Insurance Contract Fundamentals

Elements of a Contract

• A contract requires an agreement (offer and acceptance).
• Consideration (something of value exchanged) is essential.
• Parties must be competent to enter into an agreement.
• The purpose of the contract must be legal.

Insurable Interest

• Insurable interest is demonstrated through financial or economic loss.
• This interest must exist at the time of policy issuance.
• Love and affection alone are not enough proof.

Warranties and Representations

• A warranty is an absolute guarantee, critical to policy validity.
• A representation is a statement believed to be true, but not guaranteed.
• Inaccurate statements can void the contract.
• Material misrepresentations change the insurer's underwriting decision.

Unique Aspects of the Insurance Contract

• Insurance contracts are conditional; specific conditions must be met.
• They are unilateral; only one party (insurer) is obligated initially.
• Insurance contracts are contracts of adhesion, meaning they are prepared by one party (insurer) and the other (insured) has minimal say.
• Insurance contracts are aleatory, meaning the exchange of value (premium vs. payout) isn't equal. An example is: A $200 premium for a $100,000 home insurance payout if a covered peril strikes illustrates the unequal value.

Completing the Application

• Applications must be complete and accurate.
• Applications are the primary information source for underwriters.
• Required signatures are: proposed insured, policy owner, and agent.
• Incorrect information can be corrected with a new application or by correcting and initialing the changes.
• The initial premium is submitted with the application. Coverage starts after approval and policy issuance.
• The agent verifies the application's completeness and required signatures before sending it.

Sources of Information

• The Attending Physician's Report is used to gather accurate medical information.
• Medical examinations are sometimes required (higher amounts, additional concerns). Paramedical reports may also be requested.
• Insurers may check with the Medical Information Bureau (MIB) for comparisons.
• Medical exams are important for substantial coverage policies or if questions arise.
• The Fair Credit Reporting Act protects consumer information accuracy.
• Protected Health Information (PHI) disclosures require written authorization outside of treatment, payment, or health care operations (HIPAA).

Policy Delivery

• Agent delivery is preferred.
• A free-look period usually begins upon policy delivery.

Policy Explanation

• The agent is responsible for explaining benefits and provