Insurance Contracts

Question 1

Insurance policies are contracts that share many of the same attributes of all contracts:

Answer 1

But insurance policies also have unique characteristics that define their purpose and function.

Question 2

A contract is an agreement that is enforceable at law. The creation of a contract requires:

Answer 2

-an offer

-acceptance of the offer

-consideration by both parties

-competent parties

-legal purpose

Question 3

A contract involves:

Answer 3

Legally binding promises.

Question 4

Promisor vs. promisee:

Answer 4

-Promisor: The party making a promise.

-Promisee: The party to whom the promise is made.

Question 5

First Requirment: in the formation of a legal contract:

Answer 5

-Is the making of an offer by an offeror to an offeree.

-In the typical insurance sales transaction, the applicant (offeror) makes the offer to the insurance company (offeree) through a signed application plus a premium deposit.

Question 6

Key point:
Offer

Answer 6

-For an insurance offer to be complete, an application must be accompanied by a premium deposit.

-If an applicant submits an application without the first premium, the applicant is inviting the insurer to make an offer.

-If the insurer issues a policy, it then becomes the applicant’s responsibility to accept the offer by paying the first premium.

-Or, the applicant may reject the offer (and the policy).

Question 7

Second rquirment: Upon receipt of an application (offer), the insurer (offeree) has three options:

Answer 7

-accept the offer by issuing the policy as applied for.

-reject the offer by declining coverage.

-counteroffer by offering the applicant a sub-standard policy (with either a higher premium or reduced coverage. In the case of a counteroffer it would be up to the applicant to accept or decline the counteroffer.)

Question 8

Third requirement: of a valid contract is that there must be an:

Answer 8

-An exchange of consideration by each party.

-Consideration essentially means something of value given by one party to the other.

Question 9

With insurance contracts:

Answer 9

-The insurance company’s promise to pay benefits as specified in the contract is its consideration.
-The applicant’s initial premium payment is his or her consideration

Question 10

Key point:
Consideration

Answer 10

-With property and casualty insurance, the insured is not necessarily required to pay the insurer immediately.

-However, the insurance contract is still enforceable if there is a clearly implied promise by the applicant to pay the premium.

-If an applicant then fails to make the initial premium payment when it is due, the insurer can cancel the policy for nonpayment of premium.

Question 11

All parties to a contract must be deemed:

Answer 11

Legally competent.

Question 12

To be considered legally competent, a person must be:

Answer 12

-mentally sound.

-not under the influence of drugs or alcohol.

-of legal age.

Question 13

Contracts with minor children are usually not enforceable. However:

Answer 13

-Some states permit minors over a certain age (e.g., 15) to enter into a binding contract for auto, life, and health insurance.

Question 14

An insurance company’s competency is based on:

Answer 14

Its being admitted by the state to conduct business and its agents being licensed by the state.

Question 15

T/F

In the typical insurance sales transaction, the insurance company makes the initial offer to the insurance applicant.

Answer 15

-False.

-In the typical insurance transaction, the applicant is the offeror who makes an offer to the insurance company (the offeree) through a signed application plus the initial premium.

Question 16

To be legally enforceable, a contract must serve:

Answer 16

-A legal purpose.

-For example, a contract to insure an international shipment of stolen firearms would be unenforceable.

-Insurance is presumed to serve a legal purpose.

Question 17

Like all contracts, insurance policies have unique attributes that define their character. Insurance contracts are:

Answer 17

-contracts of adhesion

-aleatory

-personal

-unilateral

-conditional

Question 18

With most contracts, the parties:

Answer 18

Negotiate terms until they come to agreement.

Question 19

With an insurance contract the:

Answer 19

-Insurer determines the contract’s terms.

-It is a take-it-or-leave-it proposition.

-This is an example of a contract of adhesion.

Question 20

A contract of adhesion:

Answer 20

Is one that is drafted by one party (e.g., the insurer) which the other party (the policyholder) must accept (i.e., adhere to) as-is.

Question 21

key point:
Contract of Adheasion

Answer 21

-An insurance contract is a contract of adhesion written by the insurer.

-Because applicants for insurance have no input in drafting the contract’s language, courts have ruled that ambiguities in the contract must be interpreted in the policyholder’s favor.

Question 22

Most contracts are commutative, meaning:

Answer 22

-Most contracts are commutative, meaning each party expects to receive something equal in value to what he or she is giving.

-For example, if one party agrees to pay $1,000, he or she expects to receive something worth about $1,000 in return.

Question 23

Insurance contracts are leatory contracts that involve:

Answer 23

-An exchange of potentially unequal values.

-In an insurance contract, a policyholder may receive a benefit that is entirely out of proportion to the consideration (premium) given.

Question 24

For an aleatory contract to make sense:

Answer 24

-The possibility of receiving the disproportionately large benefit must depend on the occurrence of a chance event.

-It is the uncertainty of loss that permits the insurer to support an aleatory contract.

Question 25

Property and casualty insurance policies are:

Answer 25

-personal contracts between the insurer and the policyowner.

-An insurer agrees to financially protect the person who owns the building, not the covered building.

-In deciding whether to accept an application for property insurance, the insurer evaluates the applicant as well as the property to be covered.

Question 26

Key point:
Personal Contracts

Answer 26

-Because the contract between the insurer and the policyowner is personal, a property and casualty insurance policy cannot be transferred to a third party without the insurer’s consent.

Question 27

With most contracts, both parties make promises, and both can legally be held to them:

Answer 27

These contracts are bilateral. Each party can sue to make the other party keep their promise.

Question 28

Insurance contracts are unilateral. In a unilateral contract:

Answer 28

-Only one party makes an enforceable promise. With an insurance policy, only the insurer makes a promise that can be enforced.

