Section I – General Insurance Concepts Flashcards
1
Q
Insurance
A
a contract that binds the insurer to indemnify (compensate) the insured against specified types of loss in return for money (premiums).
2
Q
what is insurance designed to protect?
A
to protect the financial well-being of an individual, company, or other entity against the financial risks associated with unexpected loss.
3
Q
what do premium payments ensure?
A
In exchange for the premium payments from the insured, the insurer agrees to pay the policyholder upon the occurrence of specific events. In most instances, the insured pays for a portion of each loss in the form of a policy deductible, and the insurer pays for the balance of the loss up to the policy limit of insurance.
4
Q
The Law of Large Numbers
A
a theory that states that it is more likely to predict a particular outcome as the number of units in a group increases. The bigger the observed sample, the more accurate the predicted results will be.
5
Q
What is the law of large numbers 2 objectives in life insurance?
A
1) The paying of benefits to survivors of someone who dies while covered
2) The providing of distribution of benefits by lump sum or with guaranteed lifetime payments
6
Q
Indemnity
A
the underlying principle of insurance, which is restoring an insured to the same financial position that existed before a loss occurred.
7
Q
Loss
A
the source of a claim for damages under an insurance policy. Losses cause a financial loss to the insured due to loss of property, a liability from something the insured did to someone else, the loss due to the loss of a loved one, or losses due to medical problems. Loss arises from the occurrence of an event that is insured by a policy.
8
Q
direct physical loss
A
a loss in which damage occurs as the result of an occurrence without an intervening cause, such as hail damage to the roof of a house.
9
Q
intervening cause
A
an event that interrupts the chain of causation by providing an independent cause of the final result.
10
Q
indirect or consequential loss
A
a loss in which damage occurs as the result of a direct loss, such as the insured’s increase in expenses when required to stay in a hotel because a hail-damaged home cannot be lived in.
11
Q
Insurable interest
A
the concept that insurance can only be purchased when the applicant has a potential for financial loss – if the insured person died, or if the insured items were destroyed or not in their possession. In Life insurance, insurable interest is only required at the time of application.
12
Q
what are the 2 meanings of Risk?
A
(1) The property or party that is insured, and (2) The uncertainty of loss
13
Q
pure risk
A
a situation that only involves the chance for loss, or no loss, such as property ownership.
14
Q
Speculative risks
A
are situations that involve the chance for either a loss or a gain, such as gambling.
15
Q
Relationship Between Risk and Premium
A
The greater the risk, either in value or in potential for a loss or claim, the greater the premium will be.
16
Q
Negligence
A
is conduct that is culpable because it misses the standard required by law of a reasonable person in protecting others or the interests of others against risky or harmful acts of other people. It is:
The failure to do something that a reasonable person would do OR
Doing something that a reasonable person would not do
17
Q
Self-insurance
A
making financial preparations to meet risks by setting aside sufficient funds in advance to meet estimated losses, rather than purchasing an insurance policy
18
Q
Applicant
A
The individual who applies for insurance
19
Q
Insurer
A
another name for an insurance company
20
Q
Insured
A
In Life insurance, the insured whose life is covered is named in the policy, along with any covered dependents by name
21
Q
Agent/Producer
A
An individual who is state-licensed to solicit and sell insurance for one or more insurance companies. He/she must be authorized by an insurer (known as the principal) to act on its behalf.
22
Q
policy owner
A
Applies for a policy.
Takes responsibility for premium payment.
Has the right to cash values, dividends, and policy proceeds.
Has the ability to change beneficiaries and other policy particulars.
23
Q
Binder
A
a written or oral contract made by an agent that puts a policy immediately but temporarily into effect for a specified period of time, from the time initially bound until accepted or canceled by the insurance company, that includes all the terms of and endorsements to the policy. The minimum that an agent needs in order to put a binder into effect is the insured’s promise to pay the premium within a certain time frame. All policy terms and conditions are in force until a policy is issued or coverage is declined by the insurer on whom the binder was written.
24
Q
Why agents must be careful not to exceed their binding authority?
A
as the company is liable for the entire risk until reviewed and accepted or canceled by the insurer
25
Certificate of Insurance
A document issued by an insurance company/broker that is used to verify the existence of insurance coverage under specific conditions granted to listed individuals
26
Endorsement
An attachment to a document that amends or adds to it is known as an endorsement. Typically, it is an added provision to an insurance policy. Also referred to as a "rider."
27
Waiver
The voluntary abandonment of a known or legal right or advantage is a waiver
28
waiver of rights
is the intentional relinquishment of a known right. The insured would need to sign a form if they are relinquishing their rights in a policy or claim settlement.
29
Estoppel
The idea that once a fact has been admitted to be true by a previous action it can no longer be denied to be true
30
Accident
is an unforeseen and unintended event that is identifiable as to time and place.
31
Occurrence
including continuous and repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured
32
Exposure
is the condition of being at risk for financial loss due to hazards or unforeseen events.
33
hazard
is a condition that increases the chance for loss or the severity of loss.
34
4 types of hazards
Physical – Physical hazards are created by the use, condition, or occupancy of property, such as damaged steps or worn auto tires.
Moral – Moral hazards are created by the insured's habits, such as dishonesty or criminal activity. It is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
Morale – Morale hazards are created by the attitudes of the insured, such as indifference because the insured knows he/she is insured. An example would be not making sure doors and windows are locked before leaving home. If anything is stolen, the insured doesn’t worry because it’s insured. While a Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs, a Morale hazard describes an unconscious change in a person's behavior when he/she is insured.
Legal – Legal hazards are created when legal authority in a certain situation is unclear or unsettled. These can arise from changes in the law or from court rulings. An example would be a change in the building code requiring new construction to use different materials.
35
Peril
the cause of a loss or the event insured against.
| Examples: fire, lightning, theft, etc.
36
Named Peril Policy
is a policy that only provides insurance for perils that are specifically listed or named in the policy
37
Open-Perils Policy
a policy that provides insurance for all perils except those specifically excluded in the policy
Perils Include:
Life insurance: The peril insured against is death.
Health insurance: Perils include sickness, accidental injury, and disability.
38
Maslow's Hierarchy of Needs
This hierarchy of needs is important for the insurance producer to know because customers need to have one level of need met before worrying about the next. For instance, customers usually need to have the physiological need for food and shelter met before you would approach them about buying Life insurance for charitable causes.
39
National Association of Insurance Commissioners (NAIC)
All state insurance directors or commissioners are members of the National Association of Insurance Commissioners, also known as the NAIC. The group has no official legislative powers.
The NAIC tries to standardize insurance laws throughout the country by recommending model legislation in each commissioner’s home state.
Individually the commissioners or directors do not make any laws, they enforce insurance laws in their own states. They do this by determining the types of policies that can be sold in their state, by determining the amounts of surplus that insurers must maintain, by investigating complaints of agents and insurance companies, and by examining agents and insurers.
40
Tort
In common law jurisdictions, a tort is a civil wrong that unfairly causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act. Although crimes may be torts, the cause of legal action is not necessarily a crime, as the harm may be due to negligence which does not amount to criminal negligence. The victim of the harm can recover their loss as damages in a lawsuit. In order to prevail, the plaintiff in the lawsuit must show that the actions, or lack thereof, were the legally recognizable cause of the harm. A person may be found not guilty in a criminal case, but can still be found guilty or legally liable in a lawsuit.
41
Endowment
Cash from Life insurance payable to the policyholder at policy maturity (usually at the insured’s age of 100)
42
Final Expenses
The financial costs related to dying, funeral and medical expenses, debts, taxes, and administrative expenses
43
Methods of Handling Risk
When managing risk, an insured may choose to avoid, retain, transfer, share, or reduce risk
44
Avoidance
is refraining from engaging in activity that might give rise to risk, such as not owning or driving a car to avoid the risk of car accidents.
45
Retention
is the retaining of responsibility for loss. In this case, the individual will be totally responsible for paying losses. Retention is the most common method of handling risk, typically in the form of deductibles or choosing not to purchase insurance.
46
Sharing
is spreading risk among several entities or a large number of people, such as by insurance companies or physicians.
47
Reduction
decreases the chance for loss by removing or reducing hazards that might cause an accident to happen, such as wearing safety goggles or installing safety railings around a dangerous area.
48
Transfer
shifting the risk for loss from one party (the insured) to another (the insurer), either through the purchase of an insurance policy or issuance of another contractual agreement (e.g., a hold harmless agreement).
49
Adverse selection
is the tendency of persons who present a greater-than-average degree of risk for loss to apply for or continue insurance to a greater extent than persons with average or less-than-average degree of risk for loss. Normal risks may seek insurance elsewhere, possibly at a lower cost. If a person becomes sick, they may be unable to get insurance elsewhere and are, therefore, more likely to maintain the current coverage.
50
Group Risk Selection
Underwriters look more closely at the specific health history of an individual policyholder than at the collective statistics of a large group. Also, exposure to claim payments is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group.
51
Reinsurance
is insurance sold and purchased between two (2) insurance companies for the purpose of transferring and sharing risk, usually catastrophic risk or losses in excess of a specific amount (e.g., $500,000 or $10,000,000)
52
reinsurer
is an insurance company that insures the risks of other insurance companies.
53
ceding insurer
issues primary policies of insurance to individuals and/or businesses. It then buys reinsurance from a reinsurer.
54
2 types of Reinsurance Contract or Treaty
Facultative Reinsurance: The ceding insurer offers individual risks to the reinsurer, and the reinsurer may choose to accept or reject each individual risk.
Treaty Reinsurance: The reinsurer writes coverage for one or more lines of insurance issued by the ceding insurer based on terms stated in the reinsurance contract. Treaty reinsurance continues in force unless canceled by one of the parties of the treaty, and the reinsurer cannot reject individual risks.
55
Indemnity
pure and simple protection from a loss by being reimbursed or paid a sum to make you whole after you incurred a cost or experienced a loss.
56
On Behalf Of
refers to someone else beside the person experiencing the loss paying for that lost or cost in your stead. It is paid for you instead of you paying for it directly.
57
Multi-line insurance companies
are insurers that write more than one (1) line of insurance
58
Stock Companies
Insurers organized under the laws of the state in which they are incorporated that are owned by shareholders who elect officers and directors and share in profits through stock growth and dividends
59
Mutual Companies
Companies of this type have no capital stock and are owned by policyholders who share profits through dividends and who can attend and vote at company meetings
60
Assessment Mutual Insurers
share losses among group members. In a pure assessment group, no premium is paid in advance, but losses are assessed to each member as they occur. In an advance premium assessment group, premiums are paid at the beginning of each assessment period and any claims are paid from these premiums. If there are more claims than premiums paid in, additional assessments are levied against each member. If money is left at the end of the period, then the money is returned to the group members.
61
Non-Assessable Mutual Insurers
charge a fixed premium and the policyholders cannot be assessed further. Reserves and surplus are maintained to provide payment of all claims.
62
Reciprocal Companies
Groups that exchange insurance on each other.
Members appoint and empower an attorney-in-fact that legally binds members to insure each other.
Members share in any profits through lower premiums, or in any losses by assessments.
Insured members are called subscribers.
63
Risk Retention Groups
A mutual insurance company that insures people in the same profession or business
64
Fraternal Benefit Societies
Membership is based on religious, ethnic, or national lines, and noted primarily for social and charitable functions. Fraternal Benefit Societies, also called Fraternals, are societies, orders, or supreme lodges, with no capital stock, and that may or may not be incorporated. Fraternal Benefit Societies:
Are conducted solely for the benefit of members and their beneficiaries, and are not for profit.
Operate on a lodge system with a ritualistic form of work.
Have a representative form of government.
Provide benefits in accordance with their charter.
Started offering Life insurance for the benefit of their poorer members on an assessment basis, but have expanded to operate the same as other insurers today, though they still offer insurance only to members or their families.
