Unit 3 - Introduction to Contracts

Question 1

What are the 4 ESSENTIAL elements of a contract?

Answer 1

CALC.

COMPETENT PARTIES… A party must be at least age 18, adjudged sane and sober.

AGREEMENT… This is the OFFER (request from customer/applicant files application) and ACCEPTANCE (insurer/company issues policy).

LAWFUL OBJECTIVE… The legal purpose and is consistent with public policy

CONSIDERATION… The exchange of value between parties to a contract. Consideration received by the insured is the insurer’s PROMISE TO PROVIDE INDEMNITY in the event of a loss, while the consideration received by the insurer is the INSURANCE PREMIUM.

Question 2

There are 5 types of SPECIAL FEATURES within an insurance contract, the most notable of which is…

Answer 2

the CONDITIONAL CONTRACT… This feature states that the contract may be voided if all policy conditions are not met by either the insured or insurer.

** NOTE: BOTH parties in a contract have duties, obligations, and responsibilities to adhere to.

Question 3

Define WARRANTIES.

Answer 3

A PROMISE FROM THE INSURED TO THE INSURER. These are WRITTEN STATEMENTS or conditions that MUST BE TRUE AT THE TIME OF LOSS or the policy is void.

** NOTE: If a warranty is breached, coverage will be suspended, and if the claim is filed, the claim will be denied.

Question 4

Define MATERIAL MISREPRESENTATION.

Answer 4

This is the INCORRECT information GIVEN by the prospect/insured by when corrected DOES affect coverage. This will VOID COVERAGE, is considered fraud, and could be prosecuted as a felony.

Question 5

Define CONCEALMENT.

Answer 5

This occurs when the insured deliberately WITHHOLDS MATERIAL INFORMATION from the insurer. This will void coverage, is considered fraud, and could be prosecuted as a felony.

Question 6

Define FRAUD.

Answer 6

This is the INTENTIONAL use of deceit calculated to gain a financial advantage. Material representation or concealment by the prospect/insured during the application process is considered fraud that could VOID the policy coverage and could be prosecuted as a felony.

Question 7

Define WAIVER.

Answer 7

This is the VOLUNTARY relinquishment of a known right by the INSURER. If the adjuster receives a call notifying of the occurrence of a claim and waives the right to receive a written notice, this would be considered a waiver.

Question 8

Define ESTOPPEL.

Answer 8

This is the INVOLUNTARY relinquishment of a known right by the INSURER. If the agent says it is covered, it is covered, even when this is not the insurer’s intent. In essence, the agent has stopped or prevented the insurance company from denying the claim.

Question 9

Define INDEMNITY.

Answer 9

It is a principle that serves as the basis of insurance contracts. Indemnity RESTORES THE INSURED TO THE PRE-LOSS ECONOMIC OR FINANCIAL CONDITION. The insured will be NO BETTER OR NO WORSE OFF THAN BEFORE THE LOSS OCCURRED> This principle FORBIDS THE INSURED FROM MAKING A PROFIT OR GAINING FROM A LOSS.

Question 10

Define LOSS.

Answer 10

The reduction in value or unintentional decline in value.

Question 11

Define INDIRECT LOSS.

Answer 11

The inability to use property as a result of a direct loss. The insurer only pays out indirect loss claims if the DIRECT LOSS that resulted in this INDIRECT LOSS is a covered PERIL.

Question 12

Define RISK.

Answer 12

The chance of loss or UNCERTAINTY OF LOSS. There are 2 types…

1) SPECULATIVE RISK… The chance of gain/loss (e.g. gambling, stock market… NOT INSURABLE).
2) PUR RISK… The chance of loss and is therefore INSURABLE.

Question 13

Define PERILS.

Answer 13

The actual CAUSES OF LOSS identified in the policy (e.g. fire, wind, hail, or collision with another car).

** NOTE: Not all perils are covered (depends on the policy).

Question 14

Define HAZARDS.

Answer 14

The conditions that create or increase the chance of loss or contribute to the loss. POLICIES DO NOT COVER HAZARDS.

Question 15

What are the 3 types of HAZARDS?

Answer 15

1) PHYSICAL hazards are visible hazards (e.g. ice on the sidewalk or bald tires) that arise from material, structural, or operational features of a risk.
2) MORAL hazards derive from INTENTIONAL, dishonest, or illegal actions of a person (e.g. arson).
3) MORALE hazards derive from NEGLIGENCE, carelessness or indifference. It can also refer to one who takes ADDITIONAL RISKS because he/she has insurance (e.g. leaving home unlocked, leaving keys in car with engine running).

Question 16

Define LAW OF LARGE NUMBERS.

Answer 16

A statistical theory that every insurance company uses to…

1) … predict future loss
2) … set cost of premiums (by predicting # of potential claims).

** NOTE: As the # of similar risk exposures increases, the accuracy of the insurance company’s loss projections will increase (i.e. the larger the sample size, the better the insurance company’s predictions).

Question 17

What are the 4 PARTS OF AN INSURANCE CONTRACT?

