Unit 1: General Insurance Terms and Related Concepts | Chapter 1-4: Elements of a Contract

Question 1

Simply stated, an aleatory contract could be a contract providing ______________ value.

a) equivalent
b) unequal
c) uneven
d) equal

Answer 1

Simply stated, an aleatory contract could be a contract providing ______________ value.

unequal

Unequal value. An insured may pay premium without the benefit of anything in return unless there is a loss. Because of the nature of insurance (small premium in exchange of a potentially large benefit) and conversely, the insurer could pay out significantly more than the premium paid in.

Question 2

Simply stated, insurance __________ the person.

a) Empowers
b) Follows
c) Drives
d) leads

Answer 2

Simply stated, insurance __________ the person.

Follows

Insurance is personal; it “follows” the person. A person insures their own life. They buy health insurance to protect themselves against financial issues associated with medical care. They buy insurance to protect themselves against loss or damage to property or they buy insurance to protect themselves against their own negligent acts towards others (liability).

Question 3

An insurance policy is said to be one-sided, requiring only the insurer to live up to the contractual obligations under the contract. The term used to identify this concept is:

a) Unilateral
b) Consideration
c) Aleatory
d) Adhesion

Answer 3

An insurance policy is said to be one-sided, requiring only the insurer to live up to the contractual obligations under the contract. The term used to identify this concept is:

Unilateral

Unilateral means one-sided. The insurer must live up to the contract’s promise of benefit in the event of a loss.

Question 4

An insurance policy may be referred to as a conditional contract because:

a) conditions apply to both the insured and the insurer.
b) loss payment is conditioned upon actual physical damage.
c) coverage is conditioned upon payment of premium.
d) there are conditions that apply to the insured.

Answer 4

An insurance policy may be referred to as a conditional contract because:

conditions apply to both the insured and the insurer.

There are conditions applicable to both the insured and the insurer. Think of conditions as the ground rules applicable to both the insured and the insurer.

Question 5

Insurance policies are considered to be contracts of adhesion. Ambiguities under this type of contract will generally be interpreted in favor of the:

a) Equal consideration is given to all parties.
b) insured.
c) insurance company.
d) contract writer.

Answer 5

Insurance policies are considered to be contracts of adhesion. Ambiguities under this type of contract will generally be interpreted in favor of the:

insured.

Insured. An insured operates under the doctrine “utmost good faith,” assuming the insurance company when writing the contract has given consideration to the insured, as well as the insurer. The insured adheres (adhesion) to the contract as written, with no say in the contract language. Therefore, a court of law would tend to favor the insured in its interpretation of the contract.

Question 6

Each of the following is an element of a legal contract EXCEPT:

a) Valid signatures of all parties to the contract.
b) Offer and Acceptance.
c) Consideration.
d) Legal purpose between competent parties.

REMEMBER ACRONYM: COAL

Answer 6

Each of the following is an element of a legal contract EXCEPT:

Valid signatures of all parties to the contract.

Watch out for these EXCEPT questions. Valid signatures of all parties to a contract are not required, a contract could be verbal. Remember the acronym COAL for the elements of a contract.

Question 7

When a person waives a previously known right, the person is henceforth __________ , or stopped, from exercising that right in the future.

a) Competent
b) Conditioned

c) Estopped

d) forbidden

Answer 7

When a person waives a previously known right, the person is henceforth __________ , or stopped, from exercising that right in the future.

Estopped

A waiver occurs when a person voluntarily gives up a previously known right. When a person waives a previously known right, that person is henceforth estopped from exercising that right in the future.

Question 8

A “waiver” occurs when a person _______ gives up a previously known right.

a) is forced to
b) involuntarily
c) voluntarily
d) unknowingly

Answer 8

A “waiver” occurs when a person _______ gives up a previously known right.

voluntarily

• A person who voluntarily gives up a previously known right is henceforth stopped (estoppel) from exercising that right in the future.*
• For example, as an insured policyowner, the insured has the right to name and change a beneficiary designation unless they have made an irrevocable election; in which case, they can no longer make a change without the written consent of the irrevocably named beneficiary.*

Question 9

An insurance contract is considered to be a contract of utmost good faith. The insurance company relies on the integrity of an applicant for insurance. Statements made in an application for insurance are considered to be:

a) warranties of fact as of the time of application
b) statements of fact, which are warranted to be true.
c) a guarantee of factual information
d) representations, information true to the best of the applicant’s knowledge and belief.

Answer 9

An insurance contract is considered to be a contract of utmost good faith. The insurance company relies on the integrity of an applicant for insurance. Statements made in an application for insurance are considered to be:

representations, information true to the best of the applicant’s knowledge and belief.

Representations, a statement of fact, but not a warranty or guarantee of fact. Information true to the best of the applicant’s knowledge and belief.

Question 10

An insured’s submission of a proof of loss statement is considered to be a _______ of the facts.

a) Statement
b) Description
c) Representation
d) warranty

Answer 10

An insured’s submission of a proof of loss statement is considered to be a _______ of the facts.

warranty

Warranty (guarantee) of the facts.