65
Self Insurers
Self-insurance is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss. One can actually self-insure against any type of loss, but in practice most people choose to purchase insurance against potentially large, infrequent losses.
66
Syndicate insurers
are not true insurance companies.
They provide a place for members to meet and transact the business of insurance individually or as groups through a syndicate manager.
They provide assistance in gathering underwriting information and handling claims and disputes among syndicate members.
Members are individually and wholly liable for all risks they accept, with no limitations on liability.
67
Surplus or excess lines insurers
provide insurance not offered through admitted insurers.
The full amount or type of insurance must not be available through admitted insurers.
Financial consideration cannot be a deciding factor.
While a surplus/excess lines insurer has been selling insurance in a state, if the coverage is now offered by an admitted insurer, the non-admitted insurer must stop selling insurance in the state, or apply to become an admitted insurer.
68
Private vs. Government Insurers
While private insurers offer coverage for more common risks, there are some situations that are unacceptable to them. If there is the potential for special, great, or catastrophic risks, those possibilities are usually indemnified by State and Federal Government insurers.
The State or Federal Government sometimes cover certain types of insurance that private insurers cannot or will not insure. Insurers in each state are required to participate in shared or involuntary markets. These markets provide coverage for high-risk insurance applicants that do not meet normal underwriting standards.
Examples of Federal Government insurance include Social Security, Medicare, Flood insurance, Crop insurance, and Crime insurance.
69
Home Service/Debit Insurers
Home service or Debit insurers specialize in individual and industrial insurance with low face amounts - normally $1,000 or less (but the benefit can be higher). Premiums are usually collected by agents on a weekly basis at the insured’s home or place of employment. Home service agents work within a defined geographical territory and offer monthly debit Life insurance products. Some products have premiums that are billed directly by the insurer. The home service market historically has been comprised of lower and lower middle income individuals and families.
70
Captive Insurance Companies
A captive insurer is a company whose business is primarily supplied and controlled by the one interest or group of related interests that set the company up to insure their assets and operations. In this type of situation, coverage can usually be provided at a lower cost than that which is available in the general insurance market.
A captive insurance company may be a non-admitted, non-resident, or foreign insurer, and there are mainly two (2) types:
Pure captive companies, which are wholly controlled by one parent company, or
Group captive companies, which are insurers owned by a number of otherwise unaffiliated firms that are in the same type of business
71
Admitted/Authorized Insurer
An insurer authorized by a state's insurance department to transact business in that state
72
Non-Admitted Insurer/Non-Authorized Insurer
Insurance companies not authorized to transact business in a state because they either didn't seek admission to the state or failed to comply with state requirements
73
Domestic Insurer
insurers that transact business in the state where they are chartered.
74
Foreign Insurer
an insurer transacting business in a state but that is chartered under the laws of a different state or one of the U.S. territories.
75
Alien Insurer
an insurer organized under the laws of a jurisdiction outside of the United States or its territories.
76
Financial Solvency Status (Independent Rating Services)
Independent evaluation services provide information on companies such as financial strength, management caliber, and efficiency of operation.
They publish guides which analyze almost all property and liability business insurers.
They review underwriting results, management, adequacy of reserves for liabilities that are not discharged, adequacy of policyholder reserves to absorb shock losses, and soundness of investments.
If properly used, these rating services help avoid delinquent insurance companies. Ratings should be checked over a period of years to verify trends for the companies. A.M. Best and Weiss Research are two (2) companies that have guides available through most public libraries.
77
Exclusive/Captive Agents or Producers
Agents appointed by an insurer to represent the company by selling and servicing policies on its behalf, representing only one company
78
Independent agents or brokers
are agents that represent several insurers.
79
Nonresident Agent
An agent authorized to write business in a state other than the one in which he or she lives
80
direct writer
is an insurer that deals directly with the insured through a salaried representative or captive/exclusive agent rather than through independent brokers.
81
Direct mail and direct response
policies are marketed directly from the company's home office rather than through agents. Marketing is done through direct mail, internet, newspapers, magazines, radio, or TV.
82
Agency Agreement
The relationship between the insurer and the producer is defined in the agency agreement
83
Agency Agreement and Contract
In return for commission or salary paid by the company, and the authority to represent the insurer in conducting business on the company's behalf, the producer:
Is first and foremost the representative of the insurance company and has an ethical obligation to follow the rules of the insurer, to submit applications only for those risks that the insurer deems appropriate, and to service the policies of company customers. He or she is paid commission or salary by the company and is given authority to represent the company in conducting business on the company's behalf.
Acts as the representative go-between for the company and the insured, with primary responsibility to the company as the principal, while treating the customer in a fair and ethical manner.
Provides correct information to the customer about policy coverages.
Processes any requests for or cancellations of coverage in a timely fashion.
Has no authority beyond that which the insurer gives him or her.
84
Insurance Agent vs. Broker
Superficially, an insurance agent and a broker look identical as both of them are selling insurance policies. The main difference between the two (2) entities lies in the relation these persons have with the insurer and the insured. An insurance agent is designated by the insurance company to sell its products by convincing people to buy the company's policies, whereas a broker works independently and matches the needs of a client with the products available with any of the insurance companies. Both need a license to carry out their business in a state and both get commission from the company.
85
Professionalism and Ethical Conduct
When acting as representatives of their companies, agents are expected to have and exhibit professional competence that can be shown through:
A broad education and background.
Strong insurance-specific knowledge and continued education in the insurance field.
Membership in professional societies and associations.
Ethical behavior, including honesty, integrity, acting in good faith, and the knowledge of and obedience to insurance industry regulations and codes.
Concern for customers’ welfare over one’s own.
86
Fiduciary
An individual who holds a position of public trust and confidence is a fiduciary. Insurance agents are fiduciaries to both the companies they represent and their clients. As fiduciaries, agents are expected to be professional and to act ethically.
87
Financial Responsibilities
1. Money received in return for an insurance policy or binding of insurance coverage is held in a fiduciary capacity and may not be used by the agent for any other purpose.
2. Many states require producers to maintain a Premium Fund Trust Account (PFTA) if they hold premium money for any length of time before giving it to the insurer. The PFTA must be separate from personal or other business accounts.
88
Law of Agency
According to the Law of Agency, an agent's actions are regarded the same as if the company itself performed the action. The agent is a representative of the insurer and acts for the insurer. As such, the insurer becomes partially liable for the actions of the agent. It is the insurer's responsibility to monitor the compliance of its agents in order to verify that they follow all required laws. An agent represents the company through several directives.
89
Express Directive
is when authority is expressly given to the producer, either orally or in writing in his/her contract. An example of this includes the countersigning and delivering of policies. Express directive clauses are such things as scale of commissions, ownership of contracts sold, and contract cancellation procedures.
90
Implied Directive
The doctrine of “ostensible authority,” or implied directive, gives agents unwritten authority to perform incidental acts that the public assumes the agent to have.
91
Apparent Directive
Apparent authority is neither expressly given nor implied, but exists because the agent has used it in the past without the insurer stopping him or her from doing so, or it is authority that a reasonable person would assume an agent to have. If the agent has paid minor claims in the past and been reimbursed by the insurer, it is apparent he or she has the authority to do so.
92
Responsibilities to the Applicant and Insured
For risks covered by the policy, the insurer must pay all sums up to the policy limits that the insured becomes legally liable to pay; in other words, the insurer pays the lower of the claim (loss) or the policy limits. Deductibles will be applied to any property claims, but there is no deductible for medical or liability claims. The producer has responsibilities that are owed to applicants and/or insureds. He or she will:
Act only in the best interests of his or her clients.
Only provide accurate and up-to-date information and advice to customers about policies and coverages.
Aid with the accurate completion of applications and any other accompanying documentation.
Service policies as necessary and according to the desires of the insured.
Process any coverage changes or cancellations.
Act only within the scope of authority that has been given them by the insurer.
