Chapter 2: Legal Concepts of Insurance

Question 1

What is Adhesion?

Answer 1

A contract of adhesion describes a contract that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the terms of the contract on a “take it or leave it” basis when accepted.

Question 2

What is an Agent?

Answer 2

An agent represents themselves and the insurer at the time of application.

Question 3

What is an Aleatory?

Answer 3

An aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event.

Question 4

What is Apparent Authority?

Answer 4

Apparent Authority is the appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent-insurer relationship.

Question 5

What is a Broker?

Answer 5

A Broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Question 6

What is a Competent Party?

Answer 6

A competent party is one who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms and not influenced by drugs or alcohol.

Question 7

What is Concealment?

Answer 7

Concealment is the failure of the applicant to disclose a known material fact when applying for insurance.

Question 8

What is Conditional?

Answer 8

A conditional policy describes the insurer’s promise to pay benefits depends on the occurrence of an event covered by the contract.

Question 9

What is a Consideration?

Answer 9

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments.

Applicants provide the insurer with a completed application and initial premium as consideration for insurance.

Question 10

What is Estoppel?

Answer 10

Estoppel is the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Question 11

What is Express Authority?

Answer 11

Express authority is the explicit authority granted to the agent by the insurer, as written in the agency contract.

Question 12

What is Fiduciary?

Answer 12

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer.

Question 13

What is Fraud?

Answer 13

Fraud includes the deliberate knowledge of or intentional deceit to make false statements to be compensated by an insurance company.

Question 14

What is Implied Authority?

Answer 14

Implied authority is an authority not explicitly granted to the agent in the contract of agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities.

Question 15

What is an Indemnity contract?

Answer 15

Contracts of indemnity attempt to return the insured to their original financial position.

Question 16

What is Insurable Interest?

Answer 16

Insurable interest is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss.

Question 17

What is an Insurance Policy?

Answer 17

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

Question 18

What is Legal Purpose?

Answer 18

Legal purpose means an insurance contract must be legal in nature and not in opposition to public policy.

Question 19

Material misrepresentation

Answer 19

A material misrepresentation is a false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk.

Question 20

What is Parol Evidence Rule?

Answer 20

Parol evidence rule involves parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Question 21

What is a Policy rider or endorsement?

Answer 21

A policy rider or endorsement is an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature.

Question 22

What are Reasonable expectations?

Answer 22

Reasonable expectations means the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.

Question 23

What are Representations?

Answer 23

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

Question 24

What is Subrogation?

Answer 24

Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured.

Question 25

What does Unilateral mean?

Answer 25

Unilateral contracts mean only one party, the insurer, makes any kind of enforceable promise.

Question 26

What is Utmost Good Faith?

Answer 26

Utmost good faith involves the belief that both the policyowner and the insurer must know all material facts and relevant information, and as such, they will provide each other with all material facts and relevant information.

Question 27

What is a Valued contract?

Answer 27

A valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.

Question 28

What is a Voidable Contract?

Answer 28

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

Question 29

What is a Waiver?

Answer 29

A waiver is the voluntary giving up of a legal, given right.

Question 30

What is a Warranty?

Answer 30

A warranty is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract.