CA P&C: Legal Contract Principles

Question 1

Aleatory Contract

Answer 1

A contract in which the number of dollars to be given up by each party is not equal. Insurance contracts are of this type, as the policyholder pays a premium and may collect nothing from the insurer or may collect a great deal more than the amount of the premium if a loss occurs.

Question 2

Contract of Adhesion

Answer 2

This is a characteristic of a unilateral contract which is offered on a “take it or leave it” basis. Most insurance policies are contracts of “adhesion,” because the terms are drawn up by the insurer and the insured simply “adheres.” For this reason ambiguous provisions are often interpreted by courts in favor of the insured.

Question 3

Conditional Contract.

Answer 3

There are conditions which must be met by both parties before the contract is legally enforceable. In an insurance contract conditions for both the insurer and insured are spelled out in the policy form.

Question 4

Personal

Answer 4

A personal contract is between two specific parties and generally cannot be transferred to other parties, unless under conditions specified in the contract. Insurance policies are usually not transferable unless the insurer agrees to do so.

Question 5

Unilateral Contract

Answer 5

A contract such as an insurance policy in which only one party to the contract, the insurer, makes any enforceable promise. The insured does not make a promise but pays a premium, which constitutes the insured’s part of the consideration.

Question 6

Utmost Good Faith

Answer 6

Acting in fairness and equity with a sincere belief that the act is not unlawful or harmful to others. The insurance contract requires that each party is entitled to rely upon the representations of the other without attempts to conceal or deceive

Question 7

Concealment.

Answer 7

The failure to disclose a material fact and may be intentional or un-intentional. If concealment occurs, the injured party may rescind the contract.

Question 8

Materiality.

Answer 8

In insurance, it refers to a fact which is so important that the disclosure of it would change the decision of an insurance company, either with respect to writing coverage, settling a loss, or determining a premium. Usually, the misrepresentation of a material fact will void a policy.

Question 9

Fraud

Answer 9

Deceit, trickery or misrepresentation with the intent to induce another to part with something of value or surrender a legal right. (One party intentionally deceives the other in order to receive an unlawful gain) If fraud occurs, the injured party may rescind the contract.

Question 10

Waiver

Answer 10

The act of giving up or surrendering a right or privilege that is known to exist. In property and liability fields, it may be effected by an agent, adjuster, company, employee, or company official, and it can be done either orally or in writing.

Question 11

Estoppel

Answer 11

The legal principle whereby a person loses the right to deny that a certain condition exists by virtue of having acted in such a way as to persuade others that the condition does exist. For example, if an insurer allows an insured to violate one of the conditions of the policy, the insurer cannot at a later date void the policy because the condition was violated. The insurer has acted in such a way as to lead the insured to believe that the violation did not void the coverage.

Question 12

Warranty

Answer 12

A statement made on an application for most kinds of insurance that is warranted as true in all respects. If untrue in any respect, even though the untruth was not known to the applicant, the contract may be voided/rescinded without regard to the materiality of the statement. By contrast, statements in life and health applications are not warranties except in cases of fraud, and the trend in more recent court decisions in other lines has tended to modify the doctrine of warranty to an application only when the statement is material to a risk or the circumstances of a loss.

A warranty may be either expressed or implied. An expressed warranty is a written warranty while an implied warranty is not in writing.
A warranty may relate to the past, present or future.
A particular form of words is not necessary to create a warranty.

Question 13

Representation

Answer 13

A statement made on an application for insurance that the applicant represents as correct to the best of his or her knowledge and belief .

Representations :

1. may be oral or written
2. may occur before or after a policy is issued
3. is to be interpreted by the same rules as contracts
4. may apply to the future
5. does not have to be in writing
6. may be altered or withdrawn before the insurance is effected, but not afterwards

For example, An agent tells a client that their policy has coverage for the peril of “earthquake.” When the agent returns to the office, they discover “earthquake” is not covered in the policy, and calls the client to explain that “earthquake” is not covered in the policy and withdraws the representation. Had the agent not withdrawn the representation, “earthquake” would be covered under that policy due to the oral representation of agent.

7. are false when the facts fail to correspond with its assertions or stipulations
8. The materiality of representation is determined by the same rule as the materiality of concealment

9 if a representation is false in a material point, the injured party is entitled to rescind the contract from the time the representation becomes false.

Question 14

Misrepresentation

Answer 14

Purposely stating incorrectly a material fact with the intent to deceive another party (which could make a policy null and void)

Misrepresentations may pertain to: (CIC 780-784)

1. policy coverages
2. benefits or privileges guaranteeing future dividend payments
3. inducing clients to change policies with no benefit to the client
4. inducing clients to lapse, forfeit, change or surrender policies with no benefit to the client