-It promises to pay benefits if an insured loss occurs.

-Of course, policyholders must pay premiums to keep their policies in force, but there is no legally enforceable obligation to do so.

-They may stop paying premiums at will, though doing so will result in lapse of the policy.

Question 29

An insurance contract is conditional, which means the insurer’s promise to pay benefits is conditional on specified events occurring, including:

Answer 29

-making premium payments when due.

-reporting losses promptly.

-cooperating with the insurer in settling any loss.

Question 30

Insurance policies are also defined by legal concepts and interpretations that are:

Answer 30

Outside of the contract’s structure.

Question 31

An insurance contract is a contract of adhesion. Courts generally interpret:

Answer 31

Any ambiguities in the contract in a way that favors the policyholder, not the insurer.

Question 32

Even when a policy is clear and unambiguous, policyholders

Answer 32

Are sometimes surprised to find that the policy does not provide the coverage they expected.

-If a court finds that the policyholder had reasonable expectations of coverage, it may require an insurer to provide the coverage even if the policy wording says something different.

Question 33

Ex:
Reasonable expetations

Answer 33

-A minor change in coverage was made when a property insurance policy was renewed, but the insurer did not explain to this to the policyholder.

-A loss then occurs that would have been covered under the original policy but is not covered by its replacement.

-Under these circumstances, a court might agree that the insured had reasonable expectations that the renewal policy provided the same coverage as the policy it replaced and require the insurer to cover it.

Question 34

Under an indemnity contract, when a covered loss occurs, the benefit payable is related to the amount of the loss. The benefit cannot exceed the lesser of:

Answer 34

-the value of the loss.

-the maximum benefit limit specified in the policy.

Question 35

life insurance policies are valued contracts. The insurer agrees to:

Answer 35

-Pay a specified sum of money upon the death of the insured person.

-If a life insurance contract is issued for $1 million in coverage, that amount will be paid when the insured dies.

-The “value” of the insured is irrelevant.

Question 36

While most property and casualty insurance policies are contracts of indemnity, some use the agreed value approach, which is a form of valued contract. Valued coverage policies:

Answer 36

-Are typically used when it is hard to determine an item’s value, so the insurer and the insured agree on a value when insuring the item and before a loss occurs.

-The insurer promises to pay the dollar amount specified in the policy when covered property (e.g., a valuable work of art) is stolen or destroyed.

Question 37

Insurance can only work when both parties to the contract are completely honest with each other and disclose all relevant facts. That’s why insurance contracts are considered:

Answer 37

Contracts of uberrimae fidae or utmost good faith.

Question 38

Failure to disclose critical information usually gives the other party the right to void the contract.

With insurance:

Answer 38

-The applicant is expected to answer every question fully and honestly when submitting an application or filing a claim.

-The insurer is expected to disclose all relevant information about the policy being applied for.

Question 39

Representation:

Answer 39

-Is a statement made at the time the contract was formed. This statement persuades a party to enter into the contract. However, a representation does not become a part of the contract.

-That is, it is not guaranteed by the maker to be true. It is believed to be true to the best of the maker’s knowledge.

Question 40

Misrepresentation:

Answer 40

-A false statement of a material fact.

-A material fact is information that would affect an insurer’s underwriting or claim settlement decision.

-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 past two years. If discovered by the insurer at any time, a misrepresentation is grounds to void the contract.

Question 41

Concealment

Answer 41

-Is the deliberate withholding of material facts.

-If the concealed facts would have changed the insurer’s decision to offer the insurance policy, then the insurer has grounds to void the insurance contract if the failure to disclose information was intentional.

Question 42

Fraud:

Answer 42

-Is the deliberate act to deceive with the intent to gain something of value.

-Fraud is often an act of concealment or misrepresentation.

-An insurer may void a contract if, for example, an applicant has committed fraud in procuring the policy or a policyholder provides false or misleading information in connection with a loss.

Question 43

Ex:
Fraud

Answer 43

-A typical auto insurance policy may address fraud and misrepresentation with a provision that reads:

-“This policy is void from its inception if it was obtained or renewed through material misrepresentation, fraud or concealment of material fact. This means we will not be liable for any claims or damages that would otherwise be covered.”

Question 44

Warranty:

Answer 44

-A warranty guarantees that something is true and will remain true.

-stronger than a representation.

-For example, a jewelry store owner might warrant that a burglar alarm system will always be in operation. The insurer may deny paying a claim if the alarm system is not in operating condition when a burglary takes place.

Question 45

Waiver:

Answer 45

Occurs when a party to a contract gives up a right that it knows it holds, either through its actions or failure to enforce the right.

Question 46

Estoppel:

Answer 46

means that a party that waives its right to enforce a certain contract provision cannot subsequently enforce that right.

Question 47

Ex:
Waiver and Estoppel

Answer 47

-Property and casualty insurance contracts give insurers the right to cancel a policy if the premium is not paid by its renewal date.

-An insurer that routinely accepts late premium payments from a policyholder effectively waives that right with that policyholder.

-By waiving its right to cancel the policy for nonpayment of premiums by the renewal date, the insurer is estopped from exercising that right in the future if the policyholder pays a late premium.

Question 48

Rescission:

Answer 48

-Is the act of declaring that an insurance policy was never in effect.

-An insurance company that rescinds a policy states that it provides no coverage for a claim.

Question 49

Rescission usually occurs when:

Answer 49

-The insurance applicant knew of a potential claim and intentionally concealed it from the insurer.

-When the application for coverage or an important document attached to it contains information that is materially false, so that if the insurer knew the truth, the insurer would not agree to insure the risk.