1.10 Contracts

Question 1

Contract Law

Answer 1

Pertains to the formation and enforcement of contracts.

Question 2

Tort Law

Answer 2

Torts are civil wrongs; they’re not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

Question 3

Hold Harmless Agreement

Answer 3

A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.

Question 4

Reasonable Expectations Doctrine

Answer 4

What a reasonable and prudent policyowner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.

Question 5

Four Elements of a Legal Contract - (Absence of any one can void the contract)

Answer 5

A contract is an agreement between two or more parties in which there is a promise to do something in return for a valuable benefit known as a consideration. The parties to each agreement are subject to the specific terms of that agreement, which govern the way its provisions are carried out.

In the formation and enforcement of any legal contract, 4 necessary elements must have existed at the time the contract was executed between the parties.
They are:

1, Competent Parties

2. Legal Purpose
3. Agreement
4. Consideration

Question 6

1. Competent Parties - (Four Elements of a Legal Contract)

Answer 6

All parties to a contract (i.e., insurer and insured) must have legal capacity to enter into a contract. Those without legal capacity include:

A. Minors – The insurer may be held responsible for its obligations. However, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance.

B. The mentally incompetent or incapacitated

C. Persons under the influence of drugs or alcohol

Question 7

2. Legal Purpose - (Four Elements of a Legal Contract)

Answer 7

All parties to a contract must enter it for a legal purpose and in good faith; public policy cannot be violated by a legal contract.

Question 8

3. Agreement - (Four Elements of a Legal Contract)

Answer 8

One party must make and communicate an offer to the other party and the second party must accept that offer. Without an offer, there is nothing to accept, and without acceptance of an offer, there can be no agreement. Offer, acceptance, or agreement can represent this element.

Offer - The offer made to enter into an insurance contract is most commonly done through an application, accompanied by an initial premium, submitted by the applicant.

Acceptance - The acceptance of an offer to provide an insurance contract takes place when the insurance company agrees to issue the insurance applied for, after receiving an initial premium and complete application. If the applicant is insurable, but only under less favorable terms than were initially applied for, the insurer may make a counteroffer. In such cases, the insured has been determined to be acceptable to the insurance company, but a policy will not be in force until the applicant pays a higher premium and/or accepts any conditions imposed on the coverage (such as reduced benefits).

Question 9

4. Consideration - (Four Elements of a Legal Contract)

Answer 9

Something of value is exchanged by each of the parties to the contract; the exchange of money (first premium only) for a promise (the guarantees within the contract). The consideration made by the applicant is the information on the application and the initial premium payment. If an application is not accompanied by the initial premium, no offer has been made in the technical sense, since the consideration given is incomplete. If the insurer still offers a policy based on the application (notice the policy is now an offer), then acceptance is given when the initial premium is paid. At that point, consideration is complete, and the policy is in force. The consideration provided by the insurer is its promise to pay for covered losses—the contract itself.

Question 10

Insurance Contract Terms

Answer 10

These terms are commonly used when describing insurance contracts:

A. Idemnity Contract

B. Parol Evidence Rule

C. Valued Contract

D. Subrogration

Question 11

Idemnity Contract - (Insurance Contract Terms)

Answer 11

Pays a specified dollar amount, as stated in the contract, up to the amount of the actual loss. These contracts are considered reimbursement plans

Question 12

Parol Evidence Rule - (Insurance Contract Terms)

Answer 12

A written contract may not be altered without the written consent of both parties.

Question 13

Valued Contract - (Insurance Contract Terms)

Answer 13

A contract that pays a specified amount regardless of the actual loss. A life insurance contract is an example of a valued contract. It has a face value that provides a death benefit in the event of a loss.

Question 14

Subrogation

Answer 14

Occurs when a claim is paid by the insurer who has the contract and the right to take legal action against a negligent third party who may have caused the loss. Life policies have no right of subrogation.

Question 15

Characteristics of an Insurance Contract

Answer 15

1. Contract of Adhesion
2. Aleatory Contract
3. Personal Contract
4. Unilateral Contract
5. Conditional Contract

Question 16

Contract of Adhesion - (Characteristics of an Insurance Contract)

Answer 16

One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a “take-it-or-leave-it” basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Question 17

Aleatory Contract - (Characteristics of an Insurance Contract)

Answer 17

Aleatory Contract – The exchange of value is unequal. The insured’s premium payment is less than the potential benefit to be received in the event of a loss. The insurer’s payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn’t occur), than the insured’s premium payment.

Question 18

Personal Contract – (Characteristics of an Insurance Contract)

Answer 18

A contract between the insurance company and an individual. Personal contracts are specific to the person insured at the time the contract is formed. The owner and insured cannot be changed without the consent of the insurance company. A property and casualty insurance contract is personal since it cannot be assigned. Life insurance is NOT a personal contract. The policy can be assigned – or a new owner may be named as long as the insurer is notified of the change.

Question 19

Unilateral Contract - (Characteristics of an Insurance Contract)

Answer 19

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract. The policyowner can cancel the policy at any time and for any reason. The policyowner is not required to continue paying future premiums.

Question 20

Conditional Contract - (Characteristics of an Insurance Contract)

Answer 20

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy’s terms and conditions. Without premiums being paid on time and in full the insurer is not obligated to pay the claim if the policy lapses.

Question 21

Legal Interpretations Affecting Contracts

Answer 21

A. Principle of Indemnity

B. Utmost Good Faith

C. Representations

C.1 Material vs. Immaterial Representations

D. Misrepresentations

E. Warranties

F. Concealment

D. Fraud

E. Waiver

F. Estoppel

Question 22

Principle of Indemnity - (Legal Interpretations Affecting Contracts)

Answer 22

The insured is restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction.

Question 23

Utmost Good Faith - (Legal Interpretations Affecting Contracts)

Answer 23

Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made

Question 24

Representations - (Legal Interpretations Affecting Contracts)

Answer 24

Statements made by the applicant on the application are considered representations and not warranties. The representations are statements that are believed to be true to the best of the knowledge and belief of the applicant/insured at the time of application.

Question 25

Material vs. Immaterial Representations - (Legal Interpretations Affecting Contracts)

Answer 25

Statements that impact the acceptance of an insurable risk –whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk – are considered to be material. Immaterial representations do not affect the acceptance or rating of the risk.

Question 26

Misrepresentations - (Legal Interpretations Affecting Contracts)

Answer 26

A false statement contained in the application; it usually does not void coverage or the policy, if it is immaterial. If the statement is material to the issuance of coverage, meaning the insurer would not have issued a policy had the misrepresentation not been made, or premiums charged would have been higher, or coverage limited, coverage does not apply. A material misrepresentation may void the policy.

Question 27

Warranties - (Legal Interpretations Affecting Contracts)

Answer 27

Statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided.

Question 28

Concealment - (Legal Interpretations Affecting Contracts)

Answer 28

The willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim). Concealment may result in denial of coverage and may void the policy.

Question 29

Fraud - (Legal Interpretations Affecting Contracts)

Answer 29

Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements:

1. False statement, made intentionally and that pertaining to a material fact
2. Disregard for the victim
3. Victim believes the false statement
4. Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement
5. The victim’s decision and/or action results in harm

Question 30

Waiver - (Legal Interpretations Affecting Contracts)

Answer 30

Voluntary surrender of a known right, claim or privilege; An example would be an insurer’s failure to obtain an answer to an unanswered question in its application for insurance prior to issuing the policy. Such a failure waives the insurer’s right to contest a claim based on the information it could reasonably have obtained. It may also be in cases in which the insurer accepts an overdue premium that keeps the policy in-force.

Question 31

Estoppel

Answer 31

Judicial denial of a contractual right based on prior actions that are contrary to what the contract requires.

Example
An insurer who routinely does not require an application for reinstatement cannot contest a claim because an application was not submitted even though it is a requirement stated in the reinstatement provision in its contracts. In the law, there are several different forms of estoppel. If the insurer waives its rights, it cannot later then assert those rights.