Chapter 2 Legal Concepts of the Insurance Contract

Question 1

4 Elements Comprising a Legally Binding Contract

Answer 1

1. Offer and Acceptance
2. Consideration
3. Legal Purpose
4. Competent Parties

Question 2

The Effective Date of a policy is…..

Answer 2

the date the insurer accepts an offer by the applicant “as written”

Question 3

An insurance contract is conditional because…

Answer 3

the insurers promise to pay benefits is dependent on the occurrence of the risk insured against.

Question 4

Who is a contract between…

Answer 4

the Policy Owner (who is not necessarily the insured) and the Insurer.

Policy Owner has the “Right of Assessment”

Question 5

Aleatory Contracts

Answer 5

Unequal contingencies, there is an element of chance for both parties.

Premiums given by policy holder and the insurers benefits may not be equal

Question 6

Unilateral Contract

Answer 6

Obligates only ONE party (the insurer) in the contract .

only the insurance company pledges anything

Question 7

Bilateral Contract

Answer 7

Both parties make legally enforceable promises.

Question 8

Valued Contract

Answer 8

Pay a predetermined amount with no way to assess loss.

Life insurance contracts ARE valued contracts.

Question 9

Indemnity Contracts

Answer 9

Pay amount of loss only (up to policy limit)

pay amount necessary to return the insured back to same position as before the loss

Question 10

Insurable Interest

Answer 10

Loss must be sustained by the applicant upon the death or disability of another and loss must be sufficient to warrant compensation.

Question 11

True or False:

Insurable Interest must exist at the time a policy is purchased?

Answer 11

True

Question 12

True or False:

Insurable interest must exist at the time of the claim?

Answer 12

False

Question 13

The acts of the agent are considered the acts of the _____

Answer 13

company

an agent can bind a contract, a broker cannot

Question 14

3 entities in concept of agency…

Answer 14

1. The agent
2. The insured
3. The insurer

Question 15

Agency law refers to

Answer 15

The relationship between the AGENT and the COMPANY with whom they are affiliated

Question 16

3 ways in which insurer authorizes agent to represent it

Answer 16

1. Express- spelled out in contract form
2. Implied- authority is conjecture (opinion)
3. Apparent- appearance of authority is present

Question 17

Express Authority

Answer 17

specific authority given in writing

Question 18

Implied Authority

Answer 18

authority not necessarily granted in contract but which common sense dictates the agent has.

allows agent to carry out routine responsibilities

Question 19

Apparent Authority

Answer 19

Authority that agent appears to have , based on actions, words, deeds, or circumstances

Question 20

Waiver

Answer 20

voluntary surrendering of a legal given right.

Question 21

Estoppel

Answer 21

Legal enforcement of a waiver

Question 22

Parol Evidence Rule

Answer 22

Prohibits making and additional verbal changes to a contract once it become a written document.

Question 23

Fraud + Prior Knowledge =

Answer 23

VOID CONTRACT

Question 24

Adhesion

Answer 24

life insurance policy is contract of adhesion, buyers must adhere to terms with no opportunity to negotiate.

Question 25

Competent Party

Answer 25

one who is capable of understanding the contract being agreed to

Question 26

Concealment

Answer 26

failure of insured to disclose a fact at the time application is made

Question 27

Consideration

Answer 27

element of a binding contract acceptance of premium payment and statements made by insured in the application

Question 28

Fiduciary

Answer 28

Person in position of special trust and confidence ex: fund supervisor

Question 29

Fraud

Answer 29

act of deceit or intentional misrepresentation of facts.

Question 30

Legal Purpose

Answer 30

in contract law. requirement that the reason for contract must be legal

Question 31

Offer and Acceptance

Answer 31

offer can be made to applicant by signing application, paying first premium, or submitting to physical. policy issue, as applied for constitutes acceptance by company.

Question 32

Representation

Answer 32

statements made by applicant in application that they represent as being true. not warranted in exact detail

Question 33

Valued vs. Reimbursement

Answer 33

valued pays stated amount in event of a loss reimburesement contract pays amount of loss only

Question 34

Void vs. Voidable Contract

Answer 34

void is without legal effect, invalid contract. voidable is one that can be made void at the option of one or more parties.

Question 35

Warranties

Answer 35

statements made on an application for insurance are warranted to be true. exact in every detail ( as opposed to representations). statements on applications for insurance are rarely warranties unless fraud is involved.