Chapter 2- Legal Concepts of Insurance

Question 1

adhesion contract

Answer 1

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.adhesion

Question 2

for a contract to be legally valid and binding, it must contain certain elements: (4)

Answer 2

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

Question 3

• only one party (the insurer) makes any kind of enforceable promise
• insurer promises to pay benefits upon the occurrence of a specific event, such as death or disability
• The applicant does not even promise to pay premiums; but insurer has the right to cancel the contract if premiums are not paid

Answer 3

unilateral

Question 4

represents themselves and the insurer at the time of application

Answer 4

Agent

Question 5

Aleatory contract

Answer 5

Presents the potential for an unequal exchange of value or consideration between both parties.
- are conditioned upon the occurrence of an event.
-ex: insurance and gambling contracts

Question 6

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

Answer 6

Apparent Authority

Question 7

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.

Answer 7

Competent Party

Question 8

Concealment

Answer 8

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

Question 9

Conditional policy

Answer 9

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

Question 10

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

Answer 10

Consideration

Question 11

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.

Answer 11

Estoppel

Question 12

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

Answer 12

Express Authority

Question 13

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients

Answer 13

agent as a Fiduciary

Question 14

a position of trust with regard to the funds of their clients and the insurer.

Answer 14

fiduciary

Question 15

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

Answer 15

Fraud

Question 16

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.

Answer 16

Implied Authority

Question 17

indemnity contracts

Answer 17

attempt to return the insured to their original financial position.

Question 18

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.

Answer 18

Insurable Interest

Question 19

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

Answer 19

Insurance Policy

Question 20

Investor-originated life insurance (IOLI)

Answer 20

used to circumvent state insurable interest statues. This is done when an investor (or stranger) persuades an individual to take out life insurance specifically for the purpose of selling the policy to the investor. The investor compensates the insured and makes the premiums, then collects the death benefit when the insured dies.

Question 21

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

Answer 21

Material misrepresentation

Question 22

states that when 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 oral evidence.

Answer 22

Parol Evidence Rule

Question 23

parol evidence

Answer 23

oral or verbal evidence or that which is given verbally in a court of law

Question 24

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

Answer 24

Policy rider or endorsement

Question 25

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

Answer 25

Reasonable expectations

Question 26

subrogation

Answer 26

- the right for an insurer to pursue a third party that caused an insurance loss to the insured. (used to recover the amount of the claim paid to the insured for the loss)

Question 27

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.

Answer 27

Utmost Good Faith

Question 28

Valued contract

Answer 28

pays a stated sum regardless of the actual loss incurred. - ex: Life insurance contracts

Question 29

Voidable Contract

Answer 29

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

Question 30

- an agreement without legal effect - missing one of the elements specified by law - cannot be enforced by either party

Answer 30

void contract

Question 31

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

Answer 31

Waiver

Question 32

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.

Answer 32

Warranty

Question 33

tort law

Answer 33

- provide full compensation for proved harm - involves the concept of "righting a wrong" done to a person and provide relief from the wrongful acts of others by awarding monetary damages as compensation

Question 34

accident, health, and property insurance policies are examples of what contracts

Answer 34

indemnity contracts

Question 35

professional liability insurance for insurance agents - the insurer agrees to pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render

Answer 35

insurance agent errors and omissions professional liability insurance (E&O)