Applying Contract Law

Question 1

Conditional contract

Answer 1

A contract that one or more parties must perform only under certain conditions.

Question 2

Utmost good faith

Answer 2

An obligation to act in complete honesty and to disclose all relevant facts.

Question 3

Material fact

Answer 3

A fact that is significant to a decision or matter at hand.

Question 4

Misrepresentation

Answer 4

A false statement of a material fact on which a party relies.

Question 5

Incontestable clause

Answer 5

A clause that states that the insurer cannot contest the policy after it has been in force for a specified period, such as two years, during the insured’s lifetime.

Question 6

Contestable period

Answer 6

A period during which an insurer can challenge the validity of a life insurance policy.

Question 7

Contract of adhesion

Answer 7

Any contract in which one party is put in a “take-it-or-leave-it” position and must either accept the contract as written by the other party or reject the contract entirely.

Question 8

Contract of indemnity

Answer 8

A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss.

Question 9

Principle of indemnity

Answer 9

The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured.

Question 10

Valued policy

Answer 10

A policy in which the insurer pays a stated amount in the event of a specified loss (usually a total loss), regardless of the actual value of the loss.

Question 11

Binder

Answer 11

A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.

Question 12

Direct-action statute

Answer 12

A law that permits a negligence victim to sue an insurer directly or to sue both the insurer and wrongdoer jointly.

Question 13

Waiver

Answer 13

The intentional relinquishment of a known right.

Question 14

Consideration

Answer 14

Something of value or bargained for and exchanged by the parties to a contract.

Question 15

Election

Answer 15

The voluntary act of choosing between two alternative rights or privileges.

Question 16

Nonwaiver agreement

Answer 16

A signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.

Question 17

Reservation of rights letter

Answer 17

An insurer’s letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.