Characteristics of Insurance & Other Contracts Ch. 2

Question 1

Define contract

Answer 1

A legal agreement between two parties that is enforceable at law.

Question 2

What are the five essential elements required of a contract?

Answer 2

Agreement
Legal Capacity to Contract
Legality of Object
Consideration
Genuine Intention

Question 3

What must happen for an agreement to exist?(3)

Answer 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.

Question 4

Who has the Legal Capacity to Contract?

Who does not?

Answer 4

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

Question 5

Define Legality of Object

Answer 5

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

Question 6

Define consideration

Answer 6

The exchange of something of value between the parties.

Question 7

What three things must be shown to qualify the state of mind of ‘Genuine Intention’ for a contract to be valid?

Answer 7

• 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)

Question 8

What are the three additional characteristic of insurance contracts?

Answer 8

Indemnity
Insurable Interest
Utmost Good Faith

Question 9

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?

Answer 9

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.

Question 10

With the principle of indemnity, what is the insurer paying the insured for when there is a loss?

Answer 10

Only the amount of the insured’s loss, no more and no less.

Question 11

Define void contract

Answer 11

Void contract: the law considers the contract never to have existed

Question 12

Ways a contract could be considered void (2)

Answer 12

• 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

Question 13

What is a voidable contract?

Answer 13

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.

Question 14

Define Material Fact

Answer 14

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.

Question 15

When do property policies commence and expire?

Answer 15

Policies commence and expire at 12:01am pacific standard time at the address of the insured property.

Question 16

Define endorsement

Answer 16

A document that is attached to the original policy that changes the terms or conditions of that policy.

Question 17

What is a rider?

Answer 17

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.

Question 18

What is a Floater?

Answer 18

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.

Question 19

What is Loading?

Answer 19

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.

Question 20

Describe ‘Additional Condition’ -Notice to Authorities

Answer 20

When the loss to insured property is caused by a criminal act, the insured must notify the police immediately.

Question 21

Describe ‘Additional Condition’ -Pair and Set

Answer 21

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.

Question 22

Describe ‘Additional Conditions’ -Parts

Answer 22

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.

Question 23

What are the two forms of exclusions on property insurance policies?

Answer 23

Property exclusions

Perils exclusions

Question 24

Why do Insurance policies contain exclusions?(3)

Answer 24

• 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