Chapter 3 - Legal Concepts of the Insurance Contract
Insurance contracts are contracts of _______________ because the contract has been prepared by one party (the insurance company) with no negotiation between the applicant and the insurer. - Any ambiguities or confusing language in a contract of adhesion involve legal interpretations affecting contracts.
Adhesion
1. A fiduciary is a person who holds a position of financial trust and confidence. 2. Agents act in a fiduciary capacity when they accept premiums on behalf of the insurer or offer advice that affects a person's financial security.
Agent as a Fiduciary
Insurance contracts are
Aleatory
Is the appearance or assumption of authority based on the actions, words, or deeds of the principal.
Apparent Authority
The insurer is considered ________ if it has been licensed or authorized by the state in which it conducts business.
Competent
1. The insurer is considered competent if it has been licensed or authorized by the state(s) in which it conducts business. 2. The applicant, unless proven otherwise, is presumed to be competent with three possible exceptions: minors, the mentally infirm, and those under the influence of alcohol or narcotics. 3. Each state has its own laws governing the legality of minors and the mentally infirm entering into contracts of insurance. These laws are based on the principle that some parties are not capable of understanding the contract.
Competent Parties
Is defined as the failure or neglect by the applicant to disclose a known material fact when applying for insurance.
Concealment
Involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm.
Gross Negligence
Is one that pays an amount equal to the loss.
Indemnity Contract
For a contract to be enforceable, the contract must have a _______________ ________________.
Legal Purpose
1. Provided full compensation for proved harm. 2. Involves the concept of "righting a wrong" done to a person and provide relief from the wrongful acts of others by awarding monetary damages as compensation. 3. Most civil court claims fall under tort law. 4. Lawsuits involving contracts fall under contract law.
Tort Law
The concept of _________ ____________ is to provide full compensation of proved harm.
Tort Law
1. Void contract: an agreement without legal effect, is missing one of the elements specified by law for a valid contract, it cannot be enforced by either party, an insurer may void an insurance policy if a misrepresentation on the application is proven to be material. 2. Voidable contract: An agreement that, for a reason satisfactory to the court, may be set aside by one of the parties in the contract, legally binding unless the party with the right to reject it wishes to do so, an insurance contract is voidable; the insurance company has the right to cancel if the policy owner stops paying the premiums. 3. The voluntary act of terminating an insurance contract is called cancellation.
Void Versus Voidable Contracts
A _______________ contract is an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties to the contract.
Voidable
1. A contract of adhesion has been prepared by one party (the insurance company) with no negotiation between the applicant and the insurer. 2. The contract can only be modified by the insurance company. 3. the applicant adheres to the terms of the contract on a "take it or leave it" basis when accepted. 4. Any ambiguities or confusing language in a contract of adhesion involve legal interpretations affecting contracts.
Adhesion
Is a person who acts for another person or entity known as the principal with regard to contractual arrangements with third parties.
Agent
1. There is an element of chance and potential for unequal exchange of value or consideration for both parties. 2. The benefits provided by an insurance policy may or may not exceed the premiums paid. 3. Both insurance and gambling contracts are typically considered aleatory contracts.
Aleatory
Insurance contracts are _____________. This mean there is an element of chance and potential for unequal exchange of valve or consideration for both parties.
Aleatory
means there is a potential for unequal exchange of value or consideration for both parties.
Aleatory
1. The failure or neglect by the applicant to disclose a known material fate when applying for insurance. 2. If the purpose of concealing information is to defraud the insurer (that is, to obtain a policy that might not otherwise be issued if the information were revealed.), the insurer may have grounds for voiding the policy. 3. Whether or not concealment is intentional or unintentional, the injured party has the right to rescind the insurance contract (make the contract null and void). 4. Materiality means, would the insurer have issued the exact same policy with the exact same terms had they have known the concealed facts at the time of application. 5. The insurer must prove concealment and materiality.
Concealment
1. The insurer's promise to pay benefits depends on the occurrence of an event covered by the contract. 2. The insurer's obligations under the contract are conditioned on specific acts by the insured or the beneficiary.
Conditional
An insurance contract is _______________ because the insurer's promise to pay benefits depend on the occurrence of an even covered by the contract.
Conditional
1. Consideration is the value given in exchange for the promises sought. 2. The applicant gives the premium and completed application in exchange for the insurer's promise to pay benefits. 3. It also contains information such as the schedule and amount of premium payments.
Consideration
The applicant gives _______________ in exchange for the insurer's promise to pay benefits
Consideration
There are four essential ____________ that must be contained in every contract for it to be legally valid and binding (enforceable): 1. Offer and acceptance 2. Consideration 3. Legal Purpose 4. Competent parties
Elements
1. The loss of defense. 2. Protects an insured if the insurer or its producers make an error, and later the insurer attempts to deny a claim.
Estoppel
Is the authority a principal deliberately gives to its agent
Express Authority
1. Under most contracts, fraud can be a reason to void a contract. 2. Under some types of insurance contracts, an insurer has only a limited period of time (contest-ability period) to challenge the validity of a contract. 3. After that period, the insurer cannot contest the policy or deny benefits based on material misrepresentations, concealment, or fraud.