93
Common Situations for Errors and Omissions
Failure to adequately explain policy coverages or claim procedures
Unfairly/inadequately comparing policy coverages when replacing an existing policy
Failure to get the policyholder's signature upon delivery
Failure to explain changes made to the policy during underwriting
94
Insurance Contract
a binding agreement between two (2) or more parties, legally enforceable to do certain things. In an insurance contract, the insured agrees to pay a monetary premium and abide by certain agreements in exchange for the insurer agreeing to indemnify the insured in case of loss.
95
four (4) principle elements that must be in every legal contract
1. Offer and Acceptance
2. Consideration
3. Competent Parties
4. Legal Purpose
96
legal contract- Offer and Acceptance
An insurance policy is the written statement of the terms of the contract. There must be both an offer and an acceptance.
During the offer period the applicant submits an application along with the correct premium. During the acceptance period the insurer issues the policy.
If the applicant does not submit money with the application, it is not an offer, but it is an invitation to the insurer to make an offer, and the agent cannot bind coverage.
97
legal contract- Consideration
The applicant's consideration is the premium, and the insurer's consideration is the promise to indemnify the insured in the event of a loss.
98
legal contract- Competent Parties
A party to a contract is one who holds the obligations and receives the benefits of a legally binding agreement. When two (2) parties enter into an agreement, there are two (2) distinct roles each play: the promisor and the promisee.
When a contract benefits others who are not party to the agreement, these third-party beneficiaries receive benefits of a contract, while not owing any obligation.
All parties concerned must have legal capacity to enter into a contract. This is best shown by defining those who do not have legal capacity to enter into a contract. This includes:
Minors
Those legally declared incompetent
People under the influence of drugs or alcohol
In the case of minors, the insurer may be required to uphold the terms of the contract while minors may not be.
99
legal contract- Legal Purpose
The insurance policy owner must have an insurable interest in the property or person being insured. Insurable interest is defined as having a financial interest wherein the insured could lose financial position if the property were damaged or destroyed, or if the person was injured or died.
100
Mutual Agreement
Any changes the insurer makes must be agreed to in writing by the insured, or the policy will not be issued.
101
Two Party Contracts
Insurance contracts are generally between two (2) parties: (1) The insured, and (2) The insurer. The insured suffers a loss of property, health, or life, or is liable for someone else's losses. The insurer agrees to indemnify the insured for such financial loss. Insurers may pay money to a third party to whom the insured is liable (the insured has liability because they caused financial damage to another, or owe compensation for services rendered for repair of property or health).
102
Third Party Contracts
Sometimes a third party contract is created to indicate that the performance of the contract will result in a benefit to a person that did not sign the contact. Benefits to third parties are usually expected and left out of contracts, unless one of the signers wants to designate a specific benefit to a specific third party. To be able to enforce the contract, a third party must be able to prove that the contract was drawn for its benefit, otherwise the benefit is considered incidental and the contract is only enforceable by the original signers.
Banks and other mortgage companies are common third parties because many contracts involve payment on property for which the mortgage company has a financial interest because of a loan.
103
Contract of Adhesion
Only one (1) party to the contract (the insurer) prepares the contract and submits it to the other party (the insured) for acceptance in a contract of adhesion. The insured cannot make any changes to the contract.
104
Aleatory Contract
In an aleatory contract, unequal amounts of money are exchanged. The premium that the insured pays is less than the potential benefit he or she will receive in the event of a loss.
105
Personal Contract
Insurance policies are personal contracts. They cover the insurable interest of the individual insured and cannot be transferred or assigned to another individual. The exception is Life insurance.
106
Unilateral Contract
In a unilateral contract, only one party is legally bound to perform any duties once premium is paid. In an insurance contract, only the insurer makes any legally enforceable promise. The insured does not make a promise but pays a premium, which constitutes his or her part of the consideration.
107
Conditional Contract
In a conditional contract, both parties must perform certain duties to make the agreement enforceable. The insured pays premiums and follows certain policy conditions. The insurer pays claims according to policy terms.
