Insurance Contracts Flashcards
List the 5 basic elements of a Legal Contract
A contract is an agreement that is enforceable at law.
It has five basic elements:
- offer
- acceptance
- consideration
- competent parties
- legal purpose
A contract involves a binding promise for which the law creates a duty of performance.
- promisor, is the insurance company
- promisee, is the applicant (i.e., future policyowner)
Competent Parties
A contract that involves one or more incompetent parties is ____ enforceable.
To be considered legally competent, a person must be ___________, of ________\_, and not under the ________________________.
In some states the age is as low as _________ years.
For a contract to be valid, all parties must be deemed legally competent.
A contract that involves one or more incompetent parties is not enforceable.
To be considered legally competent, a person must be mentally sound, of legal age, and not under the influence of drugs or alcohol.
In some states the age is as low as 14 or 15 years.
The insurance company’s competency is based on its authority to do business in a state.
Except in the case of surplus insurance, a policy issued by a non-admitted insurer would be deemed invalid.
What is a Contract of Adhesion?
Insurer _________, the policy owner ________.
A contract of adhesion is drafted by one party and the other party must adhere to its provisions.
Insurer drafts, policy owner adheres.
What is an Aleatory Contract?
An insurance policy is _____________ which means?
Most contracts are ____________. This means
An insurance policy is aleatory. In an aleatory contract, one party may receive a benefit that is entirely out of proportion to the consideration he or she is giving.
Most contracts are commutative. This means each party to the contract expects to receive from the other party something of equal value to what he or she is giving. This is not the case with an insurance policy.
Personal Contracts cannot be _____________ without the insurers consent.
What type of insurance represents a personal contract that cannot be transferred?
Most insurance policies are personal contracts between the insurer and the policyowner.
That is, the agreement between these two parties is personal and cannot be transferred to a third party without the insurer’s consent.
Health insurance is a personal contract that cannot be transferred or assigned to another party
What is a Unilateral Contract?
Insurance contracts are _____________ ; only the ___________ makes an enforceable promise.
Insurance contracts are unilateral; only the insurer makes an enforceable promise.
What is a Condition of an insurance policy?
Insurance policies are conditional, which means their continuation depends on certain actions of the policyowner.
For instance, the contract will stay in force on the condition that the owner continues to pay premiums.
What does it mean to act in Utmost Good Faith?
Each party has the right to expect ________, _________, and _________ information from eachother.
An insurance contract requires that both the policyowner and the insurer act in utmost good faith.
That is, each party has the right to expect complete, relevant, and accurate information.
Failure to disclose critical information on the part of one party usually gives the other party the right to void the contract.
Describe Reasonable Expectations
The long-term success of the insurance industry is based on reasonable expectations that promises made by the insurer will be respected when the time comes.
The doctrine of reasonable expectations can also impact an insurer’s liability.
For example, an agent’s failure to deliver to the insurer a life insurance application and premium payment (and thus failure to get agreed-upon coverage) can result in an insurer’s unintended liability should the applicant die shortly thereafter.
Indemnity vs. Valued Contracts
A contract of indemnity is one under which the benefit payable cannot be ____________________ or the face amount of the policy, whichever is less.
__________ insurance policies are indemnity contracts.
Life insurance policies are _________ contracts that guarantee payment of a stated sum regardless of the perceived “worth” of the insured.
A contract of indemnity is one under which the benefit payable cannot be greater than the actual loss the contract owner incurs or the face amount of the policy, whichever is less.
Medical expense insurance policies are indemnity contracts.
Life insurance policies are valued contracts that guarantee payment of a stated sum regardless of the perceived “worth” of the insured.
A statement made by an insurance applicant is considered a …
A representation, which is a statement that is believed to be true to the best of their knowledge, even though in fact it may not be true.
Statements made by an insurance applicant are deemed to be representations.
A warranty is a …
A warranty is a statement the maker guarantees to be true in all ways.
In the case of a life insurance policy, the insurer makes warranties that become part of the contract.
What is the difference between Waiver and Estoppel?
Estoppel, which is the legal ___________ to abandon a decision or action once made or taken.
Two related principles that affect insurance contracts and their enforceability are:
- waiver
- estoppel
Waiver is when one party to a contract gives up a right that the party knows he or she holds.
The flip side to a waiver is the concept of Estoppel, which is the legal inability to abandon a decision or action once made or taken. Estoppel effectively limits a party’s right to change his or her mind.
In the example above, the insurer would be estopped from canceling the policy for a late premium because it had effectively waived its right to do so by allowing its agent to collect it late in the past.