Fraud
1. Contracts of insurance are binding legal agreements and are enforceable by law. 2. A policy is a written contract in which one party promises to indemnify another against loss that arises from an unknown event. 3. A policy rider or endorsement is a legal attachment amending a policy. Additional benefits or a reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider. 4. For a contract to be legally valid and binding, it must contain certain elements- offer and acceptance, consideration, legal purpose, and competent parties.
General Law of Contracts
Is the unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the principal.
Implied Authority
Can be defined as the kind of financial interest a person must have in order to possess legally enforceable insurance coverage.
Insurable Interest
Are required to make a full, fair, and honest disclosure of the risk to the agent and insurer.
Insurance Applicants
1. The object of the contract and the reason they parties enter into the agreement must be legal. 2. Insurance contracts are always considered to possess a legal purpose.
Legal Purpose
1. A contact (agreement) involves a meeting of the minds. 2. A definite, unqualified proposal (offer) by one part and the acceptance of its exact terms by the other. 3. The offer of an insurance contract is made by the applicant when the application is submitted with the initial premium. 4. The insurance company accepts the offer when it issues the policy as applied for. 5. When an offer is answered by a counter-offer, the first offer is void.
Offer and Acceptance
1. Parol Evidence is oral or verbal evidence or that which is given verbally in a court of law. 2. The parol evidence rule states that when parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.
Parol Evidence Rule
1. The owner (person) of the property is insured, not the property itself. 2. Life Insurance contracts are NOT personal contracts.
Personal Contracts
Written contract in which one party promises to indemnity another against loss that arises from an unknown event.
Policy
A ___________ _____________ or endorsement is a legal attachment amending a policy.
Policy Rider
1. Reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder 2. It also sates that an insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide.
Reasonable Expectations
1. A statement made by the applicant that they consider to be true and accurate to the best of their belief. 2. Are used by the insurer to evaluate whether or not to issue a policy. 3. like warranties, representations are not a part of the contract and need to be true only to the extent that they are material and related to the risk. 4. Statements made by applicants for insurance are considered to be representations and not warranties. 5. Cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty. 6. A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk is considered a material misrepresentation.
Representation
Is a statement made by the applicant that they consider to be true and accurate to the best of the applicant's belief.
Representation
Means the contract is made null and void.
Rescission
Is the failure to act in a reasonable or prudent manner.
Simple Negligence
What are the 3 types of negligence?
Simple, Gross, and Willful and Wanton Negligence
Has the authority to seek insurance applicants for a company but does not have any authority to bind coverage on behalf of a company to a customer.
Solicitor
Transactions are life insurance arrangements where investors persuade individuals (typically seniors) to take out new life insurance
Stranger-Originated Life Insurance (STOLI)
1. Is the right for an insurer to pursue a third party that caused an insurance loss to the insured. 2. Is used to recover the amount of the claim paid to the insured for the loss.
Subrogation
Two types of parties to an insurance contract
The Insurer and the Insured
1. Only one party (the insurer) makes any kind of enforceable promise. 2. Insurers promise to pay benefits upon the occurrence of a specific event, such as death or disability. 3. The applicant does not even promise to pay premiums. The insurer cannot require the premiums to be paid but has the right to cancel the contract if premiums are not paid.
Unilateral
Insurance contracts are _____________. This means that only one party (the insurer) makes any kind of enforceable promise.
Unilateral
1. Both the policy owner and the insurer must know all material facts and relevant information. 2. There can be no attempt by either party to conceal, disguise, or deceived. 3. Insurance applicants are required to make a full, fair, and honest disclosure of the risk to the agent and insurer.
Utmost Good Faith
Pays a stated sum regardless of the actual loss incurred.
Valued Contract
An insurance contract is either a _________________ or an _______________ _____________.
Valued Contract or Indemnity Contract
1. Valued Contract: Pays a stated sum regardless of the actual loss incurred., Life insurance contracts are valued contracts. 2. Indemnity contract: Pays an amount equal to the loss, attempts to make the insured "whole again", return the insured to their original financial position, Should not make the insured better off than they were prior to the loss. 3. Accident, health, and property insurance policies are examples of indemnity contracts.
Valued or Indemnity
A ___________ contract is simply an agreement without legal effect.
Void
When an offer is answered by a counter-offer, the first offer is
Void
1. To voluntarily relinquish or abandon a known right under an insurance contract. 2. Protects the consumer if an insurer waives its right under an insurance contract. 3. If an insurer fails to enforce (waives) a provision of a contract, it cannot later deny a claim based on a violation of that provision.
Waiver
Is the voluntary giving up of a legal, given right.
Waiver
1. A statement made by the applicant that is guaranteed to be true in every respect. 2. Becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. 3. They are presumed to be material because they affect the insurer's decision to accept or reject an applicant. 4. A warranty can be either express or implied, and ma relate to the parts, the present, the future, or to any or all of these.
Warranty
As it relates to insurance, a ______________ is a statement made by the applicant that is guaranteed to be true in every respect.
Warranty
Is considered even more severe.
Willful and Wanton Negligence