Chapter 2

Question 1

What are the elements a contract must contain in order to be legally binding?

Answer 1

Offer and acceptance, consideration, and competent parties

Question 2

Define “offer and acceptance”.

Answer 2

A definite, unqualified proposal is made by one party and the other party accepts the exact terms.

Question 3

Define “consideration”.

Answer 3

The value (payment) given in exchange for the promises sought (payment of benefits).

Question 4

Define “legal purpose”.

Answer 4

The object of the contract and the reason the parties entered into the agreement must be legal.

Question 5

What are “competent parties”?

Answer 5

1) An insurer that has been licensed and authorized by the state(s) in which it conducts business and
2) An applicant who is presumed capable of understanding the contract they agreed to.

Question 6

Define “aleatory”.

Answer 6

The unequal exchange of value or consideration for both parties.

Question 7

Define “Adhesion”.

Answer 7

When the contract, which can be modified by company, has been prepared by the insurance company with no negotiation between the applicant and the insurer, and the applicant adheres to it on a “take it or leave it” basis.

Question 8

What makes an insurance policy a unilateral contract?

Answer 8

Only the insurer is legally bound.

Question 9

What is a “valued contract”?

Answer 9

A contract in which the insurer pays a stated sum regardless of the actual loss incurred.

Question 10

What is an “indemnity contract”?

Answer 10

A contract in which the insurer pays an amount equal to the loss.

Question 11

What is concealment?

Answer 11

Intentional withholding of material facts that would affect an insurance policy’s validity.

Question 12

What are an applicant’s statements concerning occupation, hobbies, and personal health history regarded as?

Answer 12

Representation

Question 13

Insurable interest

Answer 13

The applicant must be subject to loss upon the death, illness, or disability of the person being insured and have a reasonable benefit from the other person’s continued life.

Question 14

Which type of clause describes the following statement: “We have issued the policy in consideration of the representations in your application and payment of first-term premium”.

Answer 14

Consideration clause

Question 15

Express authority

Answer 15

The principal that gives the agent authority in writing.

Question 16

…

Answer 16

…

Question 17

The deeds and actions of a producer indicate what kind of authority?

Answer 17

APPARENT authority

Question 18

Bob and Tom start a business. Since each partner contributes an important element to the success of the business, they decide to take life insurance policies out on each other, and name each other as beneficiaries. Eventually, they retire and dissolve the business. Bob dies 12 months later. The policies continue in force with no change. Both partners are still married at the time of Bob’s death. In this situation, who will receive Bob’s policy proceeds?

Answer 18

Tom

Question 19

In an insurance contract, the element that shows each party is giving something of value is called what?

Answer 19

Consideration

Question 20

Parol Evidence Rule

Answer 20

When parties put their agreement in writing, all previous verbal statements come together in that writing and cannot be changed by parol (verbal) evidence.

Question 21

A professional liability for which producers can be sued for mistakes of putting a policy into effect is called what?

Answer 21

Errors and omissions

Question 22

The power given to an individual producer that is not specifically addressed in his/her contract is considered what type of authority?

Answer 22

Implied authority