Chapter 2 - The Legal Nature of Insurance

Question 1

Insurance policies are contracts regulated by…
(whom, and provide the act.)

Answer 1

individual states per the McCarran-Ferguson Act of 1945.

Question 2

Each state has its own insurance department led by…

Answer 2

an insurance commissioner or administrator.

Question 3

Describe the 2 purposes of the National Association of Insurance Commissioners (NAIC).

Answer 3

Coordinates insurance regulation.

Makes recommendations but has no legal authority.

Question 4

Relevant insurance laws include…(3 things)

Answer 4

laws of agency, torts, and contracts.

Question 5

Most insurance is sold by agents who represent…

Answer 5

the insurer (principal)

Question 6

Since insurance is a contract, it is important to note:

Answer 6

1. The Elements of a Legally Binding Contract.
2. Lacking Elements
3. Voidable Contracts

Question 7

Related to Insurance as a Contract, list the 5 elements of a legally binding contract.

Answer 7

1. Offer and Acceptance: Unqualified offer accepted exactly.
2. Consideration: Exchange of value (e.g., premium payment).
3. Legal Object: Must be for a legal purpose.
4. Legal Capacity: Parties must be capable of entering a contract.
5. Legal Form: Generally governed by state law.

Question 8

Regarding Insurance as a contract, explain what Lacking Elements are.

Answer 8

Contracts lacking any elements are not enforceable.

Question 9

Regarding Insurance as a contract, explain what Voidable Contracts are.

Answer 9

Can be set aside by one party for satisfactory reasons.

Question 10

When Tort Liability is applied to insurance, what may cause liability or lawsuits?

Answer 10

Acts or failures to act causing damages.

Question 11

When Tort Liability is applied to insurance, criminal acts are…

Answer 11

Not covered by insurance.

Question 12

When Tort Liability is applied to insurance, llist the 3 types of tort.

Answer 12

Intentional Torts: E.g., battery, libel, slander.

Unintentional Torts (Negligence): Includes duty, breach of duty, causation, and loss.

Vicarious Liability: E.g., employer for employee.

Question 13

When Tort Liability is applied to insurance, list the 3 standards of care.

Answer 13

Negligence: Failure to act prudently.

Strict Liability: Imposed without proof of negligence.

Negligence Per Se: The act itself is negligence.

Question 14

When Tort Liability is applied to insurance, who bears the burden of proof?

Answer 14

It is initially borne by the injured party.

Question 15

Define the doctrine Res Ipsa Loquitur.

Answer 15

Presumes negligence if specific evidence is lacking.

Question 16

List the 2 types of damages that a tort can result from.

Answer 16

Bodily Injury: Medical expenses, loss of income, pain and suffering.

Property Damage: Actual monetary loss.

Question 17

What are the 2 defenses to negligence? (the 2nd has 2 subtypes)

Answer 17

Assumption of Risk: Injured party knew the risks.

Negligence of Injured Party:
Contributory Negligence: Injured party’s negligence contributed to injury.
Comparative Negligence: Damages adjusted based on injured party’s contribution.

Question 18

Under the Law of Agency, define the Binding Principal.

Answer 18

Agents can legally bind the principal within their authority.

Question 19

Under the Law of Agency, what are the 3 types of authority?

Answer 19

Express Authority: Specifically granted in writing.

Implied Authority: Necessary to carry out duties.

Apparent Authority: Insured believes agent has authority.

Question 20

Under the Law of Agency, what are the 3 types of relationships?

Answer 20

Principal-Agent: Agent acts on behalf of the principal.

Employer-Employee: Employer controls tasks.

Independent Contractor: Cannot bind the principal in contracts.

Question 21

Under the Law of Agency, what are the Agent’s 4 duties to the Principal?

Answer 21

Duty to Perform: Follow instructions, use skill.

Duty to Notify: Inform principal of material information.

Duty of Loyalty: No competition or adverse actions.

Duty to Account: Manage principal’s property properly.

Question 22

Under the Law of Agency, what are the Principal’s 4 duties to the Agent?

Answer 22

Performance: Fulfill contract with agent.
Compensation: Pay, indemnify, and reimburse agent.
Cooperation: Assist agent’s duties.
Safe Conditions: Provide safe working conditions.

Question 23

Define Indemnity and list the 5 factors it is enforced through.
(Unique Legal Characteristics of Insurance Contracts)

Answer 23

Definition: Insured recovers only actual financial loss.

5 factors:
Insurable Interest: Relationship causing financial loss.
Life Insurance Exception: Pays face value.
Actual Cash Value (ACV): Recovery amount limited to actual cash value minus depreciation.
Replacement Cost: Amount necessary to repair or replace property.
Stated Value Contracts: Agreed value at contract inception.

Question 24

Describe the Personal Contract.

(Unique Legal Characteristics of Insurance Contracts)

Answer 24

Generally non-transferable.

Question 25

The Contract of Adhesion is prepared…
(Unique Legal Characteristics of Insurance Contracts)

Answer 25

entirely by insurer.

Question 26

List the 4 influences on Utmost Good Faith.
(Unique Legal Characteristics of Insurance Contracts)

Answer 26

Misrepresentation: False statements inducing contract.
Concealment: Failure to disclose material facts.
Waiver: Relinquishment of a known right.
Estoppel: Prevents denial of accepted actions.

Question 27

In a unilateral contract: Only the ____ promises to perform.
(Unique Legal Characteristics of Insurance Contracts)

Answer 27

Insurer

Question 28

In a conditional contract, payment is…
(Unique Legal Characteristics of Insurance Contracts)

Answer 28

conditioned on premium and covered loss.

Question 29

In an aleatory contract, outcome is affected by…
(Unique Legal Characteristics of Insurance Contracts)

Answer 29

chance.

Question 30

Define subrogation.
(Unique Legal Characteristics of Insurance Contracts)

Answer 30

Insurer recovers from third party if loss caused by them.