From Online Flashcards
Define insurance
Contract in which an insurance company agrees to indemnify an insured (pay the amount lost by the person covered by the insurance), or pay a specified amount in the event of a covered loss.
Define pure risk
You will either have a loss or no loss (your house will either catch on fire or it will not)
Define speculative risk
You will either have a loss or a gain (you can win money or you can lose money)
Define exposure
Condition or situation that presents risk or the possibility of financial loss (driving a car)
Define a peril
What causes a loss (vandalism)
Define a hazard
Condition that creates or increases the change of loss from a peril (cause of loss)
Define a physical hazard
Physical characteristic that increases the probability of loss. It is the condition of the property itself (dangerous house).
Define a moral
Relates to a person’s sense of right and wrong that may lead him to want the loss to occur.
Define a morale
Relates to a person’s attitude, as reflected in his personal and business habits. (Related to carelessness - smoking next to your bed)
Define loss
The end result of the peril
What do insurers use to help them set premiums at levels needed to cover the losses and earn a profit
Law of large numbers
Define the law of large numbers
Concept that the larger the number of similar but separate exposure studies, the more predictable the results.
What does an insurer need to do business in a state
Certificate of authority issued by the Insurance Commissioner.
Define surplus line coverages
Coverage that a person cannot get from an authorized insurer. (It’s unusual, specialized or substandard - like insuring a professional football running back)
What are four elements in a contract (CLOC)
- Competent parties
- Legal object
- Offer and acceptance
- Consideration
What are three examples of a party that is not competent
- Mentally incompetent
- Dies before the offer is accepted
- Insurance company that has not complied with state regulations
Can minors contract
Yes
Can minors get out of their contract
Yes - within a reasonable time after reaching majority
Define an insurable interest (must be in a contract)
Existence of a potential financial loss resulting from the loss of the subject of the insurance (i.e the person’s life in life insurance is the insurable interest)
What would be acceptance of a policy
When the insurer issues the policy
Is a counteroffer an acceptance of a policy
No
Define consideration in a contract
It is something of value (money) which must be given by each party to create a contract
What is an insurer’s consideration
The promise to pay claims
Is a contract that is missing any essential elements valid?
No - it is void.
What if a contract has the essential elements, however, one party is victimized (due to being a minor, fraud, meace, duress), is the contract still valid
The contact is enforceable, and could be voided if the victim chooses to go to court.
What are five distinct characteristics of an insurance contract
- Adhesion
- Aleatory
- Personal
- Unilateral
- Conditional
Define adhesion in a contract
The price, terms and conditions are not subject to the bargaining process. (the applicant must adhere (stick) to the contract). “Take it or leave it”
Define Aleatory in a contract
The policy is subject to change (insurance will only pay if an unforeseen event occurs) and the premium could be less than the actual amount that the insurer would pay. “Contract is dependent on chance - resulting in an unequal exchange of values”
Define personal contract
The contract is personal, as it insurers the person, not the person’s life or property - which means that the person’s character could come into play.
Define unilateral contract
This means only one party (the insurer) makes a promise and is legally bound to fulfill. The policy owner makes no promises (not even to pay premiums). “One promise”
Define conditional contract
An insurance policy is a conditional contract, as each party must perform only if a specified, but uncertain, event takes place.
Define the principle of indemnity
An insured should not make a profit, instead, they should be in the same financial condition that they were in before the loss.
Define the doctrine of reasonable expectations
The policy is considered to cover all areas a person would reasonable expect such a policy to cover, and a court will not assume a person has read or understands any policy language which may provide technical loopholes in coverage.
Define a warranty
Guarantee about conditions which are supposed to exist - consists of promises the insured or insurer agree to keep
Define a representation
Statement considered to be substantially true to the best knowledge of the person making it.
Define misrepresentation
False statement of fact.
Define fraudulent
Statement is a false representation about a material fact
Define concealment
The willful withholding of material information in order to deceive another person.
Define a waiver
Voluntarily giving up the right “like you are waiving coverage”
Define estoppel
Court stopping a person from claiming its rights
Define the Fair Credit Reporting Act (FCRA)
Federal law designed to protect the privacy and assure the accuracy of consumer report information.
Define consumer report information
Information about an applicant’s credit history, medical conditions, driving record, criminal activity, hazardous sports, etc.
What allows the insurer to use consumer reports to underwrite insurance policies and to screen high-risk applicants
The Fair Credit Reporting Act (FCRA)
What are three conditions that allow the insurer to use the FCRA
- The insurer has the applicant’s consent
- The insurer gives the applicant a written disclosure within three days after requesting an investigative consumer report that includes information on the applicant’s lifestyle, character and reputation based on interviews (investigative consumer report)
- The insurer must provide the applicant with a notice when they take an adverse action (deny insurance, increase rates, etc.) based on their findings in the consumer report.
What must the notice of adverse action include
- Name, address, telephone number of the CRA that supplied the report
- Statement that the CRA did not make the decision to take the adverse action and cannot give specific reasons for it
- Notice of the applicant’s right to dispute the accuracy or completeness of information in the report and the right to a free copy of the report from the CRA upon request within 60 days
Define CRA
Credit reporting agencies
What happens if an insurer fails to comply with the law
They can be sued by the applicant, Federal Trade Commission, other federal agencies, and the state.
Under the USA Patriot Act, what is required by all financial institutions to implement an anti-money laundering program?
- The development of internal policies, procedures and controls
- Designation of a compliance officer
- Ongoing employee training program
- Independent audit function to test the programs
What is the purpose of the Patriot Act
To monitor and prevent the laundering of money
Define an annuity contract
An agreement between the insurer and the contract owner, where the insurer promises to pay out a fixed or variable income stream for a period of time.
What are covered products under the patriot act
- Permanent life insurance policy (not group life insurance)
- An annuity contract (not group annuity)
- Any other insurance product with features of cash value or investment
Define an insurance agent
Person that sells, markets, distributes or services an insurance company’s covered products for one or more insurance company
Define an insurance broker
Person who acts as the customer’s representative, to arrange and service products on behalf of the customer
Define insurer
Business that issues and underwrites covered products
What were companies required to do by 2006
They were required to develop and implement a written anti-money laundering program that is reasonably designed to prevent the insurance company from being used to facilitate money laundering or the financing of terrorist activities.
Who must approve of the anti-money laundering program
Senior management
Who must receive a copy of the anti-money laundering program
- The Department of Treasury
- Financial Crimes Enforcement Network (FCEN)
- Or another designee upon request
What insurance products are subject to the anti-money laundering program
- Permanent life insurance
- Fixed and variable cash value insurance products
- Annuities
What insurance products are not considered covered products and are not subject to the anti-money laundering program
- Group life
- Group annuities
- Term insurance
- Health insurance
- Property and casualty
Define a voidable contract
It’s enforceable, but could be voided
Define the doctrine of reasonable expectations
Policy is considered to cover all areas a person would reasonably expect such a policy to cover
What is an insurer who is organized in another country called
Alien insurer
What is an insurance company who is authorized to sell insurance in a state called
An admitted insurance company
What is an insurance company who is not authorized to sell insurance in a state called
Unauthorized - they may be permitted to do business in the state under special circumstances i.e. surplus
Because an insurance policy is a contract of adhesion who interprets any doubts or ambiguities in the contract
Any doubts or ambiguities will be interpreted by a court against the insurance company
What is an insurer that is doing business in another state other than the one that they are organized in called?
Foreign insurer
What is an insurer that is doing business in a state in which they are organized in called
Domestic insurer
