Characteristics of Insurance & Other Contracts Ch. 2 Flashcards
Define contract
A legal agreement between two parties that is enforceable at law.
What are the five essential elements required of a contract?
Agreement Legal Capacity to Contract Legality of Object Consideration Genuine Intention
What must happen for an agreement to exist?(3)
A meeting of the minds on subject matter, terms and conditions
A definite offer made from one party to the other
An unconditional acceptance of that offer.
Who has the Legal Capacity to Contract?
Who does not?
All persons over 18 years of age have the legal capacity to contract.
Persons who do not have the legal capacity to contract are:
-minors
-persons who are insane or mentally incompetent
-persons under the influence of drugs or alcohol
-businesses operating under a trade name
Define Legality of Object
Legality of object means that the contract must be intended for a lawful purpose. eg. It is illegal to contract with someone to maim or kill another person or to smuggle illicit drugs
Define consideration
The exchange of something of value between the parties.
What three things must be shown to qualify the state of mind of ‘Genuine Intention’ for a contract to be valid?
- it was the intention of the parties to enter into a contract
- they had all the facts they needed to make their decision
- no unfair business practices were used by either of them (fraud, deceit, coercion etc)
What are the three additional characteristic of insurance contracts?
Indemnity
Insurable Interest
Utmost Good Faith
In the spirit of utmost good faith, what is expected from the broker, the insured, and the insurer while dealing with each other in regards to insurance contracts?
All parties must be completely honest with each other at all times.
The insurer must provide a policy that is reasonably worded, all claims must be dealt with promptly and paid as soon as is reasonable.
Insured must tell the truth on their application, particularly with material facts.
With the principle of indemnity, what is the insurer paying the insured for when there is a loss?
Only the amount of the insured’s loss, no more and no less.
Define void contract
Void contract: the law considers the contract never to have existed
Ways a contract could be considered void (2)
- When one or more of the eight essential elements of an insurance contract is missing
- When there is a mistake in the terms of the contract which is considered to be beyond what could be reasonably expected
What is a voidable contract?
Voidable Contract: even though one or more elements required of legal contracts may be missing or compromised, the contract would still hold to law and the party adversely affected by that circumstance may choose to continue the contract.
Define Material Fact
A material fact is a fact that, had it been known by the underwriter, would have affected the decision regarding whether to accept the risk or not, and the rate or premium to be charged had the underwriter made the decision to accept the risk.
When do property policies commence and expire?
Policies commence and expire at 12:01am pacific standard time at the address of the insured property.
Define endorsement
A document that is attached to the original policy that changes the terms or conditions of that policy.
What is a rider?
A rider is used to add other coverages to the policy. It is different from an endorsement in that it really is its own separate Insuring Agreement with its own deductible, coverages, exclusion, terms and conditions
Riders are used more for commercial property insurance than for personal insurance.
What is a Floater?
Floaters are like riders except that they are designed to insure mobile property that moves around from one location to another.
Floaters are used to inure both mobile personal and commercial property.
What is Loading?
A loading is an additional rate, over and above the fire rate, charged by the insurance company for the additional perils insured by the policy.
Describe ‘Additional Condition’ -Notice to Authorities
When the loss to insured property is caused by a criminal act, the insured must notify the police immediately.
Describe ‘Additional Condition’ -Pair and Set
When there is a loss to one item of property that is a part of a pair or set, the item that has not been lost or damaged continues to have value and that amount will be deducted from the amount it would cost to repair or replace the entire pair or set.
Describe ‘Additional Conditions’ -Parts
Certain property items will be made from many parts, (e.g. home vacuum systems, flooring such as rugs, window and door units, etc) In the event there is a loss to a part of property consisting of other parts, the insurer shall be liable only for the cost of the lost or damaged part, including costs of installation.
What are the two forms of exclusions on property insurance policies?
Property exclusions
Perils exclusions
Why do Insurance policies contain exclusions?(3)
- there are certain losses that the insurance company considers uninsurable
- loss or damage is inevitable (wear and tear)
- there is a more specific insurance coverage available
