2.3 Contracts Flashcards
(14 cards)
Contracts:
Property and casualty insurance policies are contracts that share many features with other legal agreement. However, some of their characteristics are unique to insurance.
Elements of a legal contract
A contract is an agreement that is enforceable at law. if a contract is enforceable, the courts may require a party to perform its contractual obligations. The creation of a contract must include the following for basic elements:
ACCL
A- Agreement = offer, acceptance
C- Consideration
C-competent party
L- legal purpose
Agreement equals an offer and acceptance
Offer:
The applicant (customer) initiates the contract by filling out an insurance application and providing the initial premium payment. This clearly indicates the customer’s intent and willingness to enter a contractual relationship.
Example: An applicant filling out and submitting an insurance application along with the premium payment, effectively saying, “Accept my request for insurance coverage.”
Acceptance:
The insurer responds by accepting this offer without any conditions or changes.
Acceptance indicates the insurer has agreed to provide insurance coverage under the terms initially offered by the applicant.
The combination of these two actions creates an agreement.
Consideration
With contracts of insurance, both parties extend consideration.
the insurance companies promise to pay the amount specified in the contract as its consideration.
applicants premium payment and application are the applicants consideration.
Consideration is something of value usually money given by one party to a contract in return for the other parties. Valuable consideration, consideration can be money or anything else of value that is exchanged.
A promise can also be deemed as a consideration, as would be the case with contracts of insurance
Legal purpose
For an insurance contract to be legally enforceable, the involved parties (the applicant and the insurance company) must meet requirements of legal competence. This means the parties must:
- Be mentally sound (capable of understanding the contract terms).
Not be under the influence of substances or impairment (alcohol, drugs, etc.). - Be of legal age (usually at least 18 years old).
If either party fails to meet these conditions, the contract is considered legally unenforceable.
Legal purpose
For a contracting party to be able to enforce the terms of the contract, contract must be for a legal purpose. As long as it is legal, the purpose of the contract can be anything the parties choose
Other concepts related to insurance contracts
Sell, solicítate, negotiate
Sell
Simple meaning:
To give someone an insurance policy in exchange for money or something valuable on behalf of an insurance company.
Example:
You buy car insurance by paying a premium. The agent “sells” you the insurance.
- Solicit
Simple meaning:
Trying to sell insurance or encouraging someone to buy or apply for insurance from a specific insurance company.
Example:
An insurance agent asks if you’re interested in buying life insurance from a certain company—they are “soliciting” you. - Negotiate
Simple meaning:
Having a direct conversation, discussion, or giving advice to someone about the specific details, terms, or coverage of an insurance policy.
Example:
An agent discusses with you exactly what your policy covers, its benefits, and helps you choose the best option. They’re “negotiating.”
In short:
Sell = Actually making the transaction (money exchanged).
Solicit = Asking or persuading someone to buy.
Negotiate = Discussing the specifics or details of insurance coverage with a potential customer.
Indemnity (protect the insured from loses due to covered perils)
Meaning: The purpose of indemnity is to restore the insured financially to their original position before the loss occurred, not to allow them to profit from it.
The insurance contract should restore the insured to the financial position they were in before the loss. It should never create profit or gain from a loss event.
Representation
A statement believed to be true but not guaranteed.
Typically provided by an applicant during the insurance application process.
Used by insurers to assess risk and decide coverage.
Misrepresentation
A false or incorrect statement made by the applicant.
Can be grounds to void a contract if the misrepresentation is material (significant enough to influence the insurer’s decision).
Material Misrepresentation
A particularly serious falsehood significant enough to affect the insurance company’s decision on whether to issue the policy, coverage terms, or premium costs.
For example: an auto insurance applicant might say he has a clean driving record when, in fact, he has had three speeding tickets within the he past two years. This would be a material misrepresentation
Warranty (stronger then a representation contract)
A warranty is a stronger statement than a representation, as it’s a promise or guarantee that certain conditions will be true or actions will be taken.
If a warranty proves untrue, the insurance company can legally deny coverage or void the policy.
Example from your document: If a jewelry store guarantees a burglar alarm system will always operate, but the system fails at the time of a theft, the insurer can deny the claim.
Concealment
Concealment is intentionally hiding or deliberately withholding crucial facts during the insurance application process.
Example provided: An applicant for auto insurance deliberately failing to disclose having frequent seizures. Such concealed facts, if known, would influence the insurer’s decision to provide insurance, potentially leading the insurer to void the policy if discovered.
Certificate of Insurance (COI)
A certificate of insurance is a document is issued by an insurance company or broker. The COI verifies the existence of an insurance policy and summarizes the key aspect and conditions of the policy.
For example: a standard COI lists the policyholder’s name, the policy’s effective date, the type of coverage, policy limits and other important details of the policy
