Legal Concepts of the Insurance Contract

In order for an insurance contract to be legally binding it must have 4 essential elements

1) Offer and Acceptance 2) Consideration 3) Legal Purpose 4) Competent Parties

3 types of agent authority

1. Express 2. Implied 3. Apparent

Unilateral Contract

A one-sided agreement in which only one party, the insurance company, is legally bound to do anything - policy owner is under NO legally binding promise to pay premiums. However, the insurance company IS LEGALLY bound to pay losses covered by the policy *** If the policy owner DOESN'T pay their premiums, the insurance company does have the right to terminate the insurance policy

4) 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.

1) Offer and Acceptance

An offer is made when the applicant submits an application and money for insurance to the insurance company. The offer is accepted after it has been approved by the insurance company's underwriter and issues a policy. If no money is given, the applicant is making an invitation.

Utmost Good Faith

Implies that there will be no fraud, misrepresentation or concealment between the parties as it pertains to insurance policies - both insurance company and policy owner must be able to rely on the other for relevant and accurate info - policy owner expected to provide accurate info on the application for insurance - insurance company must clearly and truthfully describe the benefits and they must not conceal or mislead the insured

Conditional

Insurance contracts are ____ bc certain conditions must be met by all parties when a loss occurs, otherwise the contract would not be legally enforceable - if the policy owner is past due on his payments and the insured dies. The insurance company doesn't have to pay the death benefit bc a condition was not met

aleatory

Insurance contracts are _____. Which means that there is not an equal exchange of value. - Premiums paid by the insured are small in relation to the amt that will be paid by the insurance company in the event of loss

Insurance Contract

Insurance policies are legal contracts. Contract laws defines a contract as a legally binding agreement between two or more parties, where a promise of benefits is exchanged for a consideration.

A life insurance arrangement which circumvents insurable interest statutes is called?

Investor-originated life insurance (IOLI)

Stranger Oriented Life Insurance (STOLI) has been found to be a violation of which of the contractual elements?

Legal Purpose (insurable interest)

Stranger Oriented Life Insurance (STOLI)

Life insurance arrangements where investors (often strangers) persuade consumers (usually seniors) to take out NEW life insurance policies, with the investors named as beneficiary. Investors loan money to the insured to pay the premiums for a defined period. The insured ultimately assigns ownership of the policy to the investors, who receive the death benefit when the insured dies. The insured receives additional financial benefits, such as an upfront payment or a loan. illegal in some states sometimes called IOLI

Valued or Indemnity

Life insurance is valued contract, which pays a stated amount, regardless of the actual loss incurred Ex: Health Insurance -- IT only pays the amt equal to the loss -- w/ health insurance you are NOT allowed to make a profit

Insurable Interest

MOST IMPORTANT ASPECT for establishing a legal insurance contract - to purchase insurance, the policy owner must face the possibility of losing money or something of value when a loss happens - In life insurance _____ must exist bw the policy owner and the person being insured at the the time of the original application, but DOESN'T need to exist throughout the remainder of the policy

Parol Evidence Rule

Prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract.

Warranties

Statements that are guaranteed to be true and are part of the legal contract.

1) Express Authority

The authority granted to an agent by the principal (insurance company), as written in the agency contract

which of the following best describes a warranty?

a statement that is guaranteed to be true

a contract where one party either accepts or rejects the terms of a contract written by another party is

adhesion

Q purchases a $500,000 life insurance policy and pays $900 in premiums over the first six months. Q dies suddenly and the beneficiary is paid $500,000. This exchange of unequal values reflects which of the following insurance contract features?

aleatory

adhesion

also known as "take it or leave it" agreements, bc they're prepared by only ONE party, the insurance company - they are accepted or rejected by the other party, the applicant, w/ no negotiations or changes

3) Legal Purpose

an insurance contract must be legal in nature and not against public policy if an insurance contract has a insurable interest and the insured has provided written consent, it has _____

representation

are statements BELIEVED to be true, to the best of one's knowledge but are NOT GUARANTEED to be true for insurance purposes - answers that the applicant for insurance gives to the questions on the insurance application - untrue statements on the application are considered misrepresentations and could void the contract

2) Implied Authority

authority not expressed or written into the agent contract, but which the agent is assumed to have in order to transact the business of insurance for the principal - comes from the express authority , since not every single detail of an agent's authority can be spelled out in the agent's written contract

Insurance contracts are known as ____ because certain future conditions or acts must occur before any claims can be paid.

conditional

Which of the following consists of an offer, acceptance, and consideration?

contract

Personal Contract

contracts bw an individual and the insurance company, and CANNOT transfer ownership w/o the insurance company's written consent

When must insurable interest exist for a life insurance contract to be valid?

inception of the contract

A life insurance policy would be considered a wagering contract WITHOUT?

insurable interest

When third-party ownership is involved, applicants who also happen to be the stated primary beneficiary are required to have

insurable interest in the proposed insured

A policy of adhesion can only be modified by whom?

insurance company

Who makes the legally enforceable promises in a unilateral insurance policy?

insurance company

If a contract of adhesion contains complicated language, to whom would the interpretation be in favor of?

insured

Agent's Authority

is a licensed insurance producer, whose been appointed to represent an insurance company - as a representative of the insurer, ____ are given authority to perform acts on behalf of the insurance company - in the insurance business, an ____ is always considered to be acting on the behalf of the insurance company, also referred to as the principal

3) Apparent Authority

is the appearance or the assumption of authority given based on the actions or words of the principal (insurance company)

Concealment

is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision - w/ insurance it is a withholding of info by the APPLICANT that results in an inaccurate underwriting decision and can void the policy

estoppel

legal process used to prevent a party from reclaiming a right or privilege that was already waived is a legal consequence of the waiver

Insurance policies are considered aleatory bc

performance is conditioned upon a future occurence

What is the consideration given by an insurer in the Consideration clause of a life policy?

promise to pay a death benefit to a named beneficiary

2) Consideration

something of value exchanged for something else of value - consideration on the part of the insured is the payment of the premium - consideration on the part of the insurance company is a promise to pay in the event of the loss

Waiver

the act of voluntarily giving up a legal right, claim, or privilege

Investor Originated Life Insurance (IOLI)

used to circumvent state insurable interest statutes - Done when an investor/or stranger persuades an individual to take out life insurance specifically for the purpose of selling the policy to the investor. The investor compensates the insured and makes the premiums, then collects the death benefit when the insured dies sometimes called STOLI