Elisa's Book Chapter 2 Contract Law

Question 1

A Contract is defined as an

Answer 1

agreement between two or more parties.
- AN INSURANCE POLICY IS A CONTRACT

Question 2

An insurance policy is a between the policyowner and the

Answer 2

insurer (the insurance company).

Question 3

The purpose of the policy is to INDEMNIFY, OR MAKE WHOLE,

Answer 3

the insured in the event of a loss.
- In a Life insurance contract, the insurer promises to pay a predetermined amount of money, known as the face amount or death benefit of the policy, in exchange for the policyowner’s consideration (premium and statements on the application).

Question 4

Element of a Contract - in order for a contract to be legally enforceable, it must include the following essential elements:

Answer 4

Offer and acceptance, Exchange of consideration, Legal purpose, and Legal capacity of the parties.

Question 5

Element of a Contract: Offer and acceptance

Answer 5

In an insurance transaction, the applicant makes the offer to buy the policy by giving to the insurance agent (who represents the insurer) a completed application and the first premium in advance. Upon approval of the application (which may or may not include a medical examination), the insurance company formally accepts the offer by issuing the insurance policy. Sometimes, though, the insurance company will not issue the policy as applied for, but may COUNTEROFFER with the issuance of another policy at different premium rates or with different policy terms. The applicant has the right to accept or reject the counteroffer.

SHORTCUT: APPLICATION + PREMIUM = THE OFFER
POLICY ISSUED = THE ACCEPTANCE

Question 6

Element of a Contract: Consideration

Answer 6

Consideration is something of value exchanged by the parties to the contract. The applicant’s consideration is premium and statements made on the application. The company’s consideration is the promise to pay benefits in the event of a covered loss during the policy period.

SHORTCUT: CONSIDERATION = PREMIUM

Question 7

Element of a Contract: Legal purpose

Answer 7

In order to be legally enforceable, a contract must have a legal purpose. A life insurance contract is normally considered to serve a legal purpose. However, it could be misused to serve an illegal purpose. If I insure you, with plans to collect after I murder you, the contract would not be valid or enforceable. To prevent this, INSURABLE INTEREST must exist between the applicant and the proposed insured AT THE TIME OF APPLICATION. The applicant must have a financial stake in the insured’s life. The following are examples of who has insurable interest is whom:
- Spouses in each other
- Parents in their children
- Creditors in their debtors
- Employers in their key employees

It is important to note that there is no requirement that a beneficiary have an insurable interest in an insured. If Calvin Client dies a lonely bachelor, he could name his church or his college as his beneficiary…neither institution has any insurable interest in Cal’s life, but either could be his beneficiary.

In addition to insurable interest, the proposed insured (if other than the applicant) must sign the application; therefore, giving WRITTEN CONSENT to being insured.

SHORTCUT: INSURABLE INTEREST = FINANCIAL INTEREST BETWEEN APPLICANT AND INSURED AT THE TIME OF APPLICATION. (NOT TIME OF LOSS)

Question 8

Element of a Contract: Legal capacity

Answer 8

This element requires that both parties to the contract be legally competent. The insurance company is legally competent because it has the proper authority to write insurance in a given state and the agent transacting the business is, of course, properly licensed. The applicant is considered legally competent as long as he or she is of sound mind, sane, sober and legal age. Though 18 is often considered the age of majority, some states will consider a person to have legal capacity as early as age 15 for the purpose of purchasing a life insurance policy.

Question 9

Contractual Terms and Concepts: Contract of Utmost Good Faith

Answer 9

Insurance is a good faith contract because there is a mutual reliance of truthfulness on both parties. The insurer relies on the applicant to complete the application as accurately and honestly as possible, and not to falsify any claims. The applicant, in turn, trusts that the insurer will fulfill its obligation by paying the claim in the event of a loss.

Question 10

Contractual Terms and Concepts: Contract of Adhesion

Answer 10

The insurance policy is a legal contract written exclusively by the insurance company. The applicant does not take part in writing the policy, and must accept or reject it as written. Therefore, anything found to be ambiguous in the policy will be interpreted as favorable to the policyholder or beneficiary, not the insurance company.

SHORTCUT: ADHESION = ONE AUTHOR
- INSURER MUST STICK (ADHERE) TO THE CONTRACT
*YOU’LL NEVER RECEIVE IN BENEFIT WHAT YOU PAID IN PREMIUM

Question 11

Aleatory:

Answer 11

An aleatory contract is one in which the dollar value exchanged by the two parties is NOT necessarily equal. The benefits paid out by an insurance contract may or may not exceed the total premium paid.

Example one: The insured dies shortly after the life insurance policy is issued. The benefit paid far exceeds the total premium paid.

Example two: A person buys a 20-year term policy (explained in detail in chapter 4) and pays the premium for 20 years. At the end of the term, the insured is alive. The insurer pays no benefit and no refund is owed.

Question 12

Unilateral:

Answer 12

Although there are two parties to the insurance contract, only one party (the insurer) makes a legally enforceable promise: The promise to pay the policy’s benefit in the event of a covered loss. If a company arbitrarily refuses to pay a claim, they can be legally forced to do in a court of law.

SHORTCUT: UNILATERAL = ONE PROMISER

Question 13

Waiver and Estoppel:

Answer 13

These two terms are closely related. A waiver is the voluntary relinquishment of a right or privilege and estoppel legally prevents one from exercising a right or privilege. For example: Calvin Client consistently pays his premium one week after the grace period has ended. By continuing to accept the past due premium, the insurance company waives its right to cancel due to nonpayment of premium within that one week time period. Since this has become an established practice between Calvin and his company, the insurer can be estopped from enforcing a right that would now be detrimental to Calvin who has relied on this past conduct.

Question 14

KEY POINTS:
An insurance policy is a ________.

Answer 14

An insurance policy is a CONTRACT.

Question 15

KEY POINTS:
The company’s consideration is the promise to ___ in the future.

Answer 15

The company’s consideration is the promise to PAY in the future.

Question 16

KEY POINTS:
The policyowner’s consideration is payment of the initial _______ and the statements made on the __________.

Answer 16

The policyowner’s consideration is payment of the initial PREMIUM and the statements made on the APPLICATION.

Question 17

KEY POINTS:
The ______ is typically made by the applicant and the _____________ is made by the insurance company.

Answer 17

The OFFER is typically made by the applicant and the ACCEPTANCE is made by the insurance company.

Question 18

KEY POINTS:
If the proposed insured is not acceptable to the company for the policy applied for, he may be rejected or the company may make a ________________ which may result in higher premium or less favorable benefits, or both.

Answer 18

If the proposed insured is not acceptable to the company for the policy applied for, he may be rejected or the company may make a COUNTEROFFER which may result in higher premium or less favorable benefits, or both.
(Insured decides if he/she accepts the counteroffer)

Question 19

KEY POINTS:
In order to purchase insurance on someone else’s life, you must have ___________ __________ in that person.

Answer 19

In order to purchase insurance on someone else’s life, you must have INSURABLE INTEREST in that person.

Question 20

KEY POINTS:
A ___________ doesn’t need to have insurable interest in an insured.

Answer 20

A BENEFICIARY doesn’t need to have insurable interest in an insured.

Question 21

KEY POINTS:

Question 22

KEY POINTS:

Question 23

KEY POINTS: