies the actual powers and functions of the agent (written or oral) - Written in your contract as agent. You have the authority because it is written down. - Producers are allowed to solicit apps, select or reject risks in the field, complete apps, collect premiums, submit apps and premiums to the insurer to other various duties
Exclusions Section in Insurance Contract
- Types of property and causes of loss (perils) NOT covered - Prevent an insured from processing duplicate covg and permit the insurer to lower the cost of insurance - Allow/ permit an insurer to protect itself from financial disaster since it does not provide covg for catastrophic or uninsurable type losses (war, flood, or nuclear) - Possible property losses that are a certainty (Wear and tear, depreciation)
Manual Rating
- Underwriter refers to rates determined by the insurer's actuaries based on the "law of large numbers" - Provides a uniform approach to pricing similar insureds by different underwriters in many different situations
Misrepresentations
- Untrue statements made by the applicant (Insured) - Generally do not affect coverage unless fraudulent in nature - Don't think every " " is a lie unless it's intentional it's not necessarily a lie. Applicant could've misunderstood question - Untrue Statements on the policy are
Certificate of Authority
- When an insurance company wants to sell in a state and if the department of insurance says yes, they will give the insurance company "this" which allows them to be able to sell in the state. - By getting this, the insurance company becomes admitted or authorized to sell. - If an insurance company is not admitted or unauthorized, that means they do not have a " " and they are not allowed to sell - Surplus lines don't need to get this. They are not admitted, but technically they are allowed to sell, because they are difficult/hard to place insurance types.
Insurers Domicile
- Where is the company headquartered and located? And also where are they selling a company can either be domestic, foreign or alien
Aleatory Contract
- i.e. "depending on the throw of a dice or on chance; random" - A contract where the values exchanged may not be equal but depend on an uncertain event - Policy owner obtaining a lot of coverage in return for a small fee (premium) - One party may recover more in value than parted with based on future events (Claim Payment vs Premium Paid) - There is possibility that the end result will be unequal/pay thousands over years have a claim only to get some of that - Unbalanced/not an even exchange of values
Sources of Information Underwriters use to accept/decline a risk and issue a policy
1. Application: primary source of info 2. Producer Info (Insurer): provides underwriter with their opinions/ recommendations about exposure 3. Inspections: helps determine construction type 4. Consumer Report: provided if underwriter wishes to further investigate applicant (credit report/ may call previous employers/ neighbors) 5. Information Bureaus - compile specific info about insured (i.e. registry - driving record)
2 essential losses a business might face that result from terrorism
1. Certified Loss 2. Non-Certified loss
Distinct Characteristics of an Insurance Contract (CAPUCU)
1. Contract of Adhesion 2. Aleatory Contract 3. Personal Contract 4. Unilateral Contract 5. Conditional Contract 6. Utmost Good Faith
Sections of an Insurance Contract (DICE)
1. Declarations 2. Insuring Provisions (agreement) 3. Conditions 4. Exclusions
Underwriting Concepts (Market Appetite)
1. Obtain as much pertinent info as possible to decide whether to accept/ decline (reject) an app for insurance 2. Responsible for assessing + selecting risks according to the insurer's avg. risk profile 3. Help classify the risk + determine the applicable premium rate 4. Components in determining premium; A.) Loss History B.) Construction Type C.) Occupancy/ Operation involved D.) Overall Exposure 5. Adverse Selection - tendency of poorer risks to seek insurance (22 y.o. male vs 40 y.o. mom) - Known as risk selection process
A.M. Best Report (5 factors)
1. The underwriting procedures and results of the insurer 2. The insurer's economy of management 3. The adequacy of reserves in order to pay claims 4. The adequacy of policy holders surplus to absorb shocks 5. Investment soundness of premiums collected * help the consumer identify insurers who are financially sound or unstable
Insurers Can be classified as...
Authorized or unauthorized -Authorized is one that is permitted or allowed to operate in the state. it is also known as an admitted in. As long as an insurer satisfies state requirements and demonstrates solvency, it generally will be issued a certificate of authority which "authorizes "it can conduct insurance business. •Certificate of insurance makes an insurance company admitted and authorized NEVER certified. -An insurer that is not authorized to conduct insurance business in a particular state is considered to be unauthorized. Unauthorized are not issued certificate of authority. Also known as non-admitted insurer.
Responsibilities to Applicant/ Insured
The producer has responsibilities that are owed to applicants and/or insureds. He or she will: 1. Act only in the best interests of his or her clients 2. Only provide accurate and up-to-date information and advice to customers about policies and coverages 3. Aid with the accurate completion of applications and any other accompanying documentation 4. Service policies as necessary and according to the desires of the insured 5. Process any coverage changes or cancellations 6. Act only within the scope of authority that has been given them by the insurer.
