Chapter 3

Question 1

What is a contract of adhesion?

Answer 1

A contract of adhesion is one that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the contract terms on a ‘take it or leave it’ basis when accepted.

See Rule Regarding Ambiguities

Question 2

Who is an agent in insurance?

Answer 2

An agent is the person who represents the insurer during an insurance transaction and has been authorized to act on the insurance company’s behalf.

Question 3

What is the fiduciary responsibility of an agent?

Answer 3

Agents have a fiduciary responsibility to both parties - the insurer and the policy owner.

Question 4

What does aleatory mean in insurance?

Answer 4

Aleatory is a legal arrangement in which there’s the potential for an unequal exchange of value or consideration between both parties.

Question 5

What are ambiguities in an insurance contract?

Answer 5

Ambiguities refer to terms or conditions that are not clearly defined in an insurance contract.

See Adhesion

Question 6

What is apparent authority?

Answer 6

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

Question 7

What is a broker in insurance?

Answer 7

A broker is a licensed producer who represents himself and the insured during an insurance transaction, but does not hold an appointment with the insurer.

Question 8

What is a competent party?

Answer 8

A competent party is a person who is able to understand the contract to which two parties are agreeing.

Question 9

What is concealment in insurance?

Answer 9

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

Question 10

What does conditional mean in an insurance agreement?

Answer 10

Conditional means that the agreement remains in force if certain conditions are met, with the insurer’s promise to pay benefits dependent on the occurrence of a covered event.

Question 11

What is consideration in an insurance contract?

Answer 11

Consideration is the legal description of the items of value that each party to the contract provides to the other. In the case of an insurance policy, the applicant provides material information and the premium. In return, the insurance company agrees to pay the cost of claims that are covered by the policy.

Question 12

What is a Consideration Clause?

Answer 12

This clause is part of an insurance contract and sets forth the initial and renewal premiums and frequency of future payments.

Question 13

What is the Doctrine of Reasonable Expectations?

Answer 13

This doctrine states that an insurance contract will be interpreted to mean what a reasonable individual would think it means, even if the insurer must pay additional benefits that are not intended by the contract.

Question 14

What is Estoppel?

Answer 14

This is the legal impingement to one party’s ability to deny 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.

Question 15

What is Express Authority?

Answer 15

This is the explicit authority that’s granted to the agent by the insurer, as written in the agency contract.

Question 16

What is a Fiduciary?

Answer 16

A fiduciary is a person to whom property or power is entrusted for the benefit of another person. A producer is a fiduciary a position of trust regarding the funds of its clients and the insurer.

Question 17

What constitutes Fraud?

Answer 17

An individual commits fraud when he engages in intentional deceit to gain a benefit. Fraud includes having deliberate knowledge of false statements that are made or intended as well as the act of a person making such statements herself.

Question 18

What is Implied Authority?

Answer 18

This is an authority that’s not explicitly granted to the agent in the contract of agency, but which common sense dictates the agent has. This authority enables the agent to carry out routine responsibilities.

Question 19

What is an Indemnity Contract?

Answer 19

This type of contract attempts to return the insured to his original financial position.

Question 20

What is Insurable Interest?

Answer 20

This is the financial, economic, emotional impact that experienced by a person who suffers a covered loss. A person has an insurable interest if she has more to gain by not experiencing the loss.

Question 21

What is an Insurance Policy?

Answer 21

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

Question 22

What does Legal Purpose mean in an insurance contract?

Answer 22

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

Question 23

What is Material Misrepresentation?

Answer 23

This is a false statement made by an applicant that influences either an insurer’s decision to accept the risk or the classification of a risk that’s accepted by the insurer.

Question 24

What is Misrepresentation?

Answer 24

This is a statement made as a legal representation that’s factually incorrect, either totally or in part.

Question 25

What is the Parole Evidence Rule?

Answer 25

This rule states that when the parties agree in writing, all previous verbal statements come together. A written contract cannot be changed or modified by parole (oral) evidence.

Question 26

What is a Policy Rider or Endorsement?

Answer 26

This is an amendment added to an insurance contract that overrides terms in the original policy. Riders may add or remove coverages, change deductibles, or any other policy feature. In general, a policy owner must pay an additional premium to add a policy rider that enhances policy benefits.

Question 27

What are Reasonable Expectations?

Answer 27

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

Question 28

What are Representations?

Answer 28

These are statements made by the applicant that he considers true and accurate to the best of his belief.

Question 29

What is the Rule Regarding Ambiguities?

Answer 29

This rule applies to contracts of adhesion. Courts will interpret the terms of an insurance contract in favor of the insured if there’s a legal dispute and the court holds the terms of the contract to be ambiguous.

Question 30

What is Subrogation?

Answer 30

This is the right to pursue a third party that caused an insurance loss to the insured.

Question 31

What does Unilateral mean in a contract?

Answer 31

This is a type of contract in which only one party – the insurer – makes any kind of enforceable promise.

Question 32

What is Utmost Good Faith?

Answer 32

This statement is based on the belief that both the policy owner and the insurer must know all of the material facts and relevant information.

Question 33

What is a Valued Contract?

Answer 33

This type of contract pays regardless of the actual loss incurred. Life insurance contracts are valued contracts.

Question 34

What is a Void Contract?

Answer 34

This contract is an agreement that has never really been in force because it lacks one of the essential elements of a contract.

Question 35

What is a Voidable Contract?

Answer 35

This type of contract is an agreement that may be set aside by one of the parties in the contract for a reason that’s satisfactory to the court.

Question 36

What is a Waiver?

Answer 36

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

Question 37

What is a Warranty?

Answer 37

This is a statement made by the applicant that’s guaranteed to be true in every respect and also becomes a part of the contract.