Chapter 2: Contract Law

Question 1

Meaning of Consideration

Answer 1

Something of value that each party gives to the other (binding force in any contract)

Question 2

Meaning of Lapse

Answer 2

Policy termination due to nonpayment of premium

Question 3

Unilateral Contract

Answer 3

A contract that legally binds only one party to contractual obligations (one-sided)

Question 4

Contract Law

Answer 4

Contracts are written agreements that are legally enforceable by law. Contract Law is concerned with the rights and obligations arising from agreements between parties

Question 5

Tort Law

Answer 5

Tort Law deals with civil wrongs that cause harm to individuals Intentional torts or unintentional torts (negligence) and a remedy through legal action may be sought (suing).

Question 6

What are the 4 elements of a contract?

Answer 6

1.) Offer and Acceptance, 2.) Competent Parties, 3.) Legal purpose 4.) Consideration

Question 7

What is Aleatory?

Answer 7

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.

Question 8

What is Conditional Contract?

Answer 8

As the name implies, a conditional contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

Question 9

What is Contract of Adhesion

Answer 9

A contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured).

Question 10

What is Indemnity?

Answer 10

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. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

Question 11

What is personal contract?

Answer 11

In general, an insurance contract is a personal contract because it is between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer’s approval. Life insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing.

Question 12

What is Utmost good faith?

Answer 12

The insurance contract is a personal contract between the insurer and insured where each party must be able to rely on the other for valid critical information. This ability for the parties to rely on one another is called utmost good faith.

Question 13

Insurance Policy

Answer 13

The insurance policy is the written instrument in which a contract of insurance is set forth.

Question 14

Fraud

Answer 14

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.

Question 15

Concealment

Answer 15

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.

Know that intentional or unintentional concealment entitles an injured party to rescission of a contract, Cal. Ins. Code section 331

Question 16

Information that doesn’t need to be communicated in a contract:

Answer 16

1.) Those which the other knows
2) Those which, in the exercise of ordinary care, the other ought to know, and of which the party has no reason to suppose him ignorant
3) Those of which the other waives communication
4) Those which prove or tend to prove the existence of a risk excluded by a warranty and which are not otherwise material
5) Those which relate to a risk excepted from insurance and which are not otherwise material

Question 17

Materiality

Answer 17

The materiality of concealment is the rule used to determine the importance of a misrepresentation. based on the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract. Materiality is determined by the “probable and reasonable influence of the facts” that they would have on the party that needs the facts to make a decision, whether that party is the insurer or the insured. Failure to disclose material information may entitle the “injured” party to rescind the contract.

Question 18

Representation

Answer 18

Representations 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.

Material representation is when that statement that, if discovered, would alter the underwriting decision of the insurance company.

i. a representation is false when the facts fail to correspond with its assertions or stipulations, Cal. Ins. Code section 358 Then it would be a misrepresentation and could voice the contract.
ii. a representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty, Cal. Ins. Code section 354
iii. know when a representation can be altered or withdrawn, Cal. Ins. Code section 355 before the policy has been effectuated.

According to CIC 782, any person violating this provision is guilty of a misdemeanor punishable by a maximum fine of $25,000, imprisonment in a county jail for a period no longer than 1 year, or by both a fine and imprisonment. If the loss to the victim exceeds $10,000, the fine should not exceed three times the amount of the loss. In addition, the Commissioner may suspend the license of the agent for a maximum period of 3 years.

Question 19

Warranty

Answer 19

A warranty is a statement considered to be guaranteed to be true and becomes part of the contract. According to the California Insurance Code, a certain format of words is not necessary to create a warranty. Warranties can either be expressed or implied.

Question 20

Implied Warranty

Answer 20

Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction.

Representations in insurance contracts are implied warranties.

Question 21

Express Warranty

Answer 21

Every express warranty becomes part of the insurance contract.

Question 22

Waiver and Estoppel

Answer 22

Waiver is the voluntary act of relinquishing a legal right, claim or privilege.

Estoppel is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Question 23

6 elements which must be specified in all insurance policies

Answer 23

The parties to the contract;
The persons or property being insured;
A statement of the insurable interest that exists if the insured is not the owner;
The risks insured against;
The time period during which the policy will be in force or continue; and
The stated annual, semi-annual, quarterly, or monthly premium or a statement of the manner in which a premium rate and total premium will later be calculated, if it can only be determined at the termination or expiration of the contract.

Note that an insurer’s financial rating is not required to be specified in an insurance policy.

Question 24

Rights of Rescission

Answer 24

A false material representation (rescission is effective from the time the representation becomes false);
Concealment (regardless of whether the concealment is intentional); or
Violation of a material warranty or any other material provision of a policy.

Question 25

Rescission

Answer 25

Rescission is the revocation of a contract.

Question 26

Grace period for premiums after a declared emergency

Answer 26

60 days in case of a state of emergency, for payment of premiums for residential property insurance policies covering a property located within the affected area

Question 27

Application

Answer 27

A written request for coverage to an insurance company. It must truthfully represent the facts regarding the person or property to be insured. Otherwise the policy will be voided.

Question 28

Policy

Answer 28

A contract between a policyowner (often the insured) and an insurance company which agrees to pay for loss caused by specified covered events.

Question 29

Endorsement

Answer 29

are printed addendums to a contract that are used to change the policy’s original terms, conditions, or coverages (usually used in Property and Casualty insurance).

Question 30

Cancellation

Answer 30

is the act of revoking or terminating one’s insurance policy.

Question 31

Lapse

Answer 31

A policy that is terminated because of nonpayment of premiums is known as a lapsed policy.

Question 32

Grace Period

Answer 32

is the period of time after the deadline or due date of a premium in which a late premium payment may be made without penalty, or without the policy lapsing.

Question 33

Rate

Answer 33

The price of insurance for each exposure unit is called the rate.

Question 34

Premium

Answer 34

The premium is determined by multiplying the rate by the number of units of insurance purchased.

Question 35

Earned Premium

Answer 35

An earned premium is the portion of a premium that belongs to the insurance company for providing coverage for a specified period of time.

Question 36

Unearned Premium

Answer 36

The unearned premium is the portion of the premium the insurance company has collected but has yet to “earn” because it has not yet provided coverage for the insured. For example, if an insured pays an annual life insurance premium and dies before that year is up, the insurance company would have to return the portion of the premium that was “unused” or “unearned.”