Chapter 2

Question 1

The following four essential elements must be contained in every contract for it to be legally valid and binding (enforceable):

Answer 1

Offer and acceptance
Consideration
Legal purpose
Competent parties

Question 2

When an offer is answered by a counter-offer, the first offer is a

Answer 2

void

Question 3

Void Contract

Answer 3

an agreement without legal effect.

Question 4

voidable contract

Answer 4

an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties to the contract.

Question 5

Rescission

Answer 5

means the contract is made null and void.

Question 6

Insurance contracts are aleatory. What does this mean?

Answer 6

This means there is an element of chance and potential for unequal exchange of value or consideration for both parties.

Question 7

An insurance contract is either a

Answer 7

valued contract or an indemnity contract.

Question 8

valued contract

Answer 8

pays a stated sum regardless of the actual loss incurred.

Question 9

indemnity contract

Answer 9

is one that pays an amount equal to the loss.

Question 10

policy

Answer 10

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

Question 11

Insurance applicants

Answer 11

make a full, fair, and honest disclosure of the risk to the agent and insurer.

Question 12

Insurable interest can be defined as

Answer 12

the kind of financial interest a person must have in order to possess legally enforceable insurance coverage.

Question 13

Insurance is a contract of

Answer 13

utmost good faith

Question 14

A policy rider or endorsement

Answer 14

is a legal attachment amending a policy.

Question 15

For a contract to be legally valid and binding, it must contain:

Answer 15

offer and acceptance,
consideration,
legal purpose, and
competent parties.

Question 16

The applicant gives consideration in exchange for

Answer 16

the insurer’s promise to pay benefits.

Question 17

For a contract to be enforceable, the contract must have a

Answer 17

legal purpose

Question 18

Each state has its own laws governing the legality of _ and _

Answer 18

minors and the mentally infirm entering into contracts of insurance.

Question 19

Insurance contracts are

Answer 19

aleatory

Question 20

Aleatory means

Answer 20

there is a potential for unequal exchange of value or consideration for both parties.

Question 21

Insurance contracts are contracts of

Answer 21

adhesion because the contract has been prepared by one party (the insurance company) with no negotiation between the applicant and the insurer.

Question 22

Any ambiguities or confusing language in a contract of adhesion involve

Answer 22

legal interpretations affecting contracts.

Question 23

The insurer is considered _ if it has been licensed or authorized by the state in which it conducts business.

Answer 23

competent

Question 24

Most insurance is considered to be a

Answer 24

a personal contract or personal agreement between the insurer and the insured.

Question 25

Insurance contracts are unilateral this means_?

Answer 25

that only one party (the insurer) makes any kind of enforceable promise

Question 26

An insurance contract is conditional because the?

Answer 26

insurer’s promise to pay benefits depend on the occurrence of an event covered by the contract.

Question 27

As it relates to insurance, a warranty is a

Answer 27

statement made by the applicant that is guaranteed to be true in every respect.

Question 28

A representation is a

Answer 28

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

Question 29

Concealment

Answer 29

the failure or neglect by the applicant to disclose a known material fact when applying for insurance.

Question 30

Agent is a person who acts for another person or entity known as the ____

Answer 30

principal

Question 31

Express authority

Answer 31

is the authority a principal deliberately gives to its agent.

Question 32

Implied authority

Answer 32

is the unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the principal.

Question 33

Apparent authority

Answer 33

is the appearance or assumption of authority based on the actions, words, or deeds of the principal.

Question 34

waiver

Answer 34

the voluntary giving up of a legal, given right.

Question 35

tort law

Answer 35

provide full compensation for proved harm.

Question 36

A solicitor has the authority to

Answer 36

seek insurance applicants for a company but does not have any authority to bind coverage on behalf of a company to a customer.

Question 37

There are several types of negligence, including

Answer 37

Simple negligence is the failure to act in a reasonable or prudent manner.

Gross negligence involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm.

Willful and wanton negligence is considered even more severe.

Question 38

Stranger-Originated Life Insurance (STOLI)

Answer 38

transactions are life insurance arrangements where investors persuade individuals (typically seniors) to take out new life insurance.