Chapter 2: Legal Concepts of the Insurance Contract

Express Agent Authority

is the explicit authority granted to the agent by the insurer as written in the agency contract. For example, solicit applications and collect premiums

Concealment

withholding of information of facts about the applicant (smoker, diabetes)

Reasonable Expectations

a concept which states that the insured is entitled to coverage under a policy that a sensible and present person would expect it to provide. Reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder

Void and Voidable Contracts

is an agreement that does not have a legal effect, and therefore is not a contract. They are not enforceable by either party. Unlike a void contract, a voidable contract is a valid, binding contract which can be avoided at the request of a party with the right to reject

Waiver

is the voluntarily giving up of a known right. For example, if an insurer chose to approve an application and issue a policy without requesting a medical exam they cannot later request a medical exam to for the policy in the future

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

Estoppel

the legal precedes of preventing on party from reclaiming a right that was waived

Consideration

Is something of value that each interested party gives to 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 l agree to pay."

Apparent Agent Authority

deals with the relationship between the insurer, the agent, and the customer. It is the parents of authority based on the agent insure relationship. Apparent authority is a situation in which the insurance gives the customer reasonable believe that an agent has the power and authority to bind the principle. For example, since you have all the insurance application forms and business cards it is apparent to the customer that you were able to help them apply for insurance

Types of agent authority:

express, implied, and apparent

Utmost Good Fair

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 discourse 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

Brokers

a broker or independent agent may represent a number of insurance companies under separate contractual agreements

Contract of Adhesion

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

Stranger-Originated Life Insurance (STOLI)

a consumer purchases a life insurance policy with the agreement that a third-party agent/broker or investor will purchase the consumer's policy and receive the proceeds as a profit upon the consumers death. This differs from a standard insurance policy because a third-party owner will be the one benefiting from the death of the insured. They are typically illegal as they are 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

Professional Liability Insurance (Errors and omissions)

a professional liability for which producers can be sued for mistakes of putting a policy into affect. Under the insurance, the insured agrees to pay some that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render

Endorsement

a written form attached to an insurance policy that alters the policies coverage, terms, or conditions

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 had insurable interest and the insured has provided written consent, it has legal purpose. Without the legal effect, the contract would be null and void. Said differently, the contract cannot be for an illegal purpose

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 and invitation. On the other hand, if an offer is answered by the counteroffer, the first offer is void.

Fiduciary Responsibility

because the agents handles money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust and confidence. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling

Aleatory Contract

insurance contracts are aleatory, which means there is an unequal change. 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. For example, Tory paid one month's premium of $50, when she died one month later, her beneficiary received the whole $50,000 face value of Troy's policy. -consideration may be unequal -the outcome depends on chance or uncertain event -a legal bet is considered an aleatory contract

Conditional Contract

insurance contracts are conditional because certain conditions must be met by all parties in the contract. Hence, 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

Fraud

is an intentional misrepresentation or concealment of material fact made by one party in order to cheat other party out of something that has economic value. An insurer may void an insurance policy if a misrepresentation on the applicant lion is proven to be material

Subrogation

is the right for an inch or two per sway a third-party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss. For example, if an insured driver's car is totaled through the 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 in an attempt to recuperate the cost of that claim

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 to this standard as 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

Unilateral Contract

one sided agreement, where only the insurer is legally bound. In an insurance contract, only the insurance company is legally bound to do anything (pay claims). Uni=one lateral=side, one side-the insurance company is legally bound. The insured does not make a promise to pay premiums, however, if premiums are not paid the insurer had the right to cancel the contract

Insurance Interest

requires that an individual have a valid concern for the continuation of life or well-being of the person insured. Without insurable interest, and 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 (the inception of the contract). For example, spouses would typically have insurable interest of each others life childhood friends typically would not have insurable interest of each others life. Employer employer may have insurable interest on a key employees life.

Parol Evidence Rule

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

Representations

statements made by the applicant believed to be true (height, weight) are not 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 guaranteed to be true (name, DOB) becomes part of the contract and if found to be untrue, can be ground for revoking the contract

Cancellation

the Voluntary act of terminating and insurance contract

Health Insurance

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

Implied Agent Authority

the unwritten Authority of a producer to perform incidental at acts necessary to fulfill the purpose of the agency agreement (otherwise and written in the contract). For example, since you are authorities to solicit applications and collect premiums, it is implied that you are authorized to set appointments