Chapter 2 Licensing Flashcards
Legal Contracts
contract is an agreement between two or more parties that is enforceable by law. The parties to each agreement are subject to the specific terms of that agreement, which govern the way its provisions are carried out. In an insurance contract, the insurer binds itself by promising to pay the benefit in return for valuable consideration paid by the owner in the form of a premium.In the formation and enforcement of any valid legal contract, certain elements must exist at the time the contract is executed between the parties. These essential elements include competent parties, legal purpose, offer and acceptance, and consideration.
Competent Parties (Legal Capacity)
All parties to a contract must have legal capacity, or competency, to enter into a legal contract. An insurer authorized by the state is considered a competent party. Competency may also be determined by legal age or other factors. Individuals without legal capacity include:
Minors
People who are mentally incompetent or incapacitated
People under the influence of drugs or alcohol
Legal Purpose
All parties to a contract must enter it for a legal purpose and in good faith. Public policy cannot be violated by a legal contract, and insurance may not be issued for an illegal activity or immoral purpose. Intentional acts that cause a loss in order to collect from a policy, such as arson or murder, remove the legal aspect of purchasing insurance.
Agreement (Offer and Acceptance)
An agreement must exist between the parties of the contract. To form an agreement, one party must make and communicate an offer to the other party, and the second party must accept that offer. The offer must be clearly communicated so that each party understands the terms, conditions, purpose, and subject matter of the contract—this is known as a meeting of the minds.The offer to enter into an insurance contract is most commonly made by the applicant when submitting an application that is accompanied by the initial premium. The acceptance of an offer to provide an insurance contract usually takes place when the insurance company agrees to issue the insurance applied for, after receiving an initial premium and complete application.
Consideration
is the exchange of value between the parties to the contract that make the contract binding. The insured’s consideration is the payment of premium, along with an agreement to abide by the conditions of the contract. The insurer’s guarantee to indemnify in the event of a loss, as specified in the insuring clause of the policy, is its consideration.
elements of a contract
Competent Parties -Minors, mentally incomptent ,Under the influence
Legal purpose -must have insurable interest
Agreement -
Consideration-two parties exchange value and abide by condtions of the contract and payment of premium
Insurance Contract
surance policies are two-party contracts between the first-party insured and the second-party insurance company. A contract of insurance is an agreement that obligates an insurer to indemnify an insured when there is destruction, loss, or injury to something or someone in which the insured has an interest, arising from an unexpected event. An insurable event is any event, past or present, that may cause loss or damage, or that may create legal liability on the part of an insured.
The insurance contract allows for the exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small. The insurance contract is designed to transfer risk from the insured to the insurer.
Principle of Indemnity
Insurance is based on the principle of indemnity, which is compensation for a loss. It is designed to restore the insured to the same financial or physical condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction, but be made “whole” again.
Example:When an insured files a claim for loss by a covered peril to a dwelling, the insurer is obligated by the principle of indemnity to pay the insured to repair or replace the dwelling to the value it held prior to the loss, subject to the limit of insurance. A 1,200-square-foot home will be rebuilt as a 1,200-square-foot home of like kind and materials, and the claim payment should cover the cost to accomplish this without exceeding the necessary amounts. If two insurance policies apply to, and provide coverage for, this loss, the policies will specify a way to coordinate coverage so that the insured is not paid twice.
Which principle of insurance restores the insured to the same economic condition that existed before the loss?
Indemnity
Insurable Interest
Insurable interest must exist in every enforceable insurance contract. Insurable interest is the potential for an insured to suffer financial or economic hardship in the event of a loss to an individual or object, such as property. Sentimental attachment alone does not establish insurance interest. Lack of insurable interest makes the purchase of insurance illegal, since purchasing a policy without the possibility of loss makes the risk speculative. For example, a person could not purchase a policy on their neighbor’s home because they have no insurable interest.For both property and casualty insurance policies, insurable interest must exist at the time of loss, even though it is highly unlikely that an insurer would issue a policy if insurable interest does not also exist at the time of application. Property ownership, mortgage, or lien count as evidence of insurable interest under property policies. Insurable interest connected to casualty policies usually results from property or contract rights and potential legal liability.
