Insurance Contracts Flashcards
Risk
Uncertainty regarding the likelihood or severity of an event
Speculative Risk
Negative, Neutral, or Positive outcome; not compatible w/insurance
Pure Risk
Negative or Neutral outcome, no Positive; compatible w/insurance
Loss
Expense or decrease in value
Accident
Loss that occurs at either an unpredictable time or in an unpredictable amount
Are intentional acts with unintentional outcomes still accidents?
Yes
Insurance only compensates for…
Losses that are accidents
Peril
Cause of a loss
Peril: Life Insurance
Death and/or accidental death
Peril: Health Insurance
Accident and sickness
Accidents start with…
Injury
Sicknesses are…
Illnesses
Accident-only Insurance does not cover…
Loss caused by illness
Hazard
Increases likelihood or scope of loss; increases person’s exposure to loss
Physical Hazard
Environmental, physical, or biological factor that increases likelihood or severity of loss
Moral Hazard
Condition that increases temptation to cause loss on purpose
Insurers reduce moral hazards by…
Principle of indemnity and insurable interest
Principle of Indemnity
Make people “whole” again after a loss, not better or worse
Principe of Indemnity is seen in health by…
only paying for costs actually incurred
Valued Policy
Insurer and policyholder agree on value in advance of a loss
In a valued policy, the stated amount is paid…
Regardless of the loss’ actual size
A valued policy is used to insure…
Against losses that are hard to calculate
Does a valued policy follow the principle of indemnity?
Maybe
Insurable Interest
To insure a person/thing, you have an obvious desire to avoid a loss
Morale Hazard
Risk of being lazy and not worrying about the cost of losses; usually unintentional
Morale Hazards are reduced by…
Requiring consumer to pay for a portion of otherwise insured losses (“cost sharing”)
Deductible
Amount of an otherwise insured loss that must be paid by the consumer before the insurer will provide benefits
Bigger deductible =
Lower cost
Deductibles reduce…
Morale hazard and small claims
In major medical insurance, deductibles are usually enforced…
Annually
First-Dollar Coverage
No deductible
Risk Transfer/Shift
Transferring consequences of a potential loss from one party to another
Law of Large Numbers
More data an insurer has about a risk, easier it is to make predictions about losses
Inadequate data can make a risk…
Uninsurable
Mortality Tables
Estimate how many people will die at a given age
Morbidity Tables
Estimate how many people will be ill at a given age
Pooling of Risk
Risk spread across a larger group to minimize impact
Pooling of risk allows insurers to…
Diversify their portfolio of risks
Rate Class
Risk within this same pool
Adverse Selection
Occurs when insurance is purchased disproportionately by high-risk consumers
Adverse selection makes insurance…
Unaffordable or unavailable
Adverse selection is typically managed by…
Carefully evaluating/charging each insurance application based on risk and/or limiting coverage for pre-existing health conditions
Uninsurable Risk
Loss too predictable and not accidental; probability of loss too high; size of loss catastrophic to insurer; insurers lack data to understand risk and pool it with others; speculative and could result in gain
Insurance
Contractual arrangement involving risk transfer and the pooling of risk
Parties of an Insurance Contract
Insurer and Policyholder/owner
The Insurer
Issues insurance policy; accepts risk; receives “premium” as payment; controls policy with policyholder/owner
The Policyholder/Owner
Receives insurance policy; transfers risk; responsible for paying premium; controls policy with insurer
The policyholder/owner is typically…
The same person covered by the insurance
Elements of a Valid Contract
Legal Purpose; Competent Parties; Offer and Acceptance; Consideration
Legal Purpose
Contract cannot force someone to break the law
Void
Automatically invalid
Competent Parties
Must be an adult of sound mind
Offer and Acceptance
One party makes an offer and the other party has the opportunity to accept or reject
In insurance, the consumer typically makes the offer in the form of…
An application and premium
Invitation to make an offer
Application without premium
Counteroffer
Insurer refuses to insure someone at the original price but offers to do so for more premiums or with extra exclusions
Consideration
Exchange of one thing of value for another
In insurance, a premium is given in return for…
Agreeing to receive a transferred risk
Consideration Clause
Explains what’s being exchanged for in the contract
Consideration Clause: Consumer gives…
Application and Premium
Consideration Clause: Insurer gives…
The promise to pay
Consideration is contingent on…
An accurate and complete application
Unilateral Contract
Only one of the parties makes a legally enforceable promise and can be ordered to fulfill its duties by a court
Bilateral Contract
Both parties make a legally enforceable promise and can be ordered to fulfill their duties by a court
Aleatory Contract
Contract that involves matters of chance
Aleatory contract allows consideration to be…
Unequal between two parties
Aleatory contract: Buyer can benefit more than insurer (and vice versa) depending on…
If/when a loss occurs
Conditional Contract
Besides payment of premium, several rules need to be obeyed and several things need to happen before insurer must act
Personal Contract
Contract between insurer and policyholder
Does a personal contract allow transfer?
Only with insurer’s consent
Policy Period
Contractual duration of coverage
Policy Period: In major medical insurance…
Often for one year
Policy Period: In life insurance…
Might be one year, a few years, or a lifetime
Contract of Adhesion
Generally written by just one of the parties
Contract of Adhesion: Ambiguous language should be interpreted to favor…
The non-writing party
Reasonable Expectation
Policyholders should be compensated for losses based on what can be reasonably be determined by the policy language and what the insurer has disclosed
Utmost Good Faith
For the sake of efficiency, insurer and consumer must rely on each other’s honesty
Warranty (1)
A promise/statement that must be absolutely true at all times in order to keep a contract in force
Warranty (2)
A promise to do or not do something during all the contract
Representation
Statement of fact at a particular time based on the person’s own knowledge
Misrepresentation can result in…
Voidable contract if it relates to a “material fact” and was intentional
Material Fact
Information that, if known, would influence decision regarding whether to enter into a contract
Misrepresentation
Providing false information
Concealment
Failing to disclose information
Rescission
Contract is treated as if it never existed; puts insurer and policyholder back in the same position they were prior to contract
Cancelation
Contract is valid but is ended prior to intended expiration date
With a cancelation, each party keeps…
Premiums and benefits already earned/owed
Non-Renewal
Contract ends on intended expiration date but cannot be extended, even for more money
Insuring Clause
Insurer’s basic promise to pay benefits
Free-Look Periods
Gives buyers a limited time to review their coverage and get their money back for any reason
Free-Look Period time frame
10 days from date policy is delivered (not issued)
Lapse
Cancelation by insurer for nonpayment
Assignment
Rights of policyholder are transferred to another party who isn’t part of the contract
Assignment: In health insurance, involves…
Payment of benefits directly to health care providers
Assignment often requires…
Insurer’s consent
Subrogation
Insurer takes certain rights of the policyholder for itself
Subrogation typically allows insurance company to…
Sue or collect money from third parties who caused a loss
Subrogation allows for insurance companies to…
Reimburse one another
Subrogation prevents the policyholder from…
Collecting insurance money and suing for the same loss
Riders
Amend the insurer’s standard policy
Riders often add additional benefits in exchange for…
Additional premiums
Impairment Riders
Can reduce premium by excluding certain conditions or activities for that specific person
Impairment riders are typically used to insure people with…
Pre-existing conditions, high-risk hobbies, etc.
Certificates of Insurance
Proof of insurance provided to a third party
Certificates of insurance are NOT…
A contract
Changes to a certificate of insurance are invalid unless…
It is reflected in policy, too
