General Insurance

Apparent Authority

(also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

Ambiguities in a Contract of Adhesion

Because only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Unilateral Contract

In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Avoidance

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Risk

Risk is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Law of Large Numbers

The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group). The law of large numbers states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.

Rescission

When an insurance applicant intentionally fails to communicate information that the insurer needs, the insurer has the right to cancel the policy even if the failure to communicate is discovered after the policy has been issued. This act is called rescission, and the insurer is said to have rescinded the policy. Upon rescission, the policyowner loses any right to file a claim on the policy, and the insurer refunds all money paid.

Speculative Risk

involves the opportunity for either loss or gain.

Pure Risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain.

Express Authority

the authority a principal intends to grant to an agent by means of the agent's contract. It is the authority that is written in the contract.

Contract of Adhesion

A contract of adhesion is 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 an insured has little to say about its provisions. In other words, insurance contracts are offered on a take-it-or-leave-it basis by an insurer,

Fraternal Benefit Societies

A fraternal benefit society is an organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government. Fraternals sell only to their members and are considered charitable institutions, and not insurers. They are not subject to all of the regulations that apply to the insurers that offer coverage to the public at large.

Responsibilities to the Applicant and Insured

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an agent handles the funds of the insured and the insurer, he/she has fiduciary responsibility. A fiduciary is someone in a position of trust. More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds. Market conduct describes the way companies and producers should conduct their business. It is a Code of Ethics for producers. Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct regulations include, but are not limited to, the following: Conflict of interest; A request of a gift or loan as a condition to complete business; and Supplying confidential information. Producers are required to perform in a professional manner at all times. Professionalism means that a person is engaged in an occupation requiring an advanced level of training, knowledge, or skill. Being professional means placing the public's interest above one's own in all situations. Any deviation could result in a penalty.

Admitted vs. Nonadmitted Insurers

Before insurers may transact business in a specific state, they must apply for and be granted a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or nonadmitted. Most states have laws that prohibit unauthorized insurers from conducting business in the state, except through licensed excess and surplus lines brokers.

Exposure

Exposure is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates: The age of the insured; Medical history; Occupation; and Sex. A large number of units having the same or similar exposure to loss is known as homogeneous. The basis of insurance is sharing risk among the members of a large homogeneous group with similar exposure to loss.

Private vs. Government Insurers

Federal and state governments provide insurance in the areas where private insurance is not available, called social insurance programs. Government insurance programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood insurance. The major difference between government programs and private insurance programs is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

Domestic, Foreign and Alien Insurers

Insurance companies are classified according to the location of incorporation (domicile). Regardless of where an insurance company is incorporated, it must obtain a Certificate of Authority before transacting insurance within the state. A domestic insurer is an insurance company that is incorporated in this state. In most cases, the company's home office is in the state in which it was formed — the company's domicile. For instance, a company chartered in Pennsylvania would be considered a Pennsylvania domestic company. A foreign insurer is an insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam or American Samoa). For example, a company chartered in California would be a foreign company within the state of New York. An alien insurer is an insurance company that is incorporated outside the United States.

Aleatory Contract

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Reinsurance: Insurance for Insurers

Reinsurance is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer). The other insurer is called the assuming insurer, or reinsurer. When reinsurance is purchased on a specific policy, it is classified as facultative reinsurance. When an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it, it is classified as a reinsurance treaty. Treaties are usually negotiated for a period of a year or longer.

Retention

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is To reduce expenses and improve cash flow; To increase control of claim reserving and claims settlements; and To fund for losses that cannot be insured.

Reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Financial Status (Independent Rating Services)

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following various independent rating services: AM Best Fitch Standard and Poor's Moody's Weiss

Competent Parties

The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age (14 1/2 in New York), mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Utmost Food Faith

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.

Offer and Acceptance

There mus be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy

Elements of Insurable Risks

Due to chance: A loss that is outside the insured's control. Definite and measurable: A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable. Statistically predictable: Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. Not catastrophic: Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss cause by nuclear wars or events. Randomly selected and large loss exposure: There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

Stock Companies

Stock companies are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, stock companies issue nonparticipating policies, in which policyowners do not share in profits or losses. A nonparticipating (stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.