Chapter 3: Legal Concepts

Question 1

What four aspects make a contract legally valid?

Answer 1

• Offer and Acceptance
• Consideration
• Legal Purpose
• Competent Parties

Question 2

Define offer and acceptance

Answer 2

• Definite offer by one party and accepted by the other

- Application and premium submitted together

Question 3

Define Consideration

Answer 3

Consideration is given by the applicant in exchange for the insurers promise to pay benefits

Question 4

Define Legal purpose

Answer 4

The reason the parties enter into the agreement must be legal

• Insurable interest is the legal purpose of insurance contracts

Question 5

Define competent parties

Answer 5

Parties are presumed to be competent unless they are minors, mentally infirm or are under the influence of alcohol or narcotics

Question 6

Define Aleatory

Answer 6

There is a chance for unequal exchange considered for both parties. (example would be purchasing a 100,000 dollar policy but you die after three months you still receive the full policy amount)

Question 7

Define Adhesion

Answer 7

• Insurance contracts are adhesion contracts

- They come on a “take it or leave it” basis with no prior negotiating

Question 8

Define Unilateral

Answer 8

• Only the insurer makes any kind of enforceable promise
• The applicant does not even make a promise to pay premiums (but the insurer has a right to then cancel the contract if premiums are not paid)

Question 9

Define personal contract

Answer 9

• The owner of the policy has no bearing on the risk of the insurer
• Policy owners can give their policies away whenever they want

Question 10

Define conditional

Answer 10

Insurers promise to pay benefits is conditional upon an event covered by the contract

Question 11

Define Valued and Indemnity

Answer 11

Valued : Pays a stated sum regardless of the actual loss that has occurred

Indemnity: Pays amount equal to loss. Return to their original financial position

Question 12

Define Utmost Good Faith

Answer 12

• Policyowner and insurer must know all material facts and relevant information
• Both the agent and insured are required to make a full, fair and honest disclosure of risks, policies and contract

Question 13

Define warranty

Answer 13

• Statement made by an applicant that is guaranteed to be true in every aspect
• If statement is false it is considered a material misrepresentation

Question 14

Define concealment

Answer 14

Failure by the applicant to disclose a known material fact when applying for insurance

• You have a limited amount of time to identify false warranties, misrepresentations or concealments as an insurer

Question 15

Define insurable interest

Answer 15

• The person acquiring the contract must be subject to loss upon the death, illness or disability of the person being insured at the time of the application only
• This is the legal purpose

Question 16

Define Stranger-Originate Life Insurance (STOLI)

Answer 16

• Investors persuade individuals (usually seniors) to take out a new life insurance policy naming the investors as beneficiaries
• The investors loan money to the individual to pay premiums but receive all benefits from the life insurance plan when that individual dies

Question 17

Name the four duties of an agent (The Law of Agency)

Answer 17

1. Describing the company’s insurance policies
2. Soliciting applications for insurance
3. Collecting premiums from policy owners
4. Helping those who have purchased policies from the company

Question 18

Name the four principles of Agency Law

Answer 18

An agent is a person who acts for another person (principal)

1. The acts of the agent are the acts of the principal (person they are representing)
2. A contract completed by the agent is on behalf of the principal
3. Payments made to an agent on behalf of the principal are payments for the principal
4. Any knowledge of the agent on business regarding the principal is assumed to be knowledge to the principal too (full disclosure)

Question 19

What are the three types of agent authority?

Answer 19

1. Express: The principal deliberately gives to the agent
2. Implied: Unwritten authority that is assumed to have in order to conduct business for the principal
3. Apparent: Appearance of authority based on actions, words or deeds

Insurance companies may be liable for unauthorized acts of their agents when the contract is unclear about authority granted

Question 20

Define fiduciary

Answer 20

Agents hold a position of financial trust

• They act in a fiduciary capacity when collecting premiums

Question 21

Brokers vs. Agents

Answer 21

• A broker (Independent agent) represents a number of insurance companies
• Agents represent a single company

Question 22

What is Professional Liability Insurance? (E&O)

Answer 22

• Compare to malpractice insurance for doctors

- Errors and Omissions liabilities insurance for agents

Question 23

Waiver

Answer 23

Voluntarily giving up legal, given right

Question 24

Estoppel

Answer 24

Loss of defense

Question 25

Parol Evidence Rule

Answer 25

Oral or verbal evidence cannot modify a written contract

Question 26

Reasonable Expectations

Answer 26

Unexpected occurrences should be interpreted in the contract in favor of the policyholder

Question 27

Void vs. Voidable Contracts

Answer 27

• A void contract is an agreement without legal effect (cannot be enforced by either party)
• Voidable contract is a contract that can be set aside when represented by the court (if a policyholder stops paying premiums the insurance company may cancel the contract)

Question 28

Fraud

Answer 28

A contract can be void if it contradicts the elements of a legal contract. You only have two years to prove the validity of a contract

Question 29

Define representation

Answer 29

Applicants statements concerning occupation, hobbies and personal health history