Summaries Flashcards
United Ststes Legal System
The law affects risk management and insurance professionals on a daily basis. The U.S. legal system originated from the English common law system, which differs from the European civil law system that is founded exclusively on codified laws rather than case law. However, features of both systems exist in the U.S. In addition, U.S. law can be classified as either criminal or civil law, by subject matter, and as either substantive or procedural law.
Sources of U.S. Law
insurance and risk management professionals should have a basic understanding of the sources of U.S. law and how they affect one another. There are five sources of U.S. law: constitutions, legislative bodies, courts, executive branches, and administrative agencies.
Civil Trial Procedures
Court legal procedures fall into different phases, including pretrial, trial, and appellate procedures. Substantial pretrial preparation provides parties with information about allegations and evidence and gives them an opportunity to settle. If a case goes to trial, the parties can only present evidence that is relevant, material, and competent. If the court reaches a verdict, the appellant may appeal to a higher court for a review of the case, although the losing party must decide whether the potential for a favorable appellate decision outweighs the high cost of an appeal.
Alternative Dispute Resolution
ADR methods, such as arbitration, mediation, and negotiation, are ways to resolve disputes more efficiently than through the overloaded court system.
Administrative Agency Procedures
Administrative agencies have investigatory powers but are also subject to constitutional limitations. Their legal procedures include the rulemaking function, the adjudicatory function, investigative powers, and judicial review. Agencies promulgate three types of rules: legislative rules, interpretative rules, and procedural rules. Agency adjudicatory procedure is similar to court procedures, requiring notice, hearing, and adjudication. Judicial review of agency decisions involves issues of standing to sue and exhaustion of administrative remedies, as well as standards of review, such as determining the existence of agency abuse of discretion.
Requiremwnts of a valid offer
For a contract to be legally binding, there must be an agreement between the parties involved. The agreement includes both a valid offer and its acceptance. To be valid, an offer must include an intent to contract, definite terms, and communication to the other party. It also can’t be expired or have been terminated before its acceptance.
Requirements of a valid acceptance
To create an enforceable agreement, a contract must have not only a valid offer by the offeror but also valid acceptance of that offer by the offeree. Valid acceptance requires that the offer was accepted by the offeree, unconditional and unequivocal acceptance was secured, and the offeree appropriately communicated acceptance to the offeror.
Capacity to contract
Minors, insane people, and intoxicated people generally cannot enter into legally binding contracts because they are not considered competent to do so. Under some circumstances, however, these parties can contract. Artificial entities, such as corporations, can generally contract, but their ability to do so may be limited by their charter.
Assent and consideration
Genuine assent and consideration are necessary to form a contract. Failing to secure both of these could nullify a contract or result in financial damages being awarded to one of its parties. Genuine assent is the intent to form a contract. Five types of consideration are sufficient to establish an enforceable contract: valuable consideration, forbearance, present consideration, future consideration, and binding promises. Each type of consideration has its own set of legal rules. In some cases, contracts are enforceable for equitable or public policy reasons despite a lack of consideration.
Legal purpose of a contract
There are nine categories of illegal contracts: contracts to commit crimes or torts, wagering contracts, contracts harmful to the public interest, usury contracts, contracts with unlicensed practitioners, contracts to transfer liability for negligence, contracts in restraint of marriage, contracts in restraint of trade, and unconscionable bargains. Although courts generally don’t enforce illegal contracts, they may do so when a specific group is protected by law, when both parties are at fault but unequally, or in severable contracts that contain legal provisions. Additionally, some contracts must be in writing to be considered legal.
Enforceability of a contract
If an agreement is made without mutual assent, it may be unenforceable. If a party was induced to enter an agreement through fraud, mistake, duress, undue influence, or innocent misrepresentation, the agreement lacks mutual assent, and it could be avoided. Under state statutes of fraud, some contracts must be in writing to be enforceable. Generally, when a contract is in writing, parol evidence cannot be used to change the terms of the agreement. However, oral evidence can be used to prove missing contract terms, clarify ambiguities, support an allegation of wrongdoing, or demonstrate the failure to meet a condition.
Contract interpretation
When contracts contain unclear or ambiguous wording, courts follow these steps to interpret the agreements: use plain meaning of the words; effectuate the parties’ intent; classify the contract as entire or divisible; correct clerical errors and omissions; prioritize contradictory terms; interpret ambiguities against the author; consider the parties’ own interpretations; seek a legal and fair interpretation; and consider trade usage, course of dealings, and performance.
Third party contractual rights
A third party ordinarily does not have any rights under contracts made by other parties. However, in two situations third parties do have enforceable rights under contracts others have made: assignment and third-party beneficiary contracts. Although most contract rights are assignable, some are not. A primary obligation to perform usually remains with the assignor. Third-party beneficiary contracts benefit creditor beneficiaries, donee beneficiaries, and incidental beneficiaries. Creditor and donee beneficiaries, referred to as intended beneficiaries, have enforceable rights against the original promisor, but an incidental beneficiary has no enforceable rights.
Concluding a contract
Parties can discharge their contractual obligations if the performance of contractual obligations is completed, the parties agree to end duties, a new contract is substituted for a previous one, performance becomes impossible, a fraudulent alteration was made to the contract, or a condition of the contract wasn’t fulfilled.
Breach of contract
A breach of contract can occur through repudiation or anticipatory breach, and breaches can be either material or minor. With breach of contract, the nonbreaching party can sue for compensatory damages, consequential damages, and in some cases punitive damages. Extracontractual damages can be awarded against insurers. Parties to a contract can also agree on an amount of liquidated damages when the contract is formed. When money damages are an inappropriate or inadequate remedy for breach of contract, a nonbreaching party can seek equitable remedies, including specific performance and injunctions.
Contracts case study
It is necessary to establish two things about a given contract:
A valid contract was formed.
The contract is enforceable.
If a contract is legally enforceable and a breach occurs, the innocent party injured by the breach may pursue remedies and other options.
Special characteristics of insurance contracts
Insurance contracts have special characteristics that distinguish them from other contracts. An insurance policy is a conditional contract; a contract involving fortuitous events and the exchange of unequal amounts; a contract of utmost good faith; a contract of adhesion; a contract of indemnity; and a nontransferable contract.
Insurance contract formation
To be considered binding, an insurance contract must have three characteristics:
Agreement, including issues concerning offer and acceptance, effective date, and silence or delay
Policy content, which can be oral or informally written, that includes necessary terms (but can also include implied terms) and designates the insurer
Delivery
Insurance as third party beneficiary contract
An insurance contract can benefit a third party in cases of injury or damage (primarily from negligence) and in real estate sales, mortgages, lease interests, and life estates.
Representations and warranties in insurance
Statements on an insurance application are usually either representations or warranties. Representations are oral or written statements made by an insurance applicant concerning loss exposures. Warranties are statements or promises in an application that, if untrue, would render the policy voidable, whether or not they are material.
Waiver, estoppel, and election
A waiver is the intentional relinquishment of a known right based on knowledge of facts related to that relinquishment. Estoppel, in insurance law, is one party’s untrue representation of fact (intentional or unintentional) that the other party relies upon, making it unfair to allow the first party to refuse to be bound by the representation. Election is voluntarily choosing between available rights or privileges that may imply relinquishment of those not chosen.
Nonwaiver Agreements and Reservation of Rights Letters
Insurers use nonwaiver agreements and reservation of rights letters to protect certain defenses against liability that they might have under the policy terms from insureds’ assertions of waiver, estoppel, or election. These notices and agreements allow insurers to advise insureds that the insurers’ activities regarding losses do not waive their rights to stand on policy provisions. An insurer can continue to investigate and evaluate losses on their merits.
Sales Contracts
A sales contract is a legally enforceable agreement between a buyer and a seller that involves transferring ownership of goods for a price. Sales contracts, which are either unilateral or bilateral, are governed by Article 2 of the UCC. Three types of specialized sales contracts are sale on approval, sale and return, and auction sales. To be valid, a sales contract requires agreement (offer and acceptance) and consideration. Typically, a sales contract must be in written form if it involves $500 or more in goods.
