Unit 2 -Contracts Flashcards
What are the 5 elements of a contract?
Elements of a Legal Contract
• Consideration
• Legal Purpose
• Offer
• Acceptance
• Competent Parties
Describe each element of a contract.
• Consideration = Money and statements made on application (premium paid)
Legal Purpose
• Risk transfer doesn’t violate the law.
-An agreement-
Offer (made by insured)
• Insured submits application and
hirst month premium to insurer
• Insurer accepts or insurer declines the risk
Counteroffer (made by insurer)
• Agrees to issue policy but with higher premium or restrictions/ exclusions
• Insured either accepts the conditions or withdraws their application.
Acceptance
•an offer must be unconditional and unqualified.
What are considered competent parties?
Competent
• Legal age (usually 18)
• Mentally sane
• Sober
Describe adhesion in insurance
Insurance policies are contracts of adhesion.
In insurance, the insurer writes the entire contract and the insured can either accept or reject it.
Adhesion
• Policy written by the insurance
company
Adhesion = glue
• the insurance company has greater power when drawing up the policy.
• If ambiguous, court will take the side of the insured
Explain aleatory
Insurance policies are aleatory contracts, meaning that the value received from the contract by each party is unequal. In insurance, the receipt of unequal value arises because the insurer’s performance under the contract depends upon an uncertain event–the occurrence of a loss which may not happen.
The insured may pay premiums for many years and never receive any money from the insurance company if a loss does not occur. On the other hand, the insured may pay only one relatively small premium and receive thousands of dollars in return if a covered loss occurs shortly after the policy goes into effect. For example, Tim pays an annual premium of $1,000 for his homeowners insurance. His
house burns down and is a total loss after the policy is in force for two vears. The insurer will be paving much more for the loss of the home than the $2,000 Tim has paid in premiums. Such unequal receipt of value is the dehning feature of an aleatory contract.
Aleatory
• Unequal value
• Pay small premium and have a large claim, or pay premiums for many years without a claim
Explain “utmost good faith”
Insurance is a contract of utmost good faith. This means that each party is entitled to a reasonable expectation that the other party will not try to conceal pertinent information or otherwise act deceptively.
Utmost Good Faith
• The insuredend insurance
company have a right to expect honesty from each other.
Are insurance policies Unilateral?
Insurance policies are unilateral, or one-sided, contracts because only one party is legally bound to perform under the contract. The insurance company makes a legal promise to pay for a covered claim.
The insured can stop paying premiums and abandon an insurance contract at any time. The insurer does not have this flexibility.
Are auto and homeowners policies personal?
Insurance policies, such as auto and homeowners insurance, are personal contracts. They are contracts
between the insurance company and the applicant or insured; in most cases, they are non-transterable
With a homeowners policy, for example, the insurer evaluates not only the condition of the property but also the insured as a risk. A different person or family could represent a different risk, so the contract does not allow a change of insureds.
Personal
• Contract between the insurance
combany and the insured
• Cannot be changed to someone else
Explain conditional.
Insurance policies are conditional contracts because they require certain conditions to be fulfilled in order for performance under the contract to be enforced. For example, the insured may pay a premium for the policy to be in force, or the contract may require certain documents to be submitted to prove that a loss has occurred. If certain conditions are not met, the contract may be voided and a claim may not be paid.
Conditional
Conditional - insured must pay the premium for coverage and file a claim if a loss occurs
What is idemnity?
Insurance policies are contracts of indemnity, meaning that the contract is intended to restore the
insured to the initial state he or she enjoved prior to the occurrence of a loss–no more, no less
The insured is not entitled to profit from payments made in excess of the amount of a loss. Insurance is a contract of indemnity which makes you whole, not rich. The payment puts you back to where you once were.
Indemnity
• Pay for the loss with no gain
• No more! No less!
What is representation?
A representation is a statement that the applicant believes to be true. Statements made on an application by the insured are representations.
Representation–believed to be true
• Statements on applications are considered representations.
What is misrepresentation?
A misrepresentation is a representation that is actually false. For example, suppose Adam signs an insurance application as Adam L. Jones, even though his birth certificate shows no middle name-he just adopted the “I” because he thinks it sounds good.
Adam represents himself as Adam L. Jones, but the “I” is a misrepresentation.
Misrepresentation–information given that is not true but would not affect the insurance company’s
decision
Explain material misrepresentation
Misrepresentations do not necessarily void insurance contracts. In order to void a contract, they must be material misrepresentations–that is, the false information must have been a determining (or material) factor in the insurer’s decision to accept the risk. If the insurer would have charged a higher premium or rejected the application had the correct facts been known, the information is material.
For example, Adam’s harmless adoption of middle initial does not affect his insurability, so it is not a material misrepresentation and would not void his policy. However, if Adam was applying for auto insurance and said he has never had his license suspended when, in fact, his license was suspended six months ago, it is a material misrepresentation which could void his coverage.
Material misrepresentation-
information given that is not true and DOES affect the insurer’s decision.
What is a warranty?
A warranty is a statement that is guaranteed to be true, and it may be relied on by the other party. If a warranty is not kept, there is a breach of warranty that voids the contract.
Applicants for insurance make warranties to an insurer. For example, a jewelry store owner makes a promise (warranty) to the insurer to have a burglar alarm system in the store. After a burglary, it is discovered there was no alarm system. Since the insured did not do what they said they were going to do in the contract, the insurer can deny the claim.
What is concealment?
Concealment is the failure to disclose known facts. An insurer may be able to void the insurance contract if they can prove that an applicant or insured intentionally concealed a material fact.
Concealment
• Failure to disclose
• Concealing or hiding information!
• If intentional, and the information is material (important), coverage could be voided
• If NOT intentional, coverage can NOT be voided.
Ex. John and Sherry Smith are applying for auto insurance for their entire family. ‘They know that their son, Joe, has had two speeding tickets in the last year, but do not mention it when the agent asks about their driving records. In this example, John and Sherry are concealing material information, and any coverage could be voided. If they did not know about the speeding tickets, the concealment would be unintentional and most likely the coverage could not be voided.
