Legal Aspects of Insurance Flashcards
Contract
A contract is a legally binding agreement creating rights and duties for those who are parties to it. If one party to the contract fails to perform its duties without a legal excuse, the contract is breached. If a contract is breached or if disputes arise between the parties about the interpretation of the contract, the issues may be settled by a court. Courts can enforce their judgments and settle contractual disputes using a variety of remedies.
Voidable Contract
A voidable contract allows one party the option of breaking the agreement because of an act or omission of an act (a breach) by the other party. The party with the right to void the contract may instead choose to have the contract enforced.
Void Contract
A void contract is a contract that a court will not enforce because from its beginning it lacked one or more features of a valid contract.
Binder
A binder is a temporary contract in property insurance, and is often used before the issuance of the formal insurance policy. The binder must meet all the requirements for a legal contract. It is distinguished by its temporary nature (often 30 days or less).
Conditional Receipt
A conditional receipt can provide temporary coverage, contingent on an applicant’s ability to present evidence of insurability.
Four Elements of a Valid Contract
Offer and acceptance
Consideration
Capacity
Legal purpose
Consideration
The value exchanged between the parties to the contract is the consideration. The consideration is what each party gives to the other. Consideration may take a tangible form, such as money, or it may take the form of a promise to do or not to do a particular activity. There must be an exchange of consideration to have a valid contract.
Unilateral Contracts
In unilateral contracts, only one party makes an enforceable promise. Insurance contracts are unilateral in that only the insurer makes a binding promise. The insured can cancel the policy at any time without recourse, while the insurer is limited to specific situations (such as failure of the insured to pay premiums) when it may cancel a policy. The insured does not promise to pay the premiums and cannot be sued for failure to do so. Insureds cannot collect for losses if they do not pay premiums, because timely payment of the premium is a condition of the contract.
Bilateral Contracts
Contracts in which both parties make enforceable promises are called bilateral contracts. Insurance is not considered a bilateral contract.
Legal Purpose
A contract must have a legal purpose, an end or intention permitted by law. Contracts having an antisocial purpose are legally unenforceable. No court will aid the parties to such a contract. An insurance policy purchased as a gamble on a famous person’s life or on any life in which the contract owner has no legal interest is an example of an unenforceable contract. If a beneficiary attempted to collect proceeds from contracts where an insurable interest was lacking, a court would hold the contract void.
Indemnity
Indemnity means the insured should be restored to the same financial position occupied before the insured’s loss.
Three exceptions to the rule that insurance contracts are contracts of indemnity are:
Life insurance
Replacement-cost insurance
Valued insurance.
Replacement Cost Insurance
Replacement-Cost Insurance is written when the insurer promises to pay an amount equal to the full cost of repairing or replacing the property without deduction for depreciation.
Valued Insurance Policy
A valued insurance policy is an exception to the rule of indemnity. Valued policies pay the limit of liability whenever an insured total loss occurs. The value of the insured property is agreed to before the policy is written. If a total loss occurs, it may cause more or less damage than the stated amount. Nevertheless, the stated amount will be paid.
Actual Cash Value
Actual Cash Value (ACV) means replacement cost at the time of loss, less depreciation.
