1/A - What is Insurance?

Question 1

Insurance

Answer 1

Financial tool that protects individuals and organizations from unforeseen and extraordinary financial losses by transferring risk to another party.

Insurance transfers risk from one party to another.
- Insured purchases an insurance policy.
- Insurer provides financial protection to the
insured.

Question 2

How An Insurance Contract Works:

Answer 2

• Insured pays a premium
• Insurer promises to pay for specified losses if they occur
• Insurer’s promise gives peace of mind to insured

Question 3

Spreading Risk

Answer 3

Insurance works by spreading risk over a large group:

• Collected premiums go into a “pool” or “reserve”
• Policyholder can file a claim for covered losses
• After filing a claim, the insured becomes a claimant
• Insurer pays for claims out of the pooled premiums
• Pooled premiums should always be enough to cover losses

Question 4

Principle of Indemnity

Answer 4

Restoration of approximate previous financial condition; no more, no less

Question 5

Indemnification

Answer 5

Indemnification may include payment for:

• Repairs to property
• Reimbursements for additional living expenses
• Rental cars, hotels
• Costs directly associated with a loss, as allowed under the policy

Question 6

The Insurance Policy

Answer 6

The insurance policy:

• Contract to provide financial protection for a fee
• Legally binding because it meets the 4 requirements of a legal contract:
• agreement (aka Offer & Acceptance)
• consideration
• competent parties
• legal purpose

Question 7

Conditions

Answer 7

1. Agreement: mutual consent between the offeror and offeree (ex. signing the contract)
2. Consideration: all parties bring something of value (ex. money in exchange for a car)
3. Competent Parties: (ex. 18 years old, sober and sane)
4. Legal Purpose: (ex. no contracts for money laundering)

Question 8

Contract

Answer 8

A legally enforceable agreement between parties

Question 9

Agreement/Offer & Acceptance

Answer 9

Contract: a legally enforceable agreement between parties.
1. Agreement: mutual consent between the offeror and offeree

Acceptance Criteria:

a. Offeree communicates to the offeror his intent to enter into contract
b. Must be unconditional - the offeree accepts the terms proposed by the offeror
c. Original offeree is the only person who can legally accept an offer

Question 10

Termination of Offer

Answer 10

Offer may be terminated by:

• Revocation by offeror
• Rejection by offeree
• Time lapse
• Termination by operation of law
  
  • either party dies or becomes disabled
  • performance of contract becomes illegal after the offer
  • subject matter is destroyed

Offer rejection includes:

• Explicit rejection
• Proposal of new offer
• Counteroffer

NOTE: Asking for more information is NOT a legal rejection.