Definitions (Chapter 3)

Question 1

Offer and Acceptance

Answer 1

is an offer that may be made by the applicant by signing the application, paying the first premium, and if necessary, submitting to a physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or, the offer may be made by the company when no premium payment is submitted with application. Premium payment on the offered policy then constitutes acceptance by the applicant.

Question 2

Consideration

Answer 2

is something of value that each interested party gives to each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit.

Question 3

Legal Purpose

Answer 3

means an insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void.

Question 4

Competent party

Answer 4

is one who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol.

Question 5

Aleatory

Answer 5

is a feature of insurance contracts in that there is an element of chance for both parties and that the dollar given by the policyholder (premiums) and the insurer (benefits) may not be equal. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss.

• consideration may be unequal
• the outcome depends on chance or uncertain event
• a legal bet is considered an aleatory contract

Question 6

Contract of Adhesion

Answer 6

there is only one author - the insurance company. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Because an insurance contract has been prepared by an insurance company with not negotiation, it is considered a contract of Adhesion.

Question 7

Unilateral Contract

Answer 7

is a one sided agreement, where only the insurer is legally bound. In an insurance contract only the insurance company is legally bound to do anything.

Question 8

Conditional Contract

Answer 8

Means certain conditions must be met by all parties in the contract. This is needed when a loss occurs in order for the contract to be legally enforceable. All insurance contracts are conditional contracts.

Question 9

Valued Contract

Answer 9

life insurance contracts are valued contracts, which means it will pay a stated amount.

Question 10

Indemnity Contracts

Answer 10

All health Insurance contracts are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.) You cannot profit from an indemnity contract.

Question 11

Utmost Good Faith

Answer 11

Implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies.

Question 12

Warranties

Answer 12

are statements made on an application for insurance that are warranted to be true; that is, they are exact in every detail as opposed to representations. Statements on applications for insurance are rarely warranties, unless fraud is involved.

Question 13

Representations

Answer 13

are statements made by applicants on their applications for insurance that they represent as being substantially true to the best of their knowledge and belief, but that are not warranted as exact in every detail.

Question 14

Concealment

Answer 14

is the failure of the insured to disclose to the company a fact material to the acceptance of the risk at the time application is made.

Question 15

Insurable interest

Answer 15

requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. NOTE: insurable interest only needs to exist at the time of the application (the inception of the contract)

Question 16

Stranger-Originated Life Insurance (STOLI)

Answer 16

is life insurance arrangements where investors persuade consumers (usually seniors) to take out new life insurance policies, with the investors named as beneficiary. Investors loan money to the insured to pay the premiums for a defined period. The insured ultimately assigns ownership of the policy to the investors, who receive the death benefit when the insured dies. The insured receives additional financial benefits, such as an upfront payment or loan.

Question 17

Law of Agency

Answer 17

establishes a relationship in which one person is authorized to represent and act for another person or company. In applying the law of agency, the insurance company (Insurer) is the principal. An agent or producer will always be deemed to represent the insurance company an not the applicant. In regard to the insurance contract, any knowledge of the agent is considered to be knowledge of the insurance company (insurer). If the agent is working within the conditions of his/her contract, the insurance company is fully responsible.

Question 18

Express Authority

Answer 18

is the explicit authority granted to the agent by the insurer as written in the agency contract.

Question 19

Implied Authority

Answer 19

is authority not specifically granted to the agent in the contract of agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities.

Question 20

Apparent Authority

Answer 20

Deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. Apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal.

Question 21

Fiduciary Responsibility

Answer 21

describes the relationship between the agent or producer and client or company funds. Because the agent handles money of the insured and insurer, he/she has fiduciary responsibility. A fiduciary is someone in a position of trust. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling.

Question 22

Waiver

Answer 22

is an agreement waiving the company’s liability for certain type or types of risk ordinarily covered in the policy; a voluntary giving up of a legal, given right.

Question 23

Voidable contract

Answer 23

is a contract that can be made void at the option of one or more parties to the agreement

Question 24

Void Contract

Answer 24

is an agreement without legal effect; an invalid contract.