Chapter 6: Basic Legal Principles and Contract Analysis

Question 1

Insurance: Intangible Contract

Answer 1

Represents value and viewed as product that provides future benefits.

Question 2

Contract: Legal Requirements

Answer 2

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

Question 3

Offer and Acceptance

Answer 3

Must have both for contract to be effective

Question 4

Legal Purpose

Answer 4

Courts will not enforce policy if has an illegal purpose or is contrary to public policy

Question 5

Competent Parties

Answer 5

Policyholders must be of age and competent

Insurers must meet state and license requirements

Question 6

Consideration

Answer 6

A right or something of value given up or an obligation assumed

Question 7

Specific Legal Characteristics of Insurance Contracts

Answer 7

10 Characteristics to describe fundamental ideas on which insurance contracts are based.

Question 8

Unilateral Nature

Answer 8

Only one party makes a binding promise that if broken allows action against that party for breach of contract.

Question 9

Personal Nature

Answer 9

Covers the person rather than the property concerned

Most contracts are not transferable as a result of personal nature

Question 10

Conditional Nature

Answer 10

Insurer is obligated to pay claims, defend the insured against liability claims, or perform other services only if the insured has complied with policy conditions

Question 11

Contract of Adhesion

Answer 11

All details of contract prepared by insurer and not policyholder. Policyholder agrees to what is presented.

Question 12

Oral Evidence

Answer 12

Policyowner may not usually contradict the written contract by saying the agent promised policy covered certain type of loss.

Question 13

Contract of Indemnity

Answer 13

Insurer agrees to pay an amount directly related to the amount of the loss.
Valued Contract specifies the amount the insurer will pay in the event of a specified loss-usually total loss.

Question 14

Insurable Interest

Answer 14

Right to the subject matter of the insurance contract such that the policyowner would suffer financial loss from its damage, loss or destruction.

Question 15

Subrogation Rights

Answer 15

Insurer who has paid a claim under a contract takes over any rights of recovery that the insured might have against another party responsible for the loss.

Question 16

Fraud: Concealment

Answer 16

Failure to affirmatively disclose relevant information

Question 17

Fraud: Misrepresentation

Answer 17

Insurance applicant makes a false statement of a material fact.

Question 18

Fraud: Voidable Contract

Answer 18

Can be affirmed or rejected at the option of one of the parties. (usually only insurer has this right)

Question 19

Fraud (6 Elements)

Answer 19

1. False representation
2. Knowingly Made
3. Intent to influence or deceive
4. Material fact
5. Reasonable reliance
6. Detriment

Question 20

Warranties and Representations

Answer 20

Warranty is part of the contract and must be strictly complied with; whereas Representation is usually an incidental statement preceding the contract or an inducement to it.

Question 21

Insurance Contract Element

DECLARATIONS

Answer 21

Factual statements that identify the specific person, property or activity being insured and the parties to the transaction and descriptive information about the insurance being provided.

Question 22

Insurance Contract Element

DEFINITIONS

Answer 22

Explain the key policy terms and are a major help in defining the insured’s intentions.

Question 23

Insurance Contract Element

INSURING AGREEMENTS

Answer 23

Spell out the basic promise of the insurance company
Open-Perils: covers all losses except those that the policy specifically excludes
Named-Perils: Covers only losses that arise from one of the listed perils

Question 24

Insurance Contract Element

EXCLUSIONS

Answer 24

Identifies types of claims that insurer does not cover

Question 25

Insurance Contract Element

CONDITIONS

Answer 25

Policyowner must fulfill the conditions in a policy before the insurer may be held liable for a loss.

Question 26

Insurance Contract Element

MISCELLANEOUS PROVISIONS

Answer 26

Noncancelable: Policyowner has right to renew coverage at each policy anniversary date
Guaranteed Renewable: Gives the policyowner the right to renew the coverage at each anniversary date but only to a certain age
Nonrenewable for Stated Reasons Only: Insurer may refuse renewal for specific reasons listed in policy
Optionally Renewable: Insurer has right to refuse to renew a policy at end of period in which premiums are paid.
Cancelable: Insurer may cancel at any time and refund premiums paid

Question 27

Deductibles

Answer 27

Sharing in cost of loss paid by policyowner

Question 28

Coinsurance

Answer 28

Copayment required

Question 29

Coordination of Benefits

Answer 29

Prevent duplication of benefits when insured is covered by more than only plan

Question 30

Endorsement Rider

Answer 30

Provision added to policy, sometimes for additional premium, by which scope of coverage is clarified, enlarged or restricted.