Answer 17

DICE…

1) DECLARATIONS… Defines the WHO, WHAT, WHERE, and HOW MUCH of the policy. The only portion of the policy that can be personalized/customized.
2) INSURING AGREEMENT… The insurance company’s promise to pay and outline of covered PERILS.
3) CONDITIONS… The duties, obligations, and responsibilities of BOTH the insured and insurer.
4) EXCLUSIONS… Exclused perils or property

Question 18

In addition to DICE, what are the other 2 components common to insurance contracts?

Answer 18

1) SUPPLEMENTARY PAYMENTS… Apply to ALL liability policies. They are paid to INSURED only and IN ADDITION to policy limits in the form of BAILED…

• • BONDS… Premiums paid with no limits (expect $250 limit on bail bonds).
• • AID… First aid expenses at the scene of an accident with no limit.
• • INTEREST… On judgments against insured with no limits.
• • LOSS OF EARNINGS… Up to $250 per day to assist in defending or investigating a claim.
• • EXPENSES… Incurred at request of insurer.
• • DEFENSE & INVESTIGATIONS COSTS… Paid with no limit

2) ENDORSEMENTS… These…

• • … are the only way to add, delete, or modify coverage.
• • … must be in writing
• • … added to the back to a policy
• • … are not used to cancel a policy

*** NOTE: Only underwriters have the authority to issue endorsements AND they normally require an additional premium.

Question 19

What are key components of insurance policy DECLARATIONS?

Answer 19

1) PROPERTY… Describes the property being covered and it’s location.
2) PARTIES… named insured or his/her legal representative, insurer, additional insured, payee or lienholder (e.g. mortgage)
3) PERIOD OF COVERAGE… how long protection or coverage remains in force and includes the effective & expiration dates. Most insurance policies commence and terminate at 12:01 AM.
4) POLICY LIMITS… the amount of protection, Made up of LIMIT OF LIABILITY and DEDUCTIBLES
5) PREMIUMS

Question 20

Define LIMIT OF LIABILITY.

Answer 20

The dollar amount stated on the insurance contract representing the MAXIMUM AMOUNT THAT CAN BE PAID FOR A COVERED LOSS.

** NOTE: AKA POLICY LIMIT or FACE AMOUNT

Question 21

What are key components of insurance policy’s INSURING AGREEMENT?

Answer 21

1) CAUSES OF LOSS FORM… Unique to specific policy. Defines the PERILS INSURED AGAINST

** NOTE: Refer to 2 addendum POST-IT picture titled…

BASIC FORM/”NAMED PERIL”

• • FLI… Fire, Lightning, Internal explosion + removal
• • WCSHAVVER (extended coverages)… Wind, Civil Commotion, Smoke, Hail, Aircraft, Vehicle NOT owned by insured, Volcanic Eruption, Explosion, Riot
• • • Vandalism & Malicious Mischief

BROAD FORM/”NAMED PERIL”… ALL have BASIC form PLUS…
** BIG AFFECT…
Burglary damage to building, Ice/sleet/snow, Glass coverage
Accidental discharge/overflow, Falling objects, Freezing plumbing, Electric Current, Collapse coverage, Tearing apart

Question 22

Define INSURED.

Answer 22

Who the insurer promises to protect in addition to the NAMED INSURED.

Question 23

Define INSURABLE INTEREST.

Answer 23

Proof that someone stands to lose financially if a loss occurs; in property and casualty insurance, MUST EXIST AT THE TIME OF THE LOSS (i.e. you must own it to collect on it).

** NOTE: “Future” interest (e.g. inheritance) is not covered. Also, insurable interest ends when property is sold.

Question 24

What are key components of insurance policy’s CONDITIONS?

Answer 24

1) SUBROGATION RIGHTS… the rights of the insurer, who has settled the insured’s loss, to recover from the at-fault third party.
2) RIGHT OF SALVAGE… the insurer may take possession of TOTAL PROPERTY only after a financial agreement is settled upon between the parties involved.

** TOTAL PROPERTY LOSS FORMULA… When SALVAGE VALUE + ESTIMATED REPAIR COST exceed the ACTUAL CASH VALUE (ACV) of the property, the property is deemed a TOTAL LOSS.

3) DUTY TO DEFEND… The adjuster is the first line of defense. The duty to defend begins when a suit is filed against an insured seeking damages for which the policy applies; the duty to settle or defend ends when the limit of liability has been exhausted.
4) PRO RATA LIABILITY CLAUSE (OTHER INSURANCE)… Used when MORE THAN ONE COMPANY PROVIDES COVERAGE ON THE SAME PROPERTY. The bigger policy pays proportionally more than the smaller policy.

Question 25

What are key components of insurance policy’s EXCLUSIONS?

Answer 25

** NOTE: Refer to addendum POST-IT picture titled SPECIAL/OPEN EXCLUSIONS…

GWOWPENNI

• • Government actions
• • War
• • Ordinance/Law
• • Water - Flood
• • Power Inter. OFF
• • Earth movement
• • Neglect
• • Nuclear event
• • Intentional damage