Ch. 1 Contract Law, Producers, And Types of Insurers Flashcards
How do parties come to an agreement in an insurance contact? (Offer and acceptance)
The applicant usually makes the offer. It is either accepted or declined. To demonstrate acceptance, the insurance company has to deliver the policy and the applicant MUST submit an initial premium. It is possible to have the insurer make a counteroffer.
What are the four elements that must be present in order for any contract to be legal and enforceable?
1) agreement
2) consideration
3) competent parties
4) legal purpose
What is consideration?
The binding force of the policy. Each party must provide the other with something of value.
The applicant’s consideration is the premium and representations on the application.
The insurer’s consideration is the promise to pay legitimate claims.
List 5 categories of persons who do not have legal capacity to enter into a contract.
1) minors
2) legally insane
3 persons under the influence
4) persons coerced or forced to enter contract under duress.
5) enemy aliens
What does the concept of legal purpose mean?
Contract must be create with public interest in mind. Cannot be illegal.
Why is an instance policy unilateral?
The language is developed by one party– the insurer. If is a one-sided contract. The insured pays the premium and then the company promises to pay valid claims. In this aspect it is one-sided because the insured already did his part. Now the company has to pay valid claims.
What is a contact of adhesion?
One party draws up the contract and the other “adheres” to it. Ambiguities are usually decided in the insured’s favor in court.
Why is the doctrine of reasonable expectations?
A court of law will generally state that an insurance contract may be interpreted by a “reasonable” consumer to mean what the producer or insurer indicated it means or what he or she interpreted it to mean.
Why is an insurance contract aleatory?
One party may recover more in value than he or she has parted with based upon a possible future event. Unequal payment or consideration/coverage in return for a small fee.
Why is an insurance policy conditional?
It is conditional upon performance of the parties. Insured promises to pay claims if insured pays premium.
How is an insurance policy a personal contract?
It is between the insurer and the insured, not the home or auto.
Define utmost good faith
Each party must tell the truth. Each party relies on statements of the other. If the insured intentionally conceals information, the contract can be voided.
What are representations?
Statements that are made by an applicant that are true. They are recorded on an application and are usually answers to questions.
Define misrepresentations
Incorrect statements by an applicant; a false fact.
Define material misrepresentation.
Untrue statement that, if known by the insurer at the time of application, would have caused the application to be rejected. Ex. Any serious violations in last three years? If insured misrepresents, policy could be voided.
What is a warranty?
A statement made by the applicant that is totally and unequivocally true. Ex. Promise to install burglar alarm. If bank is robbed and alarm isn’t installed the is no coverage.
What is concealment?
Failure to disclose material facts that the applicant should know the insurer would want to know. Ex. Failure to tell insurer about treehouse.
What is fraud?
Intentional and deliberate deception.
Explain the concept of waiver.
Def: intentional abandonment or voluntary relinquishment of a known right found in the policy.
Waiver helps an insured avoid denial of a claim of the insurer makes a waiver. Ex. If an insured tells an agent about an unlisted operated and doesn’t endorse the policy, coverage still applies if there is a loss because the agents knowledge is presumed to be the insurer’s; they knowingly and voluntarily waived the right to deny coverage.
Ex 2: failing to cancel a policy if insured doesn’t pay the premium.
This occurs when an insurer attempts to deny a payment for a false statement made by one party, which is relied on by another, but cannot deny the payment. Ex. Agent telling insured they have 90 days to list a licensed household member when, in fact, they only have 60.
Estoppel
An insurance principal where an insurer cannot deny a payment in the case of a false statement made by one party which is relied on by another party. (Ex. Agent telling insured they have 90 days to list a licensed household member when, in fact, they only have 60.
Estoppel.
What are the four sections of an insurance contract?
Declarations
Insuring agreement
Conditions
Exclusions
The section of a policy which contains the insured’s name, a description of the property insured, the coverage period, the coverage limits, etc
Declarations.
The section of the policy that summarizes the agreement between the insurer and the insured. This includes the covered perils and promise to pay.
