Chapter 2 - Insurance Contracts

Question 1

Identify three categories of risk.

Answer 1

1. Personal Risk
2. Property Risk
3. Liability Risk

Question 2

Identify four option of dealing with risk& & which of these is least practical

Answer 2

i) Avoidance of Risk (least practical) (not driving)
ii) Controlling of Risk (fire / burglar alarms)
iii) Retention of Risk (self finance losses or insurance deductible)
iv) Transfer of Risk (purchase insurance)

Question 3

i. There are two types of risk. Identify them and provide a brief description for each.
ii. Of these types of risk, which are insurable?

Answer 3

i. Speculative Risk - involves the possibility of financial loss or gain (gambling or a business venture) (not insurable)
ii. Pure Risk - involves no chance of financial loss or gain

Question 4

Define “contract.”

Answer 4

An agreement between two or more parties which is enforceable at law.

Question 5

Five elements of all contracts

Answer 5

a. Agreement.
b. Consideration
c. Legality of object.
d. Legal capacity of the parties to contract.
e. Genuine Intention.

Question 6

Three elements unique to insurance contracts

Answer 6

a. Insurable interest.
b. Utmost good faith.
c. Indemnity.

Question 7

An offer made and An unconditional acceptance of the terms of that offer

Answer 7

Agreement

Question 8

An exchange of something of value (payment of premium or promise to pay)

Answer 8

Consideration

Question 9

When a contract insures property which is stolen, this element is said not to be present.

Answer 9

Legality of Object

Question 10

Persons considered to be competent to contact are said to have this … while a minor does not.

Answer 10

Legal Capacity
*Sole proprietor, partnerships or corporations can enter into contracts without identifying names of the owner(s)
*Trade names have no legal capacity to contract
*Can be void if:
i) Minors have right to contract for food, clothing and lodging ONLY. (Minors can enter into insurance contracts). Minors retain the right to void other contract if done within reasonable time.
ii) Mental incompetence - only courts or a qualified professional may determine if a person if mentally incompetent.
iii) Being under the influence of drugs or alcohol - requires a high level of proof

Question 11

Is present when it can be shown the contract was not affected by fraud, duress, concealment (misrepresenting or failure to disclose past or present facts) or mistake.

Answer 11

Genuine Intention

Question 12

People who are able to show that they would suffer financially by a loss are said to have this.

Answer 12

Insurable Interest
- Owners of property, Mortgagee, Bailees entrusted with property (drycleaners, repairman), person who may be held legally responsible to a third party for injury or damage
- You cannot insure property you do not own or property you expect to inherit.

Question 13

This contractual requirement is breached when an applicant for insurance deliberately withholds information about previous claims, cancellations, or refusals of insurance.

Answer 13

Utmost Good Faith

Question 14

A part of all insurance contracts which attempts to provide insureds with the actual amount of their loss … no more and no less.

Answer 14

Indemnity

Question 15

Status of contract where essential element(s) not present.

Answer 15

1. VOID: “A void contract is one which is unable in law to support the purpose for which it was intended.”
2. VOIDABLE: “A voidable contract is one which is void as to (the) wrongdoer but not void as to (the) wronged party, unless the wronged party elects to so treat it.”

Question 16

In the insurance business, it is common for brokers to “bind” an insurer on a risk. Explain

Answer 16

This means that the broker/agent has committed the insurer to provide a contract of insurance on the subject matter under discussion.

Question 17

Source of broker’s authority to bind insurer on a risk.

Answer 17

Generally, an insurer’s Agency Agreement will provide the brokerage with the authority to bind the insurer for certain classes of risks & limits.

Question 18

Identify two documents or sources which brokers can refer to to determine the extent of “binding authority” given to them.

Answer 18

1. Oral
2. Written

Question 19

Identify three types of insurance forms used by insurers to make changes to an existing policy.

Answer 19

1. Endorsements or Riders: acknowledges a change in the terms of the contract
2. Floaters: provides coverage for property having a high degree of mobility.
3. Separate Policies: Sometimes a separate policy is needed to provide additional coverages needed by insureds.
   In these instances, there is no actual change to the original contract.