108
Contract of Indemnity
The insurer must restore the insured to the same financial position they were in before the loss occurred in a contract of indemnity.
109
Valued Contract
requires the insurer to pay the insured the full face value of the policy in the event of total loss, regardless of the actual value of the lost property.
110
Health Reimbursement Arrangement
is an IRS approved, employer-funded, tax advantaged employer health benefit plan that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums. A health reimbursement arrangement is not health insurance.
111
two (2) types of service contracts
Plans where the service provider (doctor or hospital) is directly compensated by the insurer (e.g., Blue Cross and Blue Shield)
Contracts which provide protection for specific products and situations (e.g., extended service)
Note: A service contract is not an insurance policy – some states require that the contractual obligations of all service contracts sold must be guaranteed by a reimbursement insurance policy.
112
Ambiguities in a Contract of Adhesion
Any doubt or ambiguity found in an insurance policy will be found in favor of the party that did not draw up the contract (the insured).
113
Reasonable Expectations
The reasonable expectations of policy owners or beneficiaries will be honored even though the strict terms of the policy do not support these expectations.
114
Utmost Good Faith
It is understood that both parties bargain in good faith in forming the contract. Applicants and insureds are expected to make a full, fair, and honest disclosure of facts. Insurers are expected to promptly indemnify the insured in the event of loss according to the contract.
115
Representations/Misrepresentations
Representations are statements made by one party that are believed to be true. The insured's misrepresentation will not affect the insurance contract or policy unless it affects the conditions under which the policy would be issued or not. Therefore, it is material to the risk. An agent's misrepresentation, whether intended or not, is more likely to void a policy. For example, an agent may falsely represent that certain coverage is contained in the policy when, in fact, it is not.
116
Warranties
These are statements made by the applicant that are guaranteed to be true. Warranties become part of the contract and, if found to be untrue, can be grounds for revoking the contract. They are considered to be material because they affect the insurer's decision to accept or reject an applicant.
117
Concealment
Concealment is the willful failure to disclose facts that are material to the risk. An applicant's concealment of information from the insurance company could affect the insurer's decision whether or not to insure the property and could void the policy.
118
Fraud
Deceit, intentional misrepresentation, or the concealment of material facts with the intention of causing injury to another party is known as fraud. It is a deception deliberately practiced in order to secure unfair or unlawful gain (e.g., making false or misleading statements or concealing circumstances in relation to a claim or on an application).
119
Misrepresentation
Insurers or producers may not misrepresent:
A policy’s terms, benefits, or dividends.
Policy comparisons (e.g., through incomplete explanations).
The type of policy being sold.
The company’s financial status.
The assets or funds owned or controlled by an insurance company.
The company or its funds being guaranteed by a federal or state governmental agency.
Disparaging remarks about another agent, company, or policy can also be examples of misrepresentation and defamation.
120
Unfair Policy Replacement
Insurance laws of many states:
Regulate the replacement of insurance policies.
Protect policyholders and prospective buyers from unfair or deceptive practices.
Require full disclosure to the prospective buyer, as well as notice to the existing insuring company, that a policy is to be replaced. This gives the existing company a chance to contact the insured and make sure they have correct information and understand what might be lost by making the change.
121
Discrimination
Charging different rates for the same exposure based on non-actuarial data, or not founded in actual statistics, is a form of discrimination. It is also illegal to discriminate against handicapped or disabled individuals, or against anyone regarding the following:
```
Race
Religion
National origin
Marital status
Sex
Where he or she lives
Individuals of the same class and equal expectation in life
Individuals of essentially the same hazard
```
122
Rebating
The reduction in premium charged or the return of part of the required premium.
A form of discrimination. Rebating allows one individual to purchase insurance at a lower cost than another with no actuarial purpose.
Included in the area of paying commissions to an individual who does not have a license.
A misdemeanor in many states. (If so, both the agent and the insured may be subject to fines, and the agent’s license could be suspended.)