Insuring agreement.
The section of the policy that contains the responsibilities of each party to the contract. Examples include: protect property from further damage after a loss, cooperate, submit written proof of loss, etc.
Conditions
The section of property insurance policies that identifies the types of property and the causes of loss that are not covered.
Exclusions
What are some of the purposes of exclusions?
Protect the insurer from financial disaster by excluding catastrophic or uninsurable losses.
Eliminate duplicate coverage.
Keep cost of insurance low by excluding things such as wear and tear or depreciation.
What do underwriters do?
Obtain as much information as possible in order to decide whether to accept or decline an application.
Assess and select risks.
Classify the risk and determine the applicable premium rate.
Reduce adverse selection.
What are some of the variables or components involved in determining insurance rates?
Loss history
Occupancy
Construction Type
The tendency of poorer risks to seek insurance.
Adverse selection.
The ratio of losses incurred to premiums earned.
Earned premium.
The ratio of expenses incurred by the insurer in producing the policy to premiums earned.
Expense ratio.
The combination or sum of the loss and expense ratios.
Combined ratio.
Type of construction where exterior walls are made primarily of wood or another combustible material. The highest classification.
Frame
A type of construction where walls are fire-resistive. Can be classified as non-combustible or the structure, including floors as the roof, are made of slow-burning materials.
Masonry
The best construction type from a rating standpoint. Walls are made with a non-combustible materials and there are usually firewalls which confines or prevents damage for at least two hours.
Fire-Resistive.
Construction type where only a roof, flooring, or some interior framing are combustible.
Joists masonry.
What are some of the sources of underwriting information?
Application Producer Information Inspections Consumer Reports Information Bureaus (ex. AIBDCD, RMV)
A Federal law passed in 1970 which permits an insurer to conduct consumer or other reports and allows the applicant to receive a copy of the information in the report, especially of coverage has been denied as a result of information derived from the report.
The Fair Credit Act of 1970
Rates that are developed using an underwriters judgment. These usually involve “one of a kind” exposures.
Judgment rating.
This rating method uses rates printed in the rating manual which are based on loss statistics of a large number of insureds.
Manual rating.
This rating method modifies rates printed in a rating manual to reflect additional loss experiences (ex. Good driver credit, loss free years)
Merit rating
Who are the parties in an agent/insurer relationship?
The insurer is the principal/authorized representative of the principal. When principal acts within scope of his or her authority, the insurer or principal us bound or responsible for such action.
Agent authority which is defined or contained in the agent contract or agreement. This authority also extends to a producer.
Actual or Express Authority.
Unwritten agent authority. Ex. A regular duty of an agent such as an agent asking questions about the insured’s loss history.
Implied authority.
The type of authority the insurance buying public perceives the agent possesses based on his or her sections. Does not possess but the public thinks he or she does.
Apparent authority.
What are some of the responsibilities of an agent to an insured?
- fiduciary responsibility
- payment to the producer is payment to the insurer
- continuing education requirements
- must have e&o coverage
What are the three main types of insurers?
According to ownership -stock insurer -mutual insurer According to domicile -domestic -foreign -alien According to Authorization -authorized -unauthorized
An insurer that is incorporated or chartered in a particular state and its principal or home office is located in that state.
Domestic insurer.
An insurer authorized to operate in a particular state but is chartered or domiciled in a different state.
Foreign insurer. Ex. Safety in NH
A carrier with a principal office in another country but is authorized to operate in a particular state.
Alien insurer. Ex. Sun Life
Benevolent societies which operate on the “lodge system” and make insurance products available for the benefit of their members.
Fraternal associations
A concept that involves a company or individual using its assets to pay for losses, instead of buying insurance.
Self insurer
Not for profit unincorporated association generally consisting of five or more private or public employers who are engaged in the same trade or professional association which has not been in existence for less than five years, and who enter into agreements to pool their liabilities for workers comp and other specified forms of liability insurance.
Self insurance groups
A group-owned liability insurer which assumes and spreads products liability and other forms of commercial liability risks among its members. It is formed for the primary purpose of retaining or pooling risks. Can be licensed in one state and insure members in any state.
Risk retention group
What does the Risk Retention Act of 1986 state?
A RRG must form as a liability insurer under the laws of at least one state. The owners of the group must be its insureds. Was formed in response to products liability crisis in the 1970’s.
Lines of insurance that are available to people who need coverage unavailable by admitted insurers. These risks don’t meet underwriting requirements of the standard market.
Surplus lines
What is an export list?
A tool used by brokers which identifies certain kinds of coverages and classes of business operations that have been deemed to be insurable through surplus lines and are usually rejected by the voluntary or admitted market.
Provide examples of exposures surplus lines might cover.
“Hole in one” insurance, nonappearance insurance, auto racing coverage.
How does one qualify for a surplus lines policy?
An effort has to be made to secure coverage in the standard market. An affidavit has to be signed indicating that they made an effort to write voluntarily.
Why does the government provide insurance:?
1) High risk exposures that the private insurance sector is not willing nor able to assume. (ex. Nuclear exposures, flood).
2) serve the needs of the pubic (Social Security, unemployment)
3) provide coverage to those who can’t obtain voluntary insurance (MAIP, FAIR Plan)
This act serves as a financial backstop enabling commercial insurers to provide affordable terrorism coverage to policyholders. It renders terrorism exclusions null and void, but doesn’t provide coverage pricing guidelines.
Terrorism Risk Insurance Act of 2002
Which insurers does TRIA pertain to?
Commercial only.
How do certified terrorism losses differ from uncertified?
Certified losses involve a foreign person or foreign interest whereas non-certified losses may not.
Which two limitations apply to non-certified terrorism losses?
1) exclusions for acts of terrorism only apply if the acts of terrorism result in industry-wide losses that exceed $250MM for related incidents that occur within a 72 hour period.
2) exclusions for acts of terrorism are not subject to the limitations previously mentioned if: the acts invokes the use or release of nuclear materials, the act is carried out by the means of dispersal of pathogenic or biological materials, or pathogenic or biological materials are released and it appears that the purpose of the terrorism was to release such materials.
What are the four requirements for an act to be deemed an “act of terrorism?”
1) violent act or dangerous to human life, property, or infrastructure
2) resulted in damage within the US, or to an air carrier as defined in the US code
3) it must have been committed by someone acting on behalf of a foreign person of interest, as part of an effort to coerce the civilian population of the US or to influence the policy or affect the conduct of the government by coercion.
4) it must produce property and casualty losses of $100MM or more, or result in a loss of fifty or more lives (or serious physical injury, disfigurement of loss or impairment of a bodily function.
An act will not be certified as terrorism if it is committed as part of the course of war declared by Congress.
What are the two conditions that just be satisfied before a terrorism exclusion can be reinstated?
1) written statement from the insured authorizing the reinstatement.
2) failure of the insured to pay the terrorism premium within 30 days after the insurer provides notice as required by the act.
What is the possible penalty to a licensee for material representation that threatens the solvency of an insurer?
Up to 15 years. Under Federal Regulation 18 USC 1033 & 1034.
How does the Violent Crime Control Act pertain to insurance?
It provides criminal and civil enforcement provisions for insurance fraud committed by persons in the insurance industry. It makes it illegal for an individual convicted of a crime involving dishonesty, breach of trust or fiduciary responsibilities or a violation of the Act to work or continue to work in the insurance business without receiving written consent from an insurance regulatory official.
What are the two groups of insurance companies based on their distribution systems?
1) insurers operating through the American Agency System
2) direct writing insurers. (captive or controlled agents! Work through sales representatives. Exclusive to one insurer.
An insurer which does not market their products through agents or brokers.
Direct response insurers.
What re the five factors AM Best looks at when evaluating insurers?
1) underwriting procedures and results of the insurer.
2) the insurer’s economy of management
3) the adequacy of reserves in order to pay claims
4) the adequacy of policyholders surplus to absorb shocks
5) investment soundness of premiums collected
