Ch 3 - Legal Concepts of the Insurance Contract

Question 1

Consideration

Answer 1

Consideration is something of value that each party gives to each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit.

Question 2

Aleatory

Answer 2

Aleatory is a feature of insurance contracts in that there is an element of chance for both parties and that the dollar given by the policyholder (premium) and the insurer (benefits) may not be equal. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the even of a loss.

Question 3

Apparent Authority

Answer 3

Apparent Authority deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. Apparent authority is a situation in which the insurer gives the customer reasonable belief that the agent has the power and authority to bind the principal.

Question 4

Competent Party

Answer 4

A 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 of legal age, mentally capable of understanding terms, and not influenced by drugs or alcohol.

Question 5

Conditional Contract

Answer 5

A Conditional Contract means certain conditions must be met by all parties in the contract. This is needed when a loss occurs in order for the contract to be legally enforceable. All insurance contracts are conditional contracts.

Question 6

Concealment

Answer 6

Concealment is the failure of the insured to disclose to the company a fact material to the acceptance of the risk at the time application is made.

Question 7

Contract of Adhesion

Answer 7

In a contract of adhesion, there is only one author - the insurance company. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion.

Question 8

Express Authority

Answer 8

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

Question 9

Fiduciary Responsibility

Answer 9

Fiduciary Responsibility describes the relationship between agent or producer and client to company funds. Because the agent handles the money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling.

Question 10

Health Insurance Contracts

Answer 10

Health Insurance contracts are indemnity contracts and will only reimburse the actual cost of the lass (pay medical bills, etc.) You can’t profit from an indemnity contract.

Question 11

Implied Authority

Answer 11

Implied Authority is authority not specifically granted to the agent in the contract agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities.

Question 12

Insurable Interest

Answer 12

Insurable Interest requires that an individual have valid concern for the continuation of the life or well-being of person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Insurable interest only needs to exist at the time of the application (the inception of the contract).

Question 13

Law of Agency

Answer 13

The Law of Agency establishes a relationship in which one person is authorized to represent and act for another person or company. In applying the law of agency, the insurance company (insurer) is the principal. An agent or producer will always be deemed to represent the insurance company and not the applicant. In regard to the insurance contract, any knowledge of the agent is considered to be knowledge of the insurance company (insurer). If the agent is working within the conditions of his/her contract, the insurance company is fully responsible.

Question 14

Legal Purpose

Answer 14

Legal purpose means an insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void.

Question 15

Life Insurance Contracts

Answer 15

Life insurance contracts are valued contracts, which means it will pay a stated amount.

Question 16

Offer and Acceptance

Answer 16

Offer and acceptance is an offer that may be made by the applicant by signing the application, paying the first premium, and if necessary, submitting to a physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or, the offer may be hand made by the company when no premium is payment is submitted with the application. Premium payment on the offered policy then constitutes acceptance by the applicant.

Question 17

Policy

Answer 17

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

Question 18

Policy Rider

Answer 18

A legal attachment amending a policy. Additional benefits or reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider.

Question 19

Representations

Answer 19

Representations are statements made by applicants on the applications for insurance that they represent as being substantially true to the best of their knowledge and belief, but that are not warranted as exact in every detail.

Question 20

Stranger-Originated Life Insurance (STOLI)

Answer 20

STOLI is life insurance arrangements where investors persuade consumers (usually seniors) to take out a new life insurance policy, with investors named as beneficiary. Investors loan money to the insured to pay premiums for a defined period. The insured ultimately assign ownership of the policy to investors, who relied on the death benefit when the insured dies. The insured receives additional financial benefits, such as an upfront payment for a loan.

Question 21

Unilateral Contract

Answer 21

A Unilateral Contract is a one-sided agreement, where only the insurer is legally bound. In an insurance contract, not the insurance company is legally bound to do anything.

Question 22

Utmost Good Faith

Answer 22

Utmost Good Faith implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies.

Question 23

Voidable Contract

Answer 23

A voidable contract is an agreement without legal effect: an invalid contract. Fraud: In the event of fraud, insurance contracts are unique in that they run counter to the basic rule of contract law. Under most contracts, fraud can be a reason to void a contract. With life insurance contracts, an insurer has only a limited period of time (usually 2 years from the date of issuance) to challenge the validity of a contract. After that period, the insurer can’t contest the policy of deny benefits based on material misrepresentations, concealment, or fraud, Forms: The insurance carrier is responsible to assembling forms for the insured person(s). Warranties are statements made on an applicant for insurance that are warranted to be true; that is, they are exact in every detail as opposed to representations. Statements on applications for insurance are rarely warranties unless fraud is involved.

Question 24

Waiver

Answer 24

A Waiver is an agreement waiving the company’s liability or a certain type or types of risk ordinarily covered in the policy; a voluntary giving up a legal, given right.

Question 25

Estoppel

Answer 25

The legal process of preventing one party from reclaiming a right that was waived.

Question 26

Parol Evidence Rule

Answer 26

Rule that prevents parties in a contract from changing the meaning of a written contract by introducing oral or written evidence made prior to the formation of the contract, but are not part of the contract.

Question 27

Subrogation

Answer 27

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