Insurance Basics

Question 1

Valid Consideration

Answer 1

What each party in an insurance contract “put up” - insured’s valid consideration is premium. Insurer valid consideration is promise to pay claims and meet obligations of policy. Consideration = something of values that makes parties enter into a contract together.

Question 2

Contract of Adhesion

Answer 2

Insurance contracts are written by the insurer and is the only side that can provide options and policy terms. It’s all based on what the insurer gives. Insurer makes contract and insured “adheres” to them. Because of this, courts rule in favor of the insured usually when there is ambiguity.

Question 3

Reciprocal Exchange

Answer 3

Group of members who agree to insure one another. Each are insured and insurer.

Question 4

Express Authority

Answer 4

Literally in the contract

Question 5

Aleatory

Answer 5

Insurance contract are aleatory in that they are based on chance. It could end up that one party ends up benefitting and gaining a lot more.

Question 6

Morale Hazard

Answer 6

Condition that increases likelihood of loss because someone’s attitude changes. Ex. if someone buys car insurance, they will be more likely to not be careful driving. Moral = attitude.

Question 7

Independent Agents

Answer 7

Agents who often represent more than one insurance company

Question 8

Pure vs. Speculative Risk

Answer 8

Pure risk is risk that can never result in a gain for the insured (ex. purchasing health insurance). Speculative risk can result in gain (ex. putting money in stock market). Only pure risk is insurable.

Question 9

Law of Large Numbers

Answer 9

The more people in a cohort, the more predicted loss will be reality

Question 10

Warranties

Answer 10

Statements made by an insurance applicant that are material and serious enough that if they are not true, they can lead to insurer not being liable.

Question 11

Apparent

Answer 11

Authority granted to an agent because they are simply not stopped by the insurance company ever