123
examples of rebating
Reducing premiums
Accepting something of material value (barter)
Offering an incentive if the person buys a policy
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Redlining
Redlining is the refusal of an insurer to underwrite insurance coverage in certain geographic areas, such as inner-city neighborhoods, or the increasing of premium rates to an unreasonable amount to discourage certain customers in order to avoid perceived risks.
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Twisting
Twisting is the act of inducing a policyholder to drop an existing policy in order to buy a similar policy, or one with fewer benefits, from the agent doing the twisting. It usually involves fraud and misrepresentation. It is usually also not in the policyholder’s best interest. To begin with, there will usually be a higher premium for fewer benefits because the insured is generally older than when he or she bought the first policy. The NAIC encourages policyholders to request a written and signed proposal setting forth all the facts comparing the two policies. The comparisons should be submitted to both the company whose policy is proposed, as well as to the company whose policy is to be replaced.
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Churning
Churning is a form of twisting and also involves taking 25 percent, or more, of the cash value from the existing policy to pay the premium on a new policy.
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Boycotting
To boycott is to stop buying or using the goods or services of a certain company or country as a protest. Boycotting in insurance is to stop buying from a particular business to force them to buy insurance from a particular source. Insurers may not boycott or deny legitimate claims of insureds because of the provider used for services covered by the insurer. Neither insurers nor producers may use boycotts to manipulate individuals or companies to purchase insurance coverage from them.
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Intimidation
To force into or deter from buying insurance by inducing fear is known as intimidation.
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Monopoly in the Insurance Business
A monopoly is a situation in which a single company owns all, or nearly all, of the market for a given product or service. Neither insurers nor producers may set up artificial barriers to entry that do not allow competition to enter the marketplace.
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Misappropriation of Funds
This is the intentional, illegal use of the property or funds of another person for one's own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an executor, administrator of a deceased person's estate, or by any person with the responsibility to care for and protect another person's assets (a fiduciary duty, such as an insurance producer). Misappropriation of funds is a felony, a crime punishable by a prison sentence.
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False Financial Statements
It is prohibited to knowingly:
Make any false material statement of fact as to the financial condition of a person or company.
Make any false entry of a material fact in a book, report, or statement of a person or company.
Omit to make a true entry of a material fact pertaining to a person's or company's business in any book, report, or statement.
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General Industry Regulations
The insurance industry is regulated mainly by State Government rather than the Federal Government. The Federal Government can apply antitrust laws to the industry, but all states have included such laws in their own legislation in order to help keep all aspects under their own control.
Laws and penalties related to insurance companies and agents vary between states.
Certain principles remain the same in relation to the handling of public monies (insurance premiums and investment funds) and the selling of insurance.
Some Life insurance products are a cross between insurance and securities markets. As a producer begins selling these products, the producer is subject to the compliance standards that accompany these sales. In particular, the producer needs to be aware of the National Association of Securities Dealers and the Financial Industry Regulatory Authority.
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National Association of Securities Dealers
The National Association of Securities Dealers (NASD) was the self-regulatory organization for the NASDAQ stock market and the over-the-counter market. It was the association of broker/dealers that supervised and regulated the trading and the conduct of its member organizations and the licensed brokers who worked for those member organizations. The NASD was created under the Securities and Exchange Act of 1934. Even though it is not a government organization, it worked closely with state and federal securities regulators.
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The Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is the largest non-governmental regulator for all securities firms doing business in the United States.
Registering and educating industry participants
Examining securities firms
Writing and enforcing rules and the federal securities laws
Informing and educating the investing public
Providing trade reporting and other industry utilities
Administering the largest dispute resolution forum for investors and registered firms.
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The purpose of FINRA?
The purpose of FINRA is to modernize investor protection and market integrity by streamlining processes and integrating regulation in the complexity and competitiveness of today's global capital markets.
One of FINRA's goals is to increase investor education and knowledge of markets and basic principles of saving and investing.
FINRA is a trusted advocate for investors, dedicated to keeping the markets fair, ensuring investor choice, and proactively addressing emerging regulatory issues before they harm investors or the markets.