Contract of Adhesion
Insurance is considered to be a contract of adhesion. The contract is written by one party—the insurance company—without any input from the applicant. The insurer prepares the contract and presents it to the applicant on a take-it-or-leave-it basis. Because the insured has no input into the contract terms, it is not negotiable.
Unilateral Contract
is one in which only one party is legally bound to the contractual obligations. As long as all the conditions are met by the owner, the insurer makes and is legally bound by an enforceable promise of future performance and can be charged with a breach of contract if they do not meet those obligations. Except for some specialized policies that have minimum premium or noncancellable provisions, a policyowner can cancel the policy at any time and cannot be legally forced to pay the premium.
Conditional Contract
With a conditional contract, both parties must perform certain duties to make the contract enforceable. An insured can only collect if there has been a covered loss, and the insurer has a list of conditions that must be met before a claim will be paid. As long as the insured has complied with all the conditions in the contract, the insurer is obligated to pay the claims.
Aleatory Contract
in an unequal exchange of consideration due to the uncertainty of an event or loss. It cannot be known in advance whether or not the insurer will have to pay claims. If the insurer does pay for one or more losses, the insurer may have to pay significantly more compensation to the policyholder than what the policyholder paid to the insurer in premiums. It is also possible that no loss will occur, meaning the policyholder makes premium payments without receiving any compensation in return. Despite the uncertainty, both parties agree to the terms of the contract.
Personal Contract
is one between the insurance company and the individual. It cannot be transferred or assigned to another party because it is specific to the person insured. For example, a Homeowners policy covers the insurable interest of the owner for the loss of the dwelling when the policy was issued. If the insured loses insurable interest by selling the property, the insurance contract would terminate rather than passing to the new owner of the property.
M purchases an insurance policy by paying the policy premium. If a loss does not occur during the policy period, M may have paid the premium without getting anything of value in return. If a loss does occur, however, M may receive a claim payment that far exceeds the premium amount. This unequal exchange indicates that the insurance contract is a(n):
Aleatory contract
Indemnity Contract
An indemnity contract agrees to pay on behalf of another party under specified circumstances, such as when a loss occurs. The payment is for the actual loss sustained, and does not allow the insured to benefit from the loss.
Valued Contract
A valued contract is a contract that pays a stated amount in the event of a loss. Most insurance policies are not valued contracts unless they include an endorsement that changes the policy terms to settle losses in this way.
Ambiguities in a Contract of Adhesion
Because the insurer writes the contract of adhesion without input from the insured, the insurer bears more responsibility in the event that any of the contract’s language is deemed unclear. If legal questions arise regarding any doubt or ambiguity found in the contract and it is determined by a court that the policy language is not clear, the courts will rule in favor of the party that did not write it (the insured).
Reasonable Expectations
According to the reasonable expectations doctrine, policy provisions must be interpreted in a way that a reasonable and prudent policyholder would expect, even when the strict terms of the policy might not support the expectations.
Legal interpretation of a policy through the reasonable expectations doctrine protects insureds against policy terms that are legally understood to be unreasonable, and it encourages insurers to write and explain policy terms in language that is reasonably clear and understandable to insureds.Utmost Good Faith
The doctrine of utmost good faith assumes that both parties act in good faith when forming and entering into an insurance contract. The two parties rely upon the statements and promises of the other, and both assume that no attempt to conceal or deceive has been made.
Representations
Material vs. Immaterial Representations
Statements that impact the acceptance of an insurable risk are considered to be material. Material statements may affect the choice to accept or decline a risk, the rating of an acceptable risk, or how limited or comprehensive coverage is for acceptable risks. For example, a material misrepresentation discovered after policy issuance may cause the insurer to void the policy.
Immaterial representations do not affect the acceptance or rating of the risk.
Warranties
A warranty is a statement that is guaranteed to be true in all aspects. Warranties are often the basis for the validity of the contract and, if later discovered to be untrue or breached, may void the policy.
Materiality
Statements that affect the acceptance of a risk as known as material
A warranty is defined as which of the following?
A statement in the application that is guaranteed to be true
Concealment
Concealment is the willful holding back or failure to communicate material information pertinent to issuance of the contract or payment of a claim. Concealment, whether intentional or unintentional, may result in denial of coverage or voidance of the policy
Fraud
Fraud is a false statement (misrepresentation or concealment) made intentionally to deceive or induce another party to issue a contract, part with something of value, or surrender a legal right. Fraud contains five elements:
False statement, made intentionally and pertaining to a material fact
Disregard for the victim
Victim believes the false statement
Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement
The victim’s decision and/or action results in harm
Fraud is also grounds for denial of coverage and voidance of a contract.
Waiver and Estoppel
A waiver is the voluntary surrender of a known or legal right or advantage. When an insurer fails to enforce a provision of a contract, this constitutes a waiver. An express waiver occurs when someone knowingly surrenders a right, often verbally or in writing. An implied waiver occurs based on actions, and may result from neglect.
Once an insurer has waived a legal right, it cannot claim that right in the future. This is known as the principle of estoppel. Estoppel is the judicial consequence that follows a waiver: it denies a contractual right based on prior actions contrary to what the contract states.
Estoppel
A legal principle that says that if a legal right is surrendered, the right cannot be enforced afterward
Waiver
The voluntary surrender of a known or legal right or advantage
Fraud
The intentional misrepresentation, deceit, or concealment of known material facts by a person with the intention of causing injury to another
Warranty
A statement that is guaranteed to be true and coverage may hinge on the truthfulness of that statement
Concealment
Failure to provide or willful hiding of material facts pertinent to the issuance of a policy
Misrepresentation
A false statement on the application that renders the contract void if material to acceptance of the risk
Representation
A statement made on the application that is believed to be true to one’s knowledge
Standard Property and Casualty Policy Structure
Property and casualty insurance is necessary to protect some of the most essential parts of our lives, like our homes, our cars, and our financial livelihood. Accidents can happen to us, to our possessions, or to others because of our actions at any time, and without insurance, the repercussions of those accidents could be costly.
General Structure
Core components
Declarations
Insuring Agreement
Conditions
Exclusions
Other Components
Limitations
Endorsements
Additional coverages
Definitions
Property and casualty policies are either monoline policies or package policies. A monoline policy contains a single type of insurance, such as a policy that only covers property losses or a policy that only covers liability losses. A package policy contains at least 2 types of insurance and offers advantages that are not offered in a monoline policy, such as avoiding coverage gaps. Though the insured could purchase multiple monoline policies through multiple insurers, package policies allow the insured to purchase a single policy, which is more affordable. It also guarantees a higher premium paid to the insurer, compared to the premium paid if the insured were to purchase only one monoline policy through the company. Additionally, a single package policy will reduce the insurer’s administrative expenses, compared to the expenses for multiple monoline policies.
Some package policies further break down the coverage forms into multiple sections, like in a Homeowners policy, or parts, like in a Personal Auto policy. Each of these sections or parts may have their own Insuring Agreement, Exclusions, Additional Coverages, or other sections.
Declarations
Who – Names of the insurer and insured, including legal representatives in the event of the insured’s death.
What – A description of the property being insured and other parties having insurable interests, such as a mortgage holder (mortgagee). If a business is being insured, the Declarations will identify the type of business it is.
Where – The location of insured property and the named insured’s mailing address.
When – The effective and expiration dates of the policy, known as the policy term or policy period. The effective date is when coverage under the policy begins. Importantly, this is distinct from the issue date, which is when the insurer created the insurance contract, and the two dates may be different. Typically, the policy begins and ends as of 12:01 a.m. on the specified effective and expiration dates.
How Much – The limits of liability, the annual premium for each type of coverage, and any applicable deductible, which is an amount of a loss that is retained by the insured.
The Declarations page of a property insurance policy includes all of the following information, except:
Covered perils
Insuring Agreement
The Insuring Agreement is the insurer’s promise of protection to the insured, affirming that the insurer will indemnify the insured for covered losses. The perils insured against by the policy are specified in the Insuring Agreement.
Conditions
The Conditions section specifies the obligations that the insured and insurer agree to follow in order for the policy provisions to take effect, as well as other conditions of coverage. For example, a policy may require an insured to protect their property following a partial loss, and failing to do so may void any coverage for that property.
Exclusions
The Exclusions section specifies the perils that are not insured against or the property that is not covered by the policy. In other words, a policy’s exclusions can make sure a policy is limited to its intended purpose. For example, a property policy may exclude coverage for loss resulting from the peril of windstorm and hail. It may also exclude coverage to particular categories of property, such as excluding hail damage to fences and awnings.
Common exclusions include:
Ordinance or law
Earth movement, which includes earthquakes and landslides
Flood
Neglect of the insured to protect covered property from further loss
Intentional loss
Nuclear hazard, war, and military action
Governmental action
Fungus (such as mold), wet rot, dry rot, and bacteria
Deceleration page
effective and expiration dates of the policy
how much limits of coverage for the insured property,deductible and annual policy premium
Conditions
States the rights ,rules,duties and obligations of the insurer and the named insured
Specific peril not covered by the policy
neglect
intentional loss
nuclear hazard
government action
war
water such as f;ppd
earthquakwa
ordiance and law
Each of the following is a typical property insurance policy exclusion, except:
Fire
Limitations
Limitations reduce coverage without excluding it, such as by providing a smaller amount of insurance (known as a sublimit) that applies to certain losses.
Endorsements
Endorsements are policy forms that alter the provisions of an insurance contract, typically added to the policy for an additional premium. Endorsements can add coverages, increase the limits of an existing policy, exclude coverage to make a policy more affordable, or amend a standardized policy to be consistent with state laws. Policies without endorsements are sometimes referred to as unendorsed policies.
Additional Coverages
Additional Coverages are coverages automatically included in the policy without an additional premium, such as payment for costs to remove debris from the property after a covered loss or payment for fire department service charges. These are often incidental loss expenses not specifically included under the terms of the Insuring Agreement. Additional Coverages may also give back partial coverage for perils that are otherwise excluded
The duties and obligations of the insured are found under what part of the insurance policy?
Conditions
Property and casualty insurance is designed to protect against losses within two categories with distinct exposures and insurance needs: personal lines and commercial lines.
Personal lines insurance offers protection to individuals and families. This coverage includes Dwelling, Homeowners, Personal Auto, and Personal Umbrella Liability policies, among others.
Commercial lines
This coverage includes Commercial Property, Commercial General Liability, Commercial Auto, Inland Marine, Ocean Marine, Crime, Businessowners, and Workers’ Compensation policies, among others.
Named insured
is a person, company, or organization designated on the Declarations page of the policy. If property is being insured, the named insured should be the owner of the property. If vehicles are being insured, the named insured should be the party or entity to which the vehicle is titled and registered. Named insureds receive the broadest coverage of all insureds.
first named insured
is the person, company, or organization whose name appears first on the Declarations. The first named insured is granted rights and responsibilities by the policy that are not granted to other insureds, such as being responsible for premium payments.
additional insured
is a person, company, or organization not ordinarily protected by a policy but who, through the addition of an endorsement to the policy, is granted status as an insured.
Which of the following has the broadest coverage under the insurance policy?
Named insured
Accident
is a sudden, unforeseen, unintended, and unplanned event that results in bodily injury or property damage. An accident takes place at a specific time and place.
Occurrence
is an accident, including continuous or repeated exposure to the same generally harmful conditions that results in loss or damage. All accidents are considered occurrences, but not all occurrences are accidents
Primary insurance
is any type of coverage that responds to a loss first, before all other coverage respond
Excess insurance
Coverage that is provided only after the limits of a primary insurance policy are exhausted is known
Concurrent policy
Two or more policies covering the same exposures for the same policy period and with the same coverage triggers are
nonconcurrent policy
If two or more policies cover the same exposures but do not have the same policy periods, they are considered
An insurance policy that responds to a loss first is a:
Primary policy
Binder
is a temporary written or oral legal agreement (contract) issued by an insurance company or a producer to provide short-term insurance. Often, binders are issued to provide insurance until the insurer can issue the full insurance policy, and the binder would offer temporary coverage identical to what the full policy will provide
certificate of insurance
is a document that shows evidence that specific types of insurance were purchased by the insured, at certain limits, and that they were in place on the date the certificate of insurance was issued
Notice of loss
In the event of a loss or occurrence, the insured must notify the insurer in writing as soon as possible
proof of loss
a sworn, formal statement made by the insured and delivered to the insurer within a specified period of time after the insured delivers the notice of loss. It provides necessary details for the insurer to determine its liability under a policy and is much more detailed than the notice of loss.
Which of the following documents informs an insurer that a loss has occurred?
Notice of loss
Limit of Liability/Limit of Insurance
The insurer will not be responsible for payment of loss in an amount greater than the financial interest of an insured. The limit of insurance is stated in the Declarations. It is sometimes referred to as the policy’s face value.
Restoration/Nonreduction of Limits
This condition specifies the sum and circumstances under which an insurer charges the insured, usually a business firm, to restore a policy to its initial value after the insurer has paid a claim either to the insured business or to a third party on behalf of the business.
Policy Period
This condition states that insurance coverage only applies to losses occurring when the policy is in force and within a region specified by the policy. The policy is in force during the policy period specified in the Declarations
Policy Territory
may be limited to the premises, such as only covering property and liability losses at a residence or business building, or it may be more expansive for mobile property and liability claims.
Premium audit
the initial premium is an estimated premium (also called an advance or deposit premium) that approximates the amount of coverage the insured needs to purchase. Throughout the policy period, the insured delivers reports to the insurer about the fluctuations in factors used to determine the premium. At the end of the reporting period, the insurer conducts a premium audit to determine the final premium.
Liberalization Clause
If the insurer broadens coverage under a new edition of the policy form with no premium increase, that broadening of coverage will apply to existing policies using that form without the need for an endorsement. Liberalization does not apply to changes that both broaden and restrict coverages.
Subrogation (Transfer of Rights of Recovery Against Others To Us Clause)
Subrogation is the legal process allowing an insurer to seek recovery for a paid claim from a third party responsible for the loss. The right of recovery typically belongs to the person who sustained the loss, but the Subrogation condition transfers the insured’s right of recovery to the insurer that has paid a claim. This prevents the insured from collecting twice for the same loss, and ultimately holds the liable third party responsible for the loss. Further, by allowing the insurer the ability to recover claim amounts from third parties, subrogation helps the insurer control expenses and premium
A Liberalization Clause serves which of the following purposes?
Broadened coverage with no premium increase applies automatically to all policies
Named Insured Provisions
Providing prompt notice of loss to the insurer
Cooperating with the insurer in any investigation it conducts
Preserving the insurer’s rights
Promptly notifying the police in the case of theft
Protecting the property from further damage
Preparing an inventory of lost property
Submitting a formal proof of loss, typically within 60 days after the loss
Submitting to an examination under oath, as requested by the insurer
Allowing the insurer to access relevant books and records
Forwarding any legal papers associated with claims or suits against the insured
Providing names and addresses of claimants and witnesses after an accident
Helping the insurer make settlement, at the insurer’s request
Avoiding voluntary payments or assumption of financial obligations, typically with an exception for expenses associated with providing first aid to others
After a loss, the insured must provide a notice of loss to the insurer. The notice must be submitted:
Promptly
Assignment (Transfer of Your Rights and Duties Under This Policy)
The insured may not transfer rights of policy ownership without the insurer’s prior written consent. The exception to this is included in the Death condition: if the named insured dies, the rights and duties of the insured under the policy will be transferred to the named insured’s legal representative while they are acting within the scope of their duties as the legal representative.
Waiver of Subrogation Rights
In some cases, an insured may want to include a waiver of subrogation in their policy, which would waive the right of the insurer to sue a responsible third party and seek recovery for a paid claim.
Event of loss
Provide prompt,written notice of loss
Notify police in case of loss by theft
Protect property from further damage
Cooperate with cliams investigation
Prepare an inventory of damaged property
Allow inspection of damaged property,books and record
Submit proof of loss,including time and cause of loss ,other insurance and receipts and evidence to support the loss
Pro Rata Liability
The policies share losses by the ratio of applicable limits of insurance each insurer writes compared to the total of all limits available for the loss
Contribution by Equal Shares
Some policies require the insurers to share the loss by contributing equal shares until each insurer has paid its limit of insurance.
determine the policy limit K has two homeowners policies .
