Legal concepts of insurance

Question 1

What is a contract of adhesion?

Answer 1

A contract of adhesion is one that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the contract terms on a ‘take it or leave it’ basis when accepted.

See Rule Regarding Ambiguities

Question 2

Who is an agent in insurance?

Answer 2

An agent is the person who represents the insurer during an insurance transaction and has been authorized to act on the insurance company’s behalf. Agents have a fiduciary responsibility to both parties—the insurer and the policy owner.

Question 3

What does aleatory mean in insurance?

Answer 3

Aleatory refers to a legal arrangement in which there’s the potential for an unequal exchange of value or consideration between both parties.

Question 4

What are ambiguities in an insurance contract?

Answer 4

Ambiguities refer to terms or conditions that are not clearly defined in an insurance contract.

See Adhesion

Question 5

What is apparent authority?

Answer 5

Apparent authority is the appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent-insurer relationship.

Question 6

What is the role of a broker in insurance?

Answer 6

A broker is a licensed producer who represents himself and the insured during an insurance transaction, but does not hold an appointment with the insurer and cannot bind coverage.

Question 7

What is a competent party?

Answer 7

A competent party is a person who’s able to understand the contract to which two parties are agreeing, being of legal age and mentally capable.

Question 8

What is concealment in insurance?

Answer 8

Concealment is the failure of an applicant to disclose a known material fact when applying for insurance.

Question 9

What does conditional mean in an insurance agreement?

Answer 9

Conditional means that an agreement remains in force if certain conditions are met, with the insurer’s promise dependent on the occurrence of a covered event.

Question 10

What is consideration in an insurance contract?

Answer 10

Consideration is the legal description of the items of value that each party provides to the other, such as the applicant providing material information and the premium.

Question 11

What is a consideration clause?

Answer 11

A consideration clause is part of an insurance contract that sets forth the initial and renewal premiums and frequency of future payments.

Question 12

What is the doctrine of reasonable expectations?

Answer 12

This doctrine states that an insurance contract will be interpreted to mean what a reasonable individual would think it means.

Question 13

What is estoppel?

Answer 13

Estoppel is the legal impediment to one party’s ability to deny the consequences of its own actions if such actions result in another party acting in a specific manner.

Question 14

What is express authority?

Answer 14

Express authority is the explicit authority granted to the agent by the insurer, as written in the agency contract.

Question 15

What is a fiduciary?

Answer 15

A fiduciary is a person to whom property or power is entrusted for the benefit of another person, responsible for accounting for premiums and providing sound financial advice.

Question 16

What constitutes fraud in insurance?

Answer 16

Fraud occurs when an individual engages in intentional deceit to gain a benefit, including making false statements.

Question 17

What is implied authority?

Answer 17

Implied authority is authority not explicitly granted to the agent but which common sense dictates the agent has to carry out routine responsibilities.

Question 18

What is an indemnity contract?

Answer 18

An indemnity contract attempts to return the insured to his original financial position.

Question 19

What is insurable interest?

Answer 19

Insurable interest is the financial, economic, and emotional impact experienced by a person who suffers a covered loss.

Question 20

What is an insurance policy?

Answer 20

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

Question 21

What does legal purpose mean in an insurance contract?

Answer 21

Legal purpose means that an insurance contract must be legal in nature and not in opposition to public policy.

Question 22

What is material misrepresentation?

Answer 22

Material misrepresentation is a false statement made by an applicant that influences an insurer’s decision to accept the risk.

Question 23

What is misrepresentation?

Answer 23

Misrepresentation is a statement made as a legal representation that’s factually incorrect, either totally or in part.

Question 24

What is the parole evidence rule?

Answer 24

The parole evidence rule states that when parties agree in writing, all previous verbal statements come together, and a written contract cannot be changed by oral evidence.

Question 25

What is a policy rider or endorsement?

Answer 25

A policy rider or endorsement is an amendment added to an insurance contract that overrides terms in the original policy.

Question 26

What are reasonable expectations in insurance?

Answer 26

Reasonable expectations indicate that the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.

Question 27

What are representations in an insurance application?

Answer 27

Representations are statements made by the applicant that he considers true and accurate to the best of his belief.

Question 28

What is the rule regarding ambiguities?

Answer 28

This rule applies to contracts of adhesion, where courts will interpret ambiguous terms in favor of the insured.

Question 29

What is subrogation?

Answer 29

Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured.

Question 30

What is a unilateral contract?

Answer 30

A unilateral contract is one in which only one party—the insurer—makes any kind of enforceable promise.

Question 31

What does utmost good faith mean?

Answer 31

Utmost good faith is the belief that both the policy owner and the insurer must know all material facts and relevant information.

Question 32

What is a valued contract?

Answer 32

A valued contract pays a stated sum regardless of the actual loss incurred, such as life insurance contracts.

Question 33

What is a void contract?

Answer 33

A void contract is an agreement that has never really been in force because it lacks one of the essential elements of a contract.

See Voidable Contract for contrast.

Question 34

What is a voidable contract?

Answer 34

A voidable contract is an agreement that may be set aside by one of the parties for a reason satisfactory to the court.

See Void Contract for contrast.

Question 35

What is a waiver?

Answer 35

A waiver is the voluntary giving up of a legal, given right.

Question 36

What is a warranty in insurance?

Answer 36

A warranty is a statement made by the applicant that’s guaranteed to be true in every respect and becomes part of the contract.