Legal Concepts of the Insurance Contract

Question 1

Adhesion

Answer 1

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

Question 2

Agent

Answer 2

An agent represents themselves and the insurer at the time of application.

Question 3

Aleatory

Answer 3

An aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event.
Example: You pay $50 towards your premium and then die. The insurer has to pay $100,000.

Question 4

Apparent Authority

Answer 4

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

Question 5

Broker

Answer 5

A Broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Question 6

Competent Party

Answer 6

A competent party is 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 7

Concealment

Answer 7

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

Question 8

Conditional

Answer 8

A conditional policy describes the insurer’s promise to pay benefits depends on the occurrence of an event covered by the contract.

Question 9

Consideration

Answer 9

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments.

Question 10

Applicants

Answer 10

provide the insurer with a completed application and initial premium as consideration for insurance.

Question 11

Estoppel

Answer 11

Estoppel is the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Question 12

Express Authority

Answer 12

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

Question 13

Fiduciary

Answer 13

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer.

Question 14

Fraud

Answer 14

Fraud includes the deliberate knowledge of or intentional deceit to make false statements to be compensated by an insurance company.

Question 15

Implied Authority

Answer 15

Implied authority is an authority not explicitly 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 16

Indemnity contract

Answer 16

Contracts of indemnity attempt to return the insured to their original financial position.

Question 17

Insurable Interest

Answer 17

Insurable interest is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss.

Question 18

Insurance Policy

Answer 18

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

Question 19

Legal Purpose

Answer 19

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

Question 20

Material misrepresentation

Answer 20

A material misrepresentation is a false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk.

Question 21

Parol Evidence Rule

Answer 21

Parol evidence rule involves 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 22

Policy rider or endorsement

Answer 22

A policy rider or endorsement is an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature.

Question 23

Reasonable expectations

Answer 23

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

Question 24

Representations

Answer 24

Representations are statements made by the applicant that they consider to be true and accurate to the best of the applicant’s belief.

Question 25

Subrogation

Answer 25

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

Question 26

Unilateral

Answer 26

Unilateral contracts mean only one party, the insurer, makes any kind of enforceable promise.

Question 27

Utmost Good Faith

Answer 27

Utmost good faith involves the belief that both the policyowner and the insurer must know all material facts and relevant information, and as such, they will provide each other with all material facts and relevant information.

Question 28

Valued contract

Answer 28

A valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.

Question 29

Voidable Contract

Answer 29

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

Question 30

Waiver

Answer 30

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

Question 31

Warranty

Answer 31

A warranty is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract.