Chapter 3

Question 1

Aleatory

Answer 1

A feature fo insurance contracts that there is an element of chance for both parties and that the dollar given by the policyholder (premiums) and the insurer (benefits) may not be equal. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss.

• Consideration may be unequal
• The outcome depends on chance or uncertain event
• A legal bet is considered an aleatory contract

Question 2

Apparent authority

Answer 2

deals with the relationship between the insurer, the agent, and the customer. it is the appearance of authority based on the agent-insurer relationship. apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal.

Question 3

Competent party

Answer 3

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.

the insurer is considered competent if it has been licensed or authorized by the state(s) in which it conducts business.

Question 4

Conditional contract

Answer 4

certain conditions must be met by all parties in the contract. this is needed when a loss occurs in order for the contract to be legally enforceable. All insurance contracts are conditional contracts.

Question 5

Concealment

Answer 5

the failure of the insured to disclose to the company a fact material to the acceptance of the risk at the time application is made.

A customer lying or omitting the truth about something that could potentially increase their risk.

Question 6

Consideration

Answer 6

something of value that each interested party gives each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit.

The value given in exchange for the promises sought. Consideration is given by the applicant in exchange for the insurer’s promise to pay benefits. it also consists of the application and the initial premium. this is why the offer and acceptance of an insurance contract are not complete until the insurer receives the application and the first premium.

Question 7

contract of adhesion

Answer 7

there is only one author - the insurance company. if there is an ambiguity in the contract, the courts always favor the insured over the insurer. because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion.

the applicant adheres to the terms of the contract on a “take it or leave it” basis when accepted. A Policy of adhesion can also be described as one which only the insurance company can modify.

Question 8

Express authority

Answer 8

the explicit authority granted to the agent by the insurer as written in the agency contract

Question 9

Fiduciary Responsibility

Answer 9

the relationship between the agent or producer and client or company funds. because the agent handles money of the insured and the insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust.

With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling.

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 10

Health insurance contracts

Answer 10

indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.). you cannot profit from an indemnity contract

Question 11

Implied authority

Answer 11

not specifically 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 12

Insurable interest

Answer 12

requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract.

to have an insurable interest in the life of another person, an individual must have a reasonable expectation of benefitting from the other person’s continued life.

when the applicant is the same as the person to be insured, there is no question that insurable interest exists because individuals are presumed to have insurable interest in themselves.

to purchase the insurance, the policy owner must face the possibility of losing money or something of value when a loss happens.

NOTE: insurable interest only needs to exist at the time of the application (the inception of the contract)

Question 13

The law of agency

Answer 13

establishes a relationship in which one person is authorized to represent and act for another person or company. An agent or producer will always be deemed to represent the insurance company and not the applicant. In regard to the insurance contract, any knowledge of the agency s considered to be the knowledge of the insurance company (insurer). if the agent is working within the conditions of his/her contract, the insurance company is fully responsible.

Question 14

Legal purpose

Answer 14

an insurance contract must be legal and not in the opposition of public policy. if an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void.

the object of the contract and the reason the parties enter into the agreement must be legal.

Question 15

Life insurance contracts

Answer 15

valued contracts, which means it iwll pay a stated amount

Question 16

Offer and acceptance

Answer 16

an offer that may be made by the applicant by signing the application, paying the first premium, and if necessary, submitting to a physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or the offer may be made by the company when no premium payment is submitted with application. Premium payment on the offered policy then constitutes acceptance by the applicant.

A contract must be made with a definite unqualified proposal (offer) by one party and the acceptance of its exact terms by the other. in many cases, the offer of an insurance contract is made by the applicant when the application is submitted with the initial premium. The insurance company accepts the offer when it issues the policy as applied for. when an offer is answered by a counter offer, the first offer is void.

Question 17

Policy

Answer 17

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

Question 18

Policy rider

Answer 18

a legal attachment amending a policy. additional benefits or a reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider.

Question 19

Representations

Answer 19

statements made by applicants on their applications for insurance that they represent as being substantially true to the best of their knowledge and belief, but that are not warranted as exact in every detail.

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

Question 20

Stranger-originated life insurance (STOLI)

Answer 20

life insurance arrangements where investors persuade consumers (usually seniors) to take out new life insurance policies, with the investors name as beneficiary. investors loan money to the insured to pay the premiums for a defined period. the insured ultimately assigns ownership of the policy to the investors, which receive the death benefit when the insured dies. the insured receives additional financial benefits, such as up front payment or a loan.

Question 21

Unilateral contract

Answer 21

one sided agreement, where only the insurer is legally bound. in an insurance contract only the insurance company is legally bound to do anything.

only the insurer makes any kind of enforceable promises (to pay benefits upon occurrence of a specific event, such as death or disability). the insurer can’t even require the premiums to be paid. of course, the insurer has the right to cancel the contract if premiums are not paid.

Question 22

Utmost good faith

Answer 22

implies that there will be no attempt by either party to misrepresent, conceal, or commit fraud as it pertains to insurance policies.

insurance applicants are required to make a full, fair, and honest disclosure of the risk to the agent and insurer. the insurer issues the policies on the faith that the applicant was truthful. (warranties, representations, and concealment)

Question 23

Voidable contract

Answer 23

a contract that can be made void at the option of one more parties to the agreement.

Question 24

Void contract

Answer 24

an agreement without legal effect: an invalid contract.

Fraud: in the event of fraud, insurance contracts are unique in that they run counter to a basic rule of contract law. Under most contracts, fraud can be a reason to void a contract. With life insurance contracts, an insurer has only a limited period of time (usually two years from date of issue) to challenge the validity of a contract. After that period, the insurer cannot contest the policy or deny benefits based on material representations, concealment, or fraud.

Forms: the insurance carrier is responsible for assembling the policy forms for the insured person(s)

Question 25

Warranties

Answer 25

statements made on an application for insurance that are warranted to be true; that is, they are exact in every detail as opposed to representations. Statements on applications for insurance are rarely warranties, unless fraud is involved.

Question 26

Waiver

Answer 26

an agreement waiving the company’s liability for a certain type or types of risk ordinarily covered in the policy; a voluntary giving up of a legal given right.

Question 27

Contract

Answer 27

an agreement enforceable by law. it is the means by which one ore more parties bind themselves to certain promises. an insurance policy is a written contract in which one party (the insurer) promises to indemnify another (the insured) against loss that arises from an unknown event.

Question 28

Personal Contract

Answer 28

Life and health insurance are considered a personal contract or personal agreement between the insurer and the insured. the owner of the policy has no bearing on the risk the insurer has assumed. for this reason, people who buy life and health insurance policies are called policy owners rather than policy holders. policy owners actually own their policies and can give them away if they wish. this transfer of ownership is known as assignment. to assign a policy, a policy owner simply notifies the insurer in writing. the company will then accept the validity of the transfer without question. the new owner is granted all the rights of policy ownership.

Question 29

assignment

Answer 29

the transfer of policy ownership. to assign a policy, a policy owner simply notifies the insurer in writing. the company will then accept the validity of the transfer without question. the new owner is granted all the rights of policy ownership.

Question 30

valued contract

Answer 30

pays a stated sum regardless of the actual loss incurred.

ex. life insurance contracts are valued contracts. if an individual acquires a life insurance policy insuring their life for $500k, that is the amount payable at death. there is no attempt to value actual financial loss upon a person’s death.

Question 31

indemnity contract

Answer 31

pays an amount equal to the loss. contracts of indemnity attempt to return the insured to their original financial position.

ex. fire and health insurance policies.

Question 32

Estoppel

Answer 32

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.

the legal process used to prevent a party from reclaiming a right or privilege that was already waived. a legal consequence of the waiver.

I.e. loss of defense.

Question 33

Subrogation

Answer 33

the right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss.

Question 34

Tort law

Answer 34

to provide full compensation for proved harms. to right a wrong done to a person and provide relief from the wrongful acts of others by awarding monetary damages as compensation.

Question 35

broker

Answer 35

unlike agents, brokers legally represent the insureds. a broker (or independent agent) may represent a number of insurance companies under separate contractual agreements. a broker solicits and accepts applications for insurance and then places the coverage with an insurer.

Question 36

errors & omissions (E&O)

Answer 36

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 37

Parol evidence rule

Answer 37

prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract.

Question 38

endorsement

Answer 38

a written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. aka a rider.