Chapter 6

Question 1

Unilateral Contract

Answer 1

A contract in which only one of the parties to it makes a binding promise that, if broker, gives rise to an action against that party for breach of contract.

Question 2

Conditional Contract

Answer 2

An agreement in which one party has an obligation to perform only if the other party meets certain conditions specified in the agreement

Question 3

Contract of Adhesion

Answer 3

A contract that is prepared in all of its details by one party, rather than having its terms bargained over between the parties to the contract. Because insurance policies are generally contracts of adhesion, if ambiguity exists in the terms, the courts are likely to rule in favor of the insured and against the insurer (or party that drew up contract).

Question 4

Parol Evidence Rule

Answer 4

A legal principle that specifies that oral contemporaneous evidence may not be used to contradict or to vary the terms of a valid written contract.

Question 5

Contract of Indemnity

Answer 5

A policy in which the insurer agrees, if a covered loss occurs, to pay an amount directly related to the amount of the loss.

Question 6

Principle of Indemnity

Answer 6

Legal principle that the purpose of insurance is to indemnify (financially compensate) people entitled to insurance benefits in an attempt to make them financially whole; however, people should not profit from an insured loss

Question 7

Valued Contract

Answer 7

An insurance contract in which the amount of recovery does not depend on the financial amount of the loss but rather on the limit specified in the contract

Question 8

Insurable Interest

Answer 8

A right or relationship with regard to the subject matter of an insurance contract such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter

Question 9

Subrogation

Answer 9

A process by which an insurer that has paid a claim takes over that legal rights of recovery its insured might have against a responsible third party

Question 10

Concealment

Answer 10

Failure by one party to a contract to affirmatively disclose to the other party all of the important facts that are the exclusive knowledge of the first party. Even if it is not intentional or fraudulent, concealment can make an insurance contract voidable.

Question 11

Misrepresentation

Answer 11

A false and material statement made by an applicant for insurance. It is the basis for the insurer to make the contract voidable

Question 12

Voidable Contract

Answer 12

A contract that can be affirmed or rejected at the option of one of the parties but is binding on the other party.

Question 13

Void Contract

Answer 13

A contract that is entirely without legal effect and, therefore, unenforceable by either party. In essence, a void contract never was a contract

Question 14

Fraud

Answer 14

Intentional deception or intentional misleading of another person. In order to constitute fraud intent must be shown, and the information concealed or misrepresented must be relied upon by and injure the other party.

Question 15

Warranty

Answer 15

A statement that becomes a part of an insurance contract and that must be strictly complied with. A warranty, if false, makes the policy voidable, even if the false statement is not material.

Question 16

Representation

Answer 16

A statement in an insurance application that is substantially true to the best of the applicant’s knowledge and belief. A false representation of a material fact is a misrepresentation

Question 17

Declarations

Answer 17

Factual statements that are a part of an insurance policy and that identify the specific person, property, or activity being insured; the parties to the insurance transaction; and other descriptive information about the insurance being provided.

Question 18

Definitions

Answer 18

Explanations of the meaning of key terms in an insurance policy to clarify the coverage

Question 19

Insuring Agreement

Answer 19

A provision in an insurance contract that spells out the basic promise of the insurance company to pay benefits according to the terms of the policy.

Question 20

Exclusions

Answer 20

Provisions in an insurance contract that indicate what the insurer does not cover. Exclusions can apply to perils, types of losses, types of property, or types or activities.

Question 21

Noncancelable

Answer 21

In an insurance contract, the right of the insured to renew the coverage at each policy anniversary date, usually up to some state age. The coverage may not be terminated by the insurer during the term of coverage. Also, the rates for the coverage are guaranteed in the contract, although they are not necessarily level.

Question 22

Guaranteed Renewable

Answer 22

A characteristic of an insurance contract in which the insured retains the right to renew the coverage at each policy anniversary date, usually up to a stated age. Also, the insurer is not allowed to cancel the coverage during the period of protection. However, the insurer does retain the right to raise the rates for the coverage for broad classes of insureds.

Question 23

Endorsement

Answer 23

A provision added to a property or liability insurance policy, sometimes for an extra or reduced premium charge, by which the scope of the policy’s coverage is clarified, restricted, or enlarged.

Question 24

Rider

Answer 24

The term used in life insurance in place of the term endorsement