Legal Concepts

Question 1

Aleatory

Answer 1

A feature of insurance contracts in that there is an element of chance for both parties and that the dollar given by the policyholder (premiums) and the insurer (benefits) may not be equal. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss. Consideration may be unequal. The outcome depends on chance or uncertain event. A legal bet is considered an aleatory contract.

Question 2

Apparent Authority

Answer 2

Deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. Apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power an authority to bind the principle.

Question 3

Competent Party

Answer 3

One who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol.

Question 4

Conditional Contract

Answer 4

Means certain conditions must be met by all parties in the contract. This is needed when a loss occurs in order for the contract to be legally enforceable. All insurance contracts are conditional contracts.

Question 5

Concealment

Answer 5

The failure of the insured to disclose to the company a fact material to the acceptance of the risk at the time application is made.

Question 6

Consideration

Answer 6

Something of value that each interested party gives to each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit

Question 7

Contract of adhesion

Answer 7

In a contract of adhesion there is only one author - the insurance company. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Because of insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion.

Question 8

Express authority

Answer 8

The explicit authority granted to the agent by the insurer as written in the agency contract.

Question 9

Fiduciary Responsibilities

Answer 9

Describes the relationship between the agent or producer and client or company funds. Because the agent handles money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust. With insurance, for example, it is illegal for agents o mix premiums collected from applicants with their own personal funds. This is called commingling.

Question 10

Health Insurance Contracts

Answer 10

are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.) You cannot profit from an indemnity contract.

Question 11

Implied Authority

Answer 11

authority not specifically granted to the agent in the contract of agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities.

Question 12

Insurable interest

Answer 12

Requires that an individual has a valid concern for the continuation of the life of well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Note: Insurable interest only needs to exist at the time of the application (the inception of the contract).

Question 13

Law of Agency

Answer 13

Establishes a relationship in which one person is authorized to represent and act for another person or company. In applying the law of agency, the insurance company (insurer) is the principle. An agent or producer will always be deemed to represent the insurance company and not the applicant. In regard to the insurance contract, any knowledge of the agent is considered to be the knowledge of the insurance company (insurer). If the agent is working within the conditions of his/her contract, the insurance company is fully responsibile.

Question 14

Legal Purpose

Answer 14

Means an insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void.

Question 15

Life Insurance Contracts

Answer 15

Are valued contracts, which means it will pay a stated amount.

Question 16

Offer and acceptance

Answer 16

An offer that may be made by the applicant by signing the application, paying the fir premium, and if necessary, submitting to a physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or, the offer may be made by the company when no premium payment is submitted with application. Premium payment on the offered policy then constitutes acceptance by the applicant.

Question 17

Policy

Answer 17

a written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Question 18

Policy Rider

Answer 18

Legal attachment amending a policy. Additional benefits or a reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider.

Question 19

Representations

Answer 19

Statements made by applicants on their applications for insurance that they represent as being substantially true to the best of their knowledge and belief., but that are not warranted as exact in every detail.

Question 20

Stranger-Originated Life Insurance (STOLI)

Answer 20

Life insurance arrangements where investors persuade consumers (usually seniors) to take out new life insurance policies, with the investors named as beneficiary. Investors loan money to the insured to pay the premiums for a defined period. The insured ultimately assigns ownership of the policy to the investors, who receive the death benefit when the insured dies The insured receives additional financial benefits, such as an upfront payment or a loan.

Question 21

Unilateral Contract

Answer 21

One sided agreement, where only the insurer is legally bound. In an insurance contract only the insurance company is legally bound to do anything.

Question 22

Utmost Good Faith

Answer 22

Implies that there will be no attempt by either party to misrepresent, conceal, or commit fraud as it pertains to insurance policies.

Question 23

Voidable Contract

Answer 23

Contract that can be made void at the option of one or more parties to the agreement.

Question 24

Void Contract

Answer 24

Agreement without legal effect: an invalid contract. Fraud can be a reason to void a contract.

Question 25

Warranties

Answer 25

Statements made on an application for insurance that are warranted to be true; that is, they are exact in every deal as opposed to representations. Statements on applications for insurance are rarely warranties, unless fraud is involved.

Question 26

Waiver

Answer 26

Agreement waiving the company’s liability for a certain type of types of risks ordinarily covered in the policy; a voluntary giving of a legal, given right.

Question 27

For a contract to be legally binding, it must contain certain elements:

Answer 27

Offer and Acceptance, consideration, legal purpose, and competent parties.

Question 28

Valued insurance contract

Answer 28

A Valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts. If someone insures a life policy for $1M, that amount is payable at death. There is no attempt to value actual financial loss upon a person’s death.

Question 29

Indemnity Contract

Answer 29

Pays an amount equal to the loss. Contracts of indemnity attempt to return the insured to her original financial position. Fire and health insurance policies are examples of indemnity contracts. An insured who owns a $100k fire insurance policy and suffers only $5k loss due to a fire will be able to collect up to to $5k, not $100k

Question 30

Warranty

Answer 30

In insurance, is a statement made by the applicant that is guaranteed to be true. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer’s decision to accept or reject an application.

Question 31

Representation

Answer 31

A statement made by the applicant that she believes to be true. It is used by the insurer to evaluate whether or not to issue a policy. Unlike warranties, representations are not a part of the contract and need to be true only to the extent that they are material and related to the risk. Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. If an insurance company rejects a claim on the basis of a representation, the company bears the burden of proving materiality. A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk is considered a material misrepresentation.

Question 32

Principles of Agency Law

Answer 32

• The acts of the agent (within the scope of this authority) are the acts of the principle
• A contract completed by an agent on behalf of the principal is a contract of the principal
• Payments made to an agent on behalf of the principal are payments to the principal
• Knowledge of the agent regarding business of the principal is presumed to be knowledge of the principal

Question 33

Agents of fiduciary requires fulfilling the following responsibilities:

Answer 33

• Be fit and proper
• Be honest and trustworthy
• Have a good business reputation
• Be qualified to perform insurance functions
• Have knowledge of, and abide by, state laws and regulations
• Act in good faith

Question 34

Brokers Versus Agents

Answer 34

Unlike agents, brokers legally represent insureds. A broker solicits and accepts applications for insurance and then places the coverage with an insurer. The business is not in force and the insurance company is not bound until it accepts the application. Technically speaking, a broker does not represent anyone until a prospect or client requests coverage. Once this occurs the broker represents the buyer.

Question 35

Professional Liability Insurance (E&O)

Answer 35

Just as doctors should have malpractice insurance to protect against legal liability arising from their professional services, insurance agents need ERRORS AND OMISSIONS (E&O) professional liability insurance. Under this insurance, the insurer agrees to pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render.

Question 36

Endorsement

Answer 36

Written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.

Question 37

Estoppel

Answer 37

The concepts of a waiver and estoppel are closely related. Estoppel is a legal provision that prevents one party from reclaiming a forfeited right. In other words, it is the loss of defense. In the previous example, if the insurer waived its right requiring John to remit premium payments to the insurers home office. The insurance company will be estopped from denying John’s claim on the grounds that he sent his premium payments to his agent. Another example of estoppel occurs when an insurer accepts an application from a former agent. By doing so, the insurer acknowledges the existence of an agency relationship with the former agent, even though that agent no longer works for the insurer. Consequently, the insurer will be legally estopped from denying the application on the grounds that the agency relationship did not exist.

Question 38

Parol Evidence Rule

Answer 38

Oral or Verbal evidence,or that which is given verbally in the court of law. The parol evidence rule states that when parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Question 39

Reasonable Expectations

Answer 39

A legal principle that reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder. It also states that an insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide.

Question 40

Void Versus Voidable Contracts

Answer 40

The term void and voidable are often incorrectly used interchangeably. A void contract is simply an agreement without legal effect. In essence, it is not a contract at all, for it lacks one of the elements specified by law for a valid contract. A void contract cannot be enforced by either party. For example, a contract having an illegal purpose is void, and neither party to the contract can enforce it.
A voidable contract, however, is an agreement which, for a reason satisfactory to the court, ma be set aside by one of the parties to the contract. It is binding unless the party with the right to reject it wishes to do so. Say that a situation develops under which the policyholder has failed to comply with a condition of the contract: the policyholder ceased paying the premium. The contract is then voidable, and the insurance company has the right to cancel the contract and revoke the coverage. This raises another possibility under a voidable contract. In the situation previously described, the insurance company may choose not to exercise its right to cancel the contract after the policyholder fails to pay the premium. The same possibility does not exist under a void contract.

Question 41

Elements of the contract. Four elements must be present in every contract to be valid and legally enforceable:

Answer 41

Consideration, Legal Purpose, Offer and Acceptance, Competent Parties

Question 42

Concealment

Answer 42

Withholding of information or facts by the applicant (smoking, diabetes…)

Question 43

Types of agent authority:

Answer 43

Express, Implied, Apparent

Question 44

Subrogation

Answer 44

The right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss. For example, if an insured driver’s car is totaled through the fault of another driver; the insurance carrier will reimburse the covered driver as described in the policy and take legal action against the driver-at-fault in an attempt to recuperate the cost of that claim.