Two insurance policies cover the same loss. To pay the claim, each insurer pays a portion of the loss equal to the ratio of insurance written by each insurer compared to the total amount of applicable coverage. This best describes:
Pro rata liability
Arbitration
If the insurer and the insured disagree about the amount payable for a claim or whether a claim is payable at all, the dispute is settled by arbitration. The insurer and insured each select an arbitrator, and the two arbitrators will select a third. The three arbitrators will settle the dispute.
Waiver or Change
Any waiver of rights or changes to the policy must be made in writing by the insurer and attached to the policy.
Concealment or Fraud
Coverage may not apply if an insured makes a material concealment or misrepresentation, or provides fraudulent information, in the insurance application or any claim form. Further, any intentional concealment or misrepresentation of material information or fraudulent conduct is grounds for the insurer to void the policy.
Legal Action Against Us (Suit Against Us)
The insured may not pursue legal action against the insurer until they have complied with all policy terms and conditions. There is time limit for bringing action against the insurer, usually 2 years.
earned premium
is the amount of premium already paid by the insured that applies to the actual number of days coverage was in place.
unearned premium
is the amount of premium already paid by the insured that applies to the actual number of days coverage will not be in place after cancellation.
pro rata cancellation
If the insurer cancels the policy, a proportionate cancellation of insurance will refund the unearned premium, and the insurer only retains the earned premium.
short-rate cancellation
If the insured cancels the policy, the insurer retains a portion of the unearned premium to cover administrative costs, determined by the insurer’s short-rate table
flat cancellation
If the policy is cancelled within a certain number of days after being issued, or if the insurer reverses an offer of coverage, the policy may be cancelled retroactive to the effective date of the policy, meaning no coverage is provided whatsoever. The insurer must refund the entire policy premium.
lapsed
If a policy is terminated because an insured fails to pay the premium
Nonrenewal
is when the insurer chooses not to renew the policy, and coverage ends at the expiration of the policy term
X’s neighbor shoots off fireworks on July 4th and puts the shells in X’s trash can, causing a fire and damaging X’s garage. X’s insurance company pays the loss and contacts the neighbor for reimbursement. This is an example of:
Subrogation
Because only the insurance company makes a promise to fulfill an obligation by paying a future covered claim, the insurance contract is:
Unilateral
Endorsements may be added to an insurance policy to do any of the following, except:
Specify the policy’s annual premium
All of the following statements regarding the structure of a property policy are correct, except:
Additional Coverages are added to the policy for an additional premium
Which of the following is true of the Insuring Agreement?
The promise to indemnify an insured for a covered cause of loss
Which of the following is the broad term for an accident that also includes a continuous and repeated exposure?
Occurrence
Policy A provides liability coverage to F’s Grocery up to $500,000. Policy B provides coverage for the same risks up to $1.5 million. Both policies pay on a pro rata basis. If F’s Grocery is determined to have a legal liability of $400,000 to a claimant who was injured on the property, how much will Policy A pay?
$100,000
The Insuring Agreement of a policy describes:
Perils that are covered
In a legal insurance contract, all of the following are considered part of the consideration, except:
The legal capacity of the involved parties
K gets a horrible rash after using wrinkle-prevention cream for 2 months. This is considered:
When an insurer issues an insurance policy as it was applied for
Which of the following constitutes the acceptance of an offer?
Which of the following parties may assign a standard property policy?
The insured with prior written permission of the insurer
In property and casualty insurance, when a form is attached to alter or add to policy provisions or conditions, it is known as:
An endorsement
The court requires an insurer to pay a claim because it declared the language of a policy exclusion to be unreasonable in the eyes of a prudent policyholder. This is an example of:
The doctrine of reasonable expectations
The formal statement an insured provides to an insurer, including all the details an insurer needs to assess its liability following a loss, is known as a:
Proof of loss
In an insurance contract, the value that each party gives the other is called the:
Consideration
The part of an insurance contract that varies with each individual policy, but is still a mandatory part of the policy, is the:
Declarations
Two primary policies from different insurers apply to the same covered loss, and the insurers agree to pay equivalent amounts until policy limits are exhausted. This method is referred to as:
Contribution by equal shares