Question 11

Someone that intentionally misrepresents, omits, or conceals a material fact is guilty of:

a) withholding material facts
b) misrepresentation of facts
c) failing to state the facts
d) fraud

Answer 11

Someone that intentionally misrepresents, omits, or conceals a material fact is guilty of:

fraud

It is important to remember that fraud is forever in the property and casualty field. If at any time in the future, the insurer determines the insurance was fraudulantly obtained or the insured is committing fraud as it relates to the insurance, the insurer may decline a claim and/or consider the insurance to be null and void.

Question 12

A contract of adhesion may be referred to as:

a) A take-it or leave-it contract.
b) Acceptance as written contract.
c) Acceptance or rejection contract.
d) A contract of adherence.

Answer 12

A contract of adhesion may be referred to as:

A take-it or leave-it contract.

Under a contract of adhesion, one party (the insurer) has a greater power over the other (the insured) in drafting the contract. The insurance company prepares the contract without input from the insured in policy provisions and language. In affect, the applicant “adheres” to the terms of the contract when he/she accepts it. This type of contract may be referred to as a “take-it or leave-it” contract.

Question 13

Define the Acronym COAL

Answer 13

Consideration

Offer

Acceptance

Legal Purpose

Use the acronym C.O.A.L. to remember the elements of a legal and binding contract. Something
of value must be exchanged (valuable Consideration - the insured’s premium in exchange of the
insurer’s promise). An Offer must be made and Accepted. The contract must have Legal purpose
between competent parties.

Question 14

A _____________ is a legal agreement between two or more parties that is deemed enforceable under action of law.

Answer 14

A CONTRACT is a legal agreement between two or more parties that is deemed enforceable under action of law.

Question 15

An ________________ is a legal agreement between the policyowner and the insurance company, under which, the insurance company promises to pay a stated amount because of a specified event in exchange for valuable consideration (premium).

Answer 15

An insurance policy is a legal agreement between the policyowner and the insurance company, under which, the insurance company promises to pay a stated amount because of a specified event in exchange for valuable consideration (premium).

Question 16

Name the elements that make a contract legally binding

Answer 16

• *In order for a contract to be legally binding, it must contain certain elements; an offer must be made and**
• *accepted, consideration between the parties must exist, and the contract must have legal purpose between**
• *competent parties.**

Offer and Acceptance: A contract for insurance generally involves two parties - One who makes the
offer to purchase (the applicant) and the other who accepts the offer (the insurer). If the insurance is
not issued as applied for, the insurer will make a counter-offer. In which case, the applicant for insurance
will accept or reject the insurers counter-offer.

Consideration: Defined as the value given. Each party to an agreement (contract) provides valuable
consideration, such as the policyowner’s premium in exchange for the promise of future benefit from the
insurance company.

Legal Purpose: A contract must have a legal purpose to be enforceable. A contract that is against
public policy or in violation of the law is not enforceable.

Competent Parties: An additional consideration are the parties to the contract. A contract is not
considered valid unless the parties to the contract are competent. A person who is a minor, the mentally
infirm, and those under the influence of alcohol or drugs are considered incompetent under contract law.

Question 17

An insurance contract is considered __________ in nature, because there is an element of chance for both parties to the contract. From the insured’s perspective, the benefits contracted for may never occur; therefore, the payment of premiums would always exceed the monetary value received. Conversely, from the insurer’s perspective, the benefits paid in the event of a claim may far out-weigh the actual premiums paid.

Answer 17

Aleatory

An insurance contract is considered aleatory in nature, because there is an element of chance for both parties to the contract. From the insured’s perspective, the benefits contracted for may never occur; therefore, the payment of premiums would always exceed the monetary value received. Conversely, from the insurer’s perspective, the benefits paid in the event of a claim may far out-weigh the actual premiums paid. Simply stated, an aleatory contract could be considered unequal in value between the parties.

Question 18

• *Under a contract of ____________, one party (the insurer) has a greater power over the other (the insured)**
• *in drafting the contract. The insurance company prepares the contract without input from the insured in**
• *policy provisions and language. Basically, the applicant “adheres” to the terms of the contract when he/she**
• *accepts it. This type of contract may be referred to as a “take-it or leave-it” contract.**

Answer 18

Adhesion

Under a contract of adhesion, one party (the insurer) has a greater power over the other (the insured) in drafting the contract. The insurance company prepares the contract without input from the insured in policy provisions and language. Basically, the applicant “adheres” to the terms of the contract when he/she accepts it. This type of contract may be referred to as a “take-it or leave-it” contract.

If ambiguities arise in policy provisions and/or language, a court of law will usually interpret the policy in favor of the insured. The courts also rely on the doctrine of reasonable expectations, which states a policy should include provisions and language that an average person would reasonably expect it to include, regardless of what it actually provides.

Question 19

The courts also rely on the doctrine of _______________________\_, which states a policy should include provisions and language that an average person would reasonably expect it to include, regardless of what it actually provides.

Answer 19

reasonable expectations

The courts also rely on the doctrine of reasonable expectations, which states a policy should include provisions and language that an average person would reasonably expect it to include, regardless of what it actually provides.

Question 20

An insurance contract is considered to be ______________, meaning “one-sided.” An insurance contract is written by one party (the insurer) without input from the applicant, and only the insurance company is bound by the provisions of the contract. As long as the policyowner pays the required premium, the insurer must fulfill its contractual obligations under the contract.

Answer 20

Unilateral

An insurance contract is considered to be unilateral, meaning “one-sided.” An insurance contract is written by one party (the insurer) without input from the applicant, and only the insurance company is bound by the provisions of the contract. As long as the policyowner pays the required premium, the insurer must fulfill its contractual obligations under the contract.

• *Simply stated: An insurance policy is an act (payment of premiums) in exchange of a promise (future**
• *benefits).**

Question 21

• *An insurance contract is considered to be a contract of ______________ from both the insured’s and the**
• *insurer’s perspective**

Answer 21

utmost good faith

• *An insurance contract is considered to be a contract of utmost good faith from both the insured’s and the**
• *insurer’s perspective:**

Question 22

The insurance company relies on the integrity of the applicant. Statements made by an applicant in an application for insurance are considered to be ____________________; information true to the best of the applicant’s knowledge and belief. However, in the event of a claim, ________________________, which is a sworn statement or warranty of the facts.

Answer 22

The insurance company relies on the integrity of the applicant. Statements made by an applicant in
an application for insurance are considered to be representations; information true to the best of the
applicant’s knowledge and belief. However, in the event of a claim, the claimant may be required
to submit a proof-of-loss statement, which is a sworn statement or warranty of the facts.

NOTE: Warranty has the same meaning as guarantee.

Question 23

The insured relies on the insurer’s integrity and ability in the promise of ________________.

Answer 23

The insured relies on the insurer’s integrity and ability in the promise of future benefits.

Question 24

• *By definition, the intentional misrepresentation, omission, or concealment of a material fact is considered to**
• *be _______________. A material fact, had it been known, may have altered the insurer’s decision to issue the insurance policy.**

Answer 24

Fraud

By definition, the intentional misrepresentation, omission, or concealment of a material fact is considered to
be fraud. A material fact, had it been known, may have altered the insurer’s decision to issue the insurance
policy.

NOTE: Fraud is forever in property and casualty insurance. If at any time in the future the insurer determines the insured fraudulently obtained the insurance or is in the process of committing fraud as it relates to the insurance, the insurer can deny the claim and consider the contract to be null and void.

Question 25

A ___________ occurs when a person voluntarily gives up a previously known right. When a person waives a previously known right, that person is henceforth stopped (estopped) from exercising that right in the future.

This legal doctrine could come into play in insurance under the Law of Agency, where a “contract entered
into by an appointed agent is considered entered into by the principal (insurer).” If the agent issues a binder
without a disclaimer, indicating the binder is temporary coverage only, the insurer could be prevented from
denying permanent coverage.

Answer 25

waiver

A waiver occurs when a person voluntarily gives up a previously known right. When a person waives a previously known right, that person is henceforth stopped (estopped) from exercising that right in the future.

This legal doctrine could come into play in insurance under the Law of Agency, where a “contract entered
into by an appointed agent is considered entered into by the principal (insurer).” If the agent issues a binder
without a disclaimer, indicating the binder is temporary coverage only, the insurer could be prevented from
denying permanent coverage.

Question 26

An insurance contract is _________ in nature

Answer 26

personal

An insurance contract is personal in nature. A person purchases insurance to protect him or herself against
the loss of property. A person might say “I have my home insured for loss due to fire”, when in reality it is the
person that is insured against the loss of property due to fire. Insurance is also purchased to protect against a
person’s own negligent acts (liability insurance) or to protect themselves, their families, or businesses against
loss of life, incurred medical expense, or loss of income due to disability.

Simply stated, insurance follows the person.

Question 27

An insurance policy may be referred to as a “_______________” because there are conditions applicable to both the insurance company and the insured. The conditions section of an insurance policy describe the duties of each party to the contract.

Answer 27

conditional contract

An insurance policy may be referred to as a “conditional contract,” because there are conditions applicable to both the insurance company and the insured. The conditions section of an insurance policy describe the duties of each party to the contract.

From an insured’s perspective: In addition to payment of premium and in the event of a loss (claim),
an insured is required to:
Provide prompt notification - notify the insurer that a loss has occurred.
Cooperate with the insurer in its investigation and/or settlement of defense of a claim.
In the event of a property loss, protect property from further damage to the best of the insured’s
ability.
Submit a proof-of-loss statement.
Submit to examination under oath if requested to do so.

From the insurer’s perspective: The insurance company is required to live up to the contract’s promise, according to the provisions of the policy.

Because of these conditions, an insurance policy may be referred to as “conditional contract.”