Performance and Breach of Sales Contracts
Performance of contractual obligations is required to complete (discharge) a sales contract, and a contract is breached when a party fails to achieve performance. In some circumstances, a seller’s nonperformance can be excused. If a breach has occurred, sellers and buyers can pursue various remedies.
Negotiable Instruments
Negotiable instruments, such as commercial paper, are used in business transactions daily. They are written documents promising the holder a specific payment, must adhere to several UCC Article 3 requirements, and can be transferred. The most common types of commercial paper are drafts and notes. Holders in due course can be free of all defenses against negotiable instruments.
Documents of Title
Article 7 of the UCC addresses the shipment, storage, and delivery procedures and requirements during the sale of commercial goods. Article 7 also deals with documents of title used in this process, including warehouse receipts and bills of lading. Under certain circumstances, such documents may be negotiable instruments.
Secured Transactions
Buyers often use secured transactions to borrow money or use credit when purchasing goods. In secured transactions, the lender has the right to take possession of property put up as collateral on the loan by the borrower if the borrower defaults on the loan. This property is known as the security interest. A secured transaction has five elements: debtor (borrower), secured creditor (lender), collateral, security interest, and security agreement. These transactions are governed by Article 9 of the UCC. Attachment is what creates the security interest in property, and perfection validates the attachment and provides a lender with the right to seize a security interest. Nonpayment is the most obvious form of default on a secured transaction and can allow a lender to foreclose on the security interest.
Consumer Protection Laws
Federal and state policymakers have enacted laws to protect consumers in the commercial sale of goods. Consumer protection laws include fair trade laws, consumer credit laws, and bankruptcy laws. Fair trade laws include the FTC Act and the Magnuson-Moss Warranty Act. Consumer credit laws include the Truth in Lending Act, Electronic Fund Transfer Act, Fair Credit Reporting Act, and Equal Credit Opportunity Act. The federal Bankruptcy Act governs most bankruptcies, although it doesn’t apply to insurers, whose insolvencies are subject to state regulation.
Ownership and Possession of Personal Property
Personal property is all property that is not land or structures or rights attached to the land. Personal property can be obtained through creation of intellectual property, accession, confusion, gifts, and bailments.
Bailee’s and Bailor’s rights and duties
In bailments, a bailor leaves personal property with a bailee. Bailments can benefit the bailor, the bailee, or both. A bailee has possession only, and cannot transfer title to the property, but may have a right to use the property.
Real Property Ownership
There are eight common forms of ownership interest:
Fee simple estate
Life estate
Joint tenancy
Tenancy by the entirety
Tenancy in common
Community property
Cooperative ownership
Condominium ownership
Real Property Sales
A real property sale involves a contract of sale and a deed, both of which, under the statute of frauds, must be in writing. To be valid, both documents must also meet other requirements. Recording of real estate transfer documents protects buyers against ownership claims made by subsequent purchasers.
Real Property Security Interests and Liens
Security interests in real property include mortgages, trust deeds, and land contracts. Liens give certain creditors rights to have their debts paid out of debtors’ property, usually by sale. Mechanic’s liens give those who repair property a right to retain the property to secure payment.
Incidental Real Property Rights
Incidental real property rights include adverse possession claims; rights under, above, and on the land’s surface; the right to lateral and subjacent support; water rights; and the ownership of fixtures.
Land use restrictions
Land use restrictions include easements, profitsà prendre, restrictions on land use, licenses, zoning, building codes, and eminent domain.
Landlord and Tennant Relationship
Landlord-tenant law governs lease interests in real property, which are limited interests of limited duration. A landlord’s primary duty is to deliver possession of the premises to the tenant at the inception of the lease. The tenant must pay rent and leave the premises in the condition in which it was received, except for reasonable wear and tear. The landlord has the same liability to third parties for injuries sustained on the premises as does the tenant.
