Legal Concepts of Insurance Contracts Flashcards
Life Insurance
The insurance company agrees to pay a predetermined amount - the face amount (or benefit) in exchange for the insured’s consideration (premium.
Health Insurance
The insurance company agrees to pay a percentage of the insured’s medical bills (or benefit) in exchange for consideration (premium).
Consideration
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.
Legal Purpose
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.
Offer and Acceptance
An Offer is made when the applicant submits an application and initial premium for insurance to the insurance company. The offer is accepted by the insurer after is has been approved by the insurance company’s underwriter and a policy is issued.
Competent Parties
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.
Contract of Adhesion
Because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion. In a contract of adhesion there is only one author - the insurance company. insurance carriers are also responsible for assembling the policy forms for insureds. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Under a contract of adhesion, the terms must be accepted or rejected in full.
Aleatory Contract
Insurance contracts are aleatory, which means there is an unequal exchange. The premiums paid by 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
Unilateral Contract
One sided agreement, where only the insurer is legally bound. In an insurance contract, only the insurance company is legally bound to do anything (pay claims). The insured does not pro,is to pay premiums, however, if premiums are not paid the insurer has the right to cancel the contract.
Personal Contract
Most insurance contracts are personal contracts between the insurance company and the insured individual, and are not transferable to another person without the insurer’s consent.
Conditional Contract
Insurance contracts are conditional because certain conditions must be met by all parties in the contract. Hence, benefits depend on the occurrence of an event covered by contract.
Valued vs. Indemnity
Life insurance contracts are valued contracts, which means it will pay a stated amount. Health insurance contracts are indemnity contracts and will only reimburse the actual cost of the loss.
Utmost Good Faith
Implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies. Insurance applicants are required to make full, fair, and honest disclosure to the risk to the agent and insurer.
Warranties
Statements made by applicant guaranteed to be true (name, DOB) becomes part of the contract and if found to be untrue, can be ground for revoking the contract.
Insurable Interest
Requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is legally enforceable and would be considered a wagering contract.