Chapter 3: Legal Concepts Flashcards
What four aspects make a contract legally valid?
- Offer and Acceptance
- Consideration
- Legal Purpose
- Competent Parties
Define offer and acceptance
- Definite offer by one party and accepted by the other
- Application and premium submitted together
Define Consideration
Consideration is given by the applicant in exchange for the insurers promise to pay benefits
Define Legal purpose
The reason the parties enter into the agreement must be legal
- Insurable interest is the legal purpose of insurance contracts
Define competent parties
Parties are presumed to be competent unless they are minors, mentally infirm or are under the influence of alcohol or narcotics
Define Aleatory
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)
Define Adhesion
- Insurance contracts are adhesion contracts
- They come on a “take it or leave it” basis with no prior negotiating
Define Unilateral
- 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)
Define personal contract
- The owner of the policy has no bearing on the risk of the insurer
- Policy owners can give their policies away whenever they want
Define conditional
Insurers promise to pay benefits is conditional upon an event covered by the contract
Define Valued and Indemnity
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
Define Utmost Good Faith
- 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
Define warranty
- Statement made by an applicant that is guaranteed to be true in every aspect
- If statement is false it is considered a material misrepresentation
Define concealment
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
Define insurable interest
- 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
Define Stranger-Originate Life Insurance (STOLI)
- 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
Name the four duties of an agent (The Law of Agency)
- Describing the company’s insurance policies
- Soliciting applications for insurance
- Collecting premiums from policy owners
- Helping those who have purchased policies from the company
Name the four principles of Agency Law
An agent is a person who acts for another person (principal)
- The acts of the agent are the acts of the principal (person they are representing)
- A contract completed by the agent is on behalf of the principal
- Payments made to an agent on behalf of the principal are payments for the principal
- Any knowledge of the agent on business regarding the principal is assumed to be knowledge to the principal too (full disclosure)
What are the three types of agent authority?
- Express: The principal deliberately gives to the agent
- Implied: Unwritten authority that is assumed to have in order to conduct business for the principal
- 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
Define fiduciary
Agents hold a position of financial trust
- They act in a fiduciary capacity when collecting premiums
Brokers vs. Agents
- A broker (Independent agent) represents a number of insurance companies
- Agents represent a single company
What is Professional Liability Insurance? (E&O)
- Compare to malpractice insurance for doctors
- Errors and Omissions liabilities insurance for agents
Waiver
Voluntarily giving up legal, given right
Estoppel
Loss of defense
Parol Evidence Rule
Oral or verbal evidence cannot modify a written contract
Reasonable Expectations
Unexpected occurrences should be interpreted in the contract in favor of the policyholder
Void vs. Voidable Contracts
- 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)
Fraud
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
Define representation
Applicants statements concerning occupation, hobbies and personal health history
