General Law of Contracts: Insurance

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Questions and Answers

What is required for a contract to be legally valid?

Offer and acceptance

Consideration

Legal purpose

All of the above (correct)

What is the legal term for a written contract in which one party promises to indemnify another against loss from an unknown event?

Endorsement

Policy (correct)

Counter-offer

Agreement

Who initiates the offer of an insurance contract?

The insurance agent

The applicant by submitting the application with the initial premium (correct)

The state insurance commissioner

The insurer by providing a quote

What happens when an offer is answered by a counter-offer in a contract negotiation?

The initial offer is void Signup and view all the answers

Which of the following is NOT a requirement for a legally binding contract?

Premium amount Signup and view all the answers

In what situation is the applicant not presumed to be competent?

When the applicant is a minor Signup and view all the answers

What is a policy rider or endorsement?

An amendment to a policy Signup and view all the answers

Which element of a contract involves the value given in exchange for the promises sought?

Consideration Signup and view all the answers

Which type of contract pays a stated sum regardless of the actual loss incurred?

Valued contract Signup and view all the answers

What is the primary purpose of tort law?

To provide full compensation for proved harm Signup and view all the answers

What type of claims fall under contract law?

Claims for breach of agreement Signup and view all the answers

Which insurance policies are examples of indemnity contracts?

Accident, health, and property insurance policies Signup and view all the answers

Which principle is NOT a characteristic of an indemnity contract?

Pays a stated sum regardless of the loss incurred Signup and view all the answers

What is a contract in which there is an element of chance and potential for unequal exchange of value for both parties?

Aleatory contract Signup and view all the answers

Which of the following best describes a void contract?

A contract that is not legally binding and cannot be enforced by either party Signup and view all the answers

What differentiates a voidable contract from a void contract?

A voidable contract can be legally cancelled by one party, unlike a void contract which cannot be enforced Signup and view all the answers

Which type of contract is prepared by one party without negotiation and can only be modified by that party?

Adhesion contract Signup and view all the answers

Under the parol evidence rule, what is prohibited?

Changing or modifying a written contract using oral evidence Signup and view all the answers

In which type of contract does the insurer promise to pay benefits upon the occurrence of a specific event, without requiring the applicant to promise to pay premiums?

Unilateral contract Signup and view all the answers

Which type of contract insures a person and not the property itself?

Personal contract Signup and view all the answers

What happens if an insurer fails to enforce a provision of a contract?

It cannot later deny a claim based on a violation of that provision Signup and view all the answers

What condition must hold true for an insurer to fulfill its promise to pay benefits?

A specific event covered by the contract occurs Signup and view all the answers

Which term refers to the voluntary act of terminating an insurance contract?

Cancellation Signup and view all the answers

What is the contestability period in the context of insurance contracts?

A limited period during which the insurer can challenge the validity of a contract Signup and view all the answers

In insurance contracts, which principle requires both parties to disclose all material facts and relevant information?

Utmost good faith Signup and view all the answers

What does the term 'estoppel' refer to in insurance contracts?

The prevention of denying a claim due to an error made by the insurer Signup and view all the answers

Which of the following is NOT a characteristic of a unilateral contract?

Applicable to both parties making promises Signup and view all the answers

In which situation can a voidable contract be set aside?

When one party wishes to do so for a satisfactory reason Signup and view all the answers

Which of the following correctly defines a personal contract?

The person (owner) of the property is insured Signup and view all the answers

What does estoppel protect an insured against?

Errors made by an insurer or its producers Signup and view all the answers

In what capacity does an insurance agent act when they accept premiums on behalf of the insurer?

As a fiduciary Signup and view all the answers

What is the primary purpose of subrogation in insurance?

To pursue a third party responsible for an insurance loss Signup and view all the answers

Which type of insurance agent is NOT specifically mentioned as being offered E&O Insurance?

Health and Disability agents Signup and view all the answers

Which of the following is a typical loss covered under an E&O policy?

Not providing insurance coverage when required Signup and view all the answers

What is a common exclusion in an E&O Insurance policy?

Criminal acts Signup and view all the answers

What does the rule of 'Reasonable Expectations' reinforce?

Ambiguities in insurance contracts should favor the policyholder. Signup and view all the answers

Which of these would likely result in a covered loss under E&O policy?

Not handling a claim properly Signup and view all the answers

What does an E&O insurance policy typically exclude?

Intentionally harming others Signup and view all the answers

Which of the following best describes a warranty in an insurance policy?

A statement that is guaranteed to be true and could revoke the contract if untrue. Signup and view all the answers

What differentiates a representation from a warranty in an insurance policy?

Representations need to be true only to the extent that they are material to the risk. Signup and view all the answers

What could be grounds for voiding an insurance policy under concealment?

Failure to disclose a known material fact. Signup and view all the answers

When would an injured party have the right to rescind an insurance contract under concealment?

Whether or not the concealment is intentional or unintentional. Signup and view all the answers

Which characteristic is specific to a void contract?

An agreement without legal effect. Signup and view all the answers

In the context of insurance, what is a material misrepresentation?

A false statement that would influence the insurer's decision. Signup and view all the answers

How can an express warranty in an insurance policy be qualified?

By an implied warranty. Signup and view all the answers

Study Notes

General Law of Contracts

Contracts of insurance are binding legal agreements and are enforceable by law.
A "policy" is a written contract in which one party promises to indemnify another against loss that arises from an unknown event.
A policy rider or endorsement is a legal attachment amending a policy.

Elements of a Valid Contract

Offer and acceptance: a meeting of the minds, definite proposal, and acceptance of exact terms.
Consideration: value given in exchange for promises sought, such as premium and completed application.
Legal purpose: object of the contract and reason for entering into the agreement must be legal.
Competent parties: insurer must be licensed or authorized, and applicant is presumed competent unless proven otherwise.

Types of Contracts

Aleatory Contracts

Element of chance and potential for unequal exchange of value or consideration.

Adhesion Contracts

Prepared by one party (insurer) with no negotiation between applicant and insurer.
Contract can only be modified by the insurance company.

Unilateral Contracts

Only one party (insurer) makes an enforceable promise.
Insurer promises to pay benefits upon the occurrence of a specific event.

Personal Contracts

Owner (person) of the property is insured, not the property itself.

Conditional Contracts

Insurer's promise to pay benefits depends on the occurrence of an event covered by the contract.

Utmost Good Faith

Both parties must know all material facts and relevant information.
No attempt to conceal, disguise, or deceive.

Reasonable Expectations

Ambiguities in insurance contracts should be interpreted in favor of the policyholder.
Insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide.

Warranty

Statement made by the applicant that is guaranteed to be true in every respect.
Becomes part of the contract, and if found to be untrue, can be grounds for revoking the contract.

Representation

Statement made by the applicant that they consider to be true and accurate to the best of their belief.
Used by the insurer to evaluate whether or not to issue a policy.

Concealment

Failure or neglect by the applicant to disclose a known material fact.
If intentional, insurer may void the policy; if unintentional, injured party has the right to rescind the contract.

Void versus Voidable Contracts

Void Contract

Agreement without legal effect, missing one of the elements specified by law for a valid contract.
Cannot be enforced by either party.

Voidable Contract

Agreement that, for a reason satisfactory to the court, may be set aside by one of the parties in the contract.
Legally binding unless the party with the right to reject it wishes to do so.

Fraud

Can be a reason to void a contract, under some types of insurance contracts, insurer has a limited period to challenge the validity of a contract.

Parol Evidence Rule

When parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Waiver

Voluntarily relinquishing or abandoning a known right under an insurance contract.

Estoppel

Loss of defense, protects an insured if the insurer or its producers make an error, and later the insurer attempts to deny a claim.

Insurance Agent Errors and Omissions

Estoppel

Protects an insured if the insurer or its producers make an error, and later the insurer attempts to deny a claim.

Agent as a Fiduciary

A fiduciary is a person who holds a position of financial trust and confidence.

Subrogation

Right for an insurer to pursue a third party that caused an insurance loss to the insured.

Insurance Agent Errors and Omissions Professional Liability Insurance (E&O)

Professional liability insurance for insurance agents.

Tort Law

Provides full compensation for proved harm.

Valued or Indemnity

Valued Contract

Pays a stated sum regardless of the actual loss incurred.

Indemnity Contract

Pays an amount equal to the loss, aiming to make the insured "whole again".

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Description

Learn about the basics of contracts of insurance, including policies, riders, and endorsements. Understand how insurance agreements are enforced by law and the implications of adding or removing benefits.