Ch. 3 - Legal Concepts of the Insurance Contract

Question 1

Adhesion

Answer 1

A contract of adhesion describes a contract that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The application adheres to the terms of the contract on a “take it or leave it” basis when excepted.

Question 2

Agent

Answer 2

An agent represent themselves and the insurer at the time of application.

Question 3

Aleatory

Answer 3

And aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event

Question 4

Apparent Authority

Answer 4

A parent authority is the appearance of the insurar providing the agent authority to perform unspecified tasks based on the agent-insurer relationship.

Question 5

Broker

Answer 5

A broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Question 6

Competent Party

Answer 6

The competent party is one who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be a legal age, mentally capable of understanding the terms and not influenced by drugs or alcohol.

Question 7

Concealment

Answer 7

Concealement is the failure of the applicant to disclose a known material fact when applying for insurance.

Question 8

Conditional

Answer 8

A conditional policy describes the insurer’s promise to pay benefits, depends on the occurrence of an event covered by the contract.

Question 9

Consideration

Answer 9

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments.

Question 10

Applicants

Answer 10

Provide the insurer with a completed application and initial premium as consideration for insurance.

Question 11

Estoppel

Answer 11

Estoppel is the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Question 12

Express Authority

Answer 12

Express authority is the explicit authority granted to the agent by the insurer, as written in the agency contract.

Question 13

Fiduciary

Answer 13

The responsibility of an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer.

Question 14

Fraud

Answer 14

Fraud includes the deliberate knowledge of or intentional deceit to make false statements to be compensated by an insurance company.

Question 15

Implied Authority

Answer 15

Implied authority is an authority not explicitly granted to the agent in the contract of agency, but which commonsense dictates the agent has. It enables the agent to carry out routine responsibilities.

Question 16

Indemnity contract

Answer 16

Insurable interest is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss.

Question 17

Insurance Policy

Answer 17

An insurance policy is a written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Question 18

Legal Purpose

Answer 18

Legal purpose means an insurance contract must be legal in nature and not in opposition to public policy.

Question 19

Material Misrepresentation

Answer 19

A material misrepresentation is a false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk.

Question 20

Parol Evidence Rule

Answer 20

Parol evidence rule involves parties who put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be arranged or modified by parol (oral) evidence.

Question 21

Policy rider or endorsement

Answer 21

A policy rider or endorsement is an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature.

Question 22

Reasonable expectations

Answer 22

Reasonable expectations means the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.

Question 23

Representations

Answer 23

Representations are statements made by the applicant that they consider to be true and accurate to the best of the applicant’s belief.

Question 24

Subrogation

Answer 24

Subrogation is the right for an insurer to pursue a third-party that caused an insurance loss to the insured.

Question 25

Unilateral

Answer 25

Unilateral contracts mean only one party, the insurer, makes any kind of enforceable promise.

Question 26

Utmost Good Faith

Answer 26

Utmost good faith involves the belief that both the policy owner and the insurer must know all material facts and relevant information, and such as, they will provide each other with all material facts and relevant information.

Question 27

Valued Contract

Answer 27

A valued contract pays a stated some regardless of the actual losses incurred. Life insurance contracts are valued contracts.

Question 28

Voidable Contract

Answer 28

A voidable contract is an arrangement that, for a reason satisfactory to the court may be set aside by one of the parties in the contract.

Question 29

Waiver

Answer 29

A waiver is the voluntary giving up of a legal, given right.

Question 30

Warranty

Answer 30

A warranty is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, it found to be untrue, can be grounds for revoking the contract.