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.
