Chapter 1(Contracts)

Question 1

A contract

Answer 1

is an agreement between two or more parties enforceable by law

Question 2

In order for insurance contracts to be legally binding, they must have what 4 essential elements?

Answer 2

1. Agreement — offer and acceptance;
2. Consideration;
3. Competent parties; and
4. Legal purpose.

Question 3

There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant usually makes the _________ when submitting the application. ___________ takes place when an insurer’s underwriter approves the application and issues a policy.

Answer 3

offer, Acceptance

Question 4

The binding force in any contract is the ___________.

Answer 4

consideration

(Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.)

Question 5

Insurer’s consideration

Answer 5

is the promise to pay for losses; insured’s consideration is the payment of premium and statements on the application.

Question 6

The ______________ must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Answer 6

parties to a contract

Question 7

The purpose of the contract must be _______ and not against public policy.

Answer 7

legal

(To ensure legal purpose of a Life Insurance policy, for example, it must have both: insurable interest and consent. A contract without a legal purpose is considered void, and cannot be enforced by any party.)

Question 8

If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could _______________

Answer 8

reasonably expect coverage.

Question 9

Indemnity (sometimes referred to as reimbursement)

Answer 9

is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

( Ex. Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount of insurance).

Question 10

Indemnity means insureds cannot recover _________ than their loss.

Answer 10

more

Question 11

utmost good faith

Answer 11

implies that there will be no fraud, misrepresentation or concealment between the parties.

Question 12

Representations

Answer 12

are statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true.

(For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.)

Question 13

Untrue statements on the application are considered ______________and could void the contract.

Answer 13

misrepresentations

Question 14

A material misrepresentation

Answer 14

is a statement that, if discovered, would alter the underwriting decision of the insurance company.

Question 15

Furthermore, if material misrepresentations are __________, they are considered fraud

Answer 15

intentional

Question 16

___________ are statements believed to be true. Insured’s statements on the application are representations.
Warranties

Answer 16

Representations

Question 17

A warranty

Answer 17

is an absolutely true statement upon which the validity of the insurance policy depends.

(reach of warranties can be considered grounds for voiding the policy or a return of premium so statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.)

Question 18

Concealment

Answer 18

is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision

(In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.)

Question 19

Fraud

Answer 19

is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party.

(Fraud is grounds for voiding an insurance contract.)