Chapter 3

Question 1

Adhesion:

Answer 1

A contract of adhesion describes 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.

Question 2

Agent:

Answer 2

An agent represents themselves and the insurer at the time of application.

Question 3

Aleatory:

Answer 3

An insurance contract is an aleatory contract because one party may recover more in value than he or she has paid. Aleatory contracts are conditioned upon the occurrence of an event. For example, an individual who has a disability insurance policy will collect benefits if she becomes disabled. However, if no disability strikes, benefits are not paid. Another example illustrating the aleatory nature of insurance contracts is a life insurance policy that pays out a $20,000 death benefit after the insurance company collects only $100 in premiums.

Question 4

Apparent Authority

Answer 4

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

Question 5

Broker:

Answer 5

A Broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Question 6

Competent Party:

Answer 6

A competent party 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.

Question 7

Concealment:

Answer 7

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

Question 8

Conditional:

Answer 8

A conditional policy describes the insurer’s promise to pay benefits depends on the occurrence of an event covered by the contract. For example, the timely payment of premiums is a condition for keeping the contract in force. If premiums are not paid, the company is relieved of its obligation to pay a benefit. The requirement to notify the insurer of a loss is another necessary condition, as is the insured’s need to provide “proof of loss” as well. An insurer will not pay the benefits if the insured does not notify the company of the loss or cannot prove that the loss occurred

Question 9

Consideration:

Answer 9

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. The applicant’s consideration is the premium paid and the representations (i.e., statements) he or she makes on the completed application. The insurer’s consideration is the promise to pay legitimate claims for coverage provided during the policy period. Sometimes consideration is referred to as a bargained-for exchange. Whatever we call it, consideration is the binding force of any insurance policy.

Question 10

Applicants

Answer 10

provide the insurer with a completed application and initial premium as consideration for insurance.

Question 11

Errors and Omissions Liability Insurance (E&O)

Answer 11

Under this insurance, 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.

Question 12

Estoppel:

Answer 12

Estoppel 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.
This legal doctrine of estoppel applies when ALL of the following elements are present:
An agent or legal representative acting within his authority makes an inaccurate representation on behalf of the insurance company.
A consumer relies on the veracity of the information provided to make legally binding decisions.
When a circumstance arises that tests the validity of the questionable representation, the insurance company refuses to honor it by citing the terms of the contract as written.
The decision of the insurer causes financial harm to the consumer.

Question 13

Express Authority:

Answer 13

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

Question 14

Fiduciary:

Answer 14

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer. For example, Agents act in a fiduciary capacity when they accept premiums on behalf of the insurer or offer advice that affects a person’s financial security

Question 15

Fraud:

Answer 15

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

Question 16

Implied Authority:

Answer 16

Implied authority 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.

Question 17

Indemnity contract:

Answer 17

Contracts of indemnity attempt to return the insured to their original financial position

Question 18

Insurable Interest:

Answer 18

Insurable interest 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. For example, we assume that a husband and wife have an insurable interest in each other’s life as there are financial and emotional benefits to the continuation of each life. The same holds for parents and children. In a business situation, it exists between a business and a key employee. An individual would possess an insurable interest in a nephew or niece if the latter lived in the individual’s household, and he or she was their guardian. A person would not have an insurable interest in the life of their mail carrier as there is no expectation of benefiting from the mail carrier’s continued life. It is important to note for a life or health insurance contract, insurable interest is only required at the time of the application For example, Ned and Nancy are married and take out an insurance policy on each other’s life. There is no issue if Ned and Nancy later get divorced but keep the life insurance policies they own on each other. Though insurable interest no longer exists, the policies remain valid because insurable interest existed when the policies were bought.

Question 19

Insurance Policy:

Answer 19

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

Question 20

Legal Purpose:

Answer 20

Legal purpose means an insurance contract must be legal in nature and not in opposition to public policy.

Question 21

Material misrepresentation:

Answer 21

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

Question 22

Materiality

Answer 22

means the insurer would not have issued the same policy with the exact same terms had the insurer have known the concealed facts at the time of application.

Question 23

Parol Evidence Rule:

Answer 23

Parol evidence rule involves 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 parol (oral) evidence.

Question 25

Policy rider or endorsement:

Answer 25

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

Question 26

Reasonable expectations

Answer 26

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

Question 27

Rescission:

Answer 27

means the contract is made null and void.

Question 28

Representations:

Answer 28

Representations are statements made by the applicant that they consider to be true and accurate to the best of the applicant’s belief.

Question 29

Subrogation

Answer 29

Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured.

Question 30

Unilateral

Answer 30

Unilateral contracts mean only one party, the insurer, makes any kind of enforceable promise.

Question 31

Utmost Good Faith

Answer 31

Utmost good faith 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. There can be no attempt by either party to conceal, disguise, or deceive.

Question 32

Valued contract:

Answer 32

A valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.

Question 33

Voidable Contract:

Answer 33

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

Question 34

Waiver:

Answer 34

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

Question 35

Warranty

Answer 35

A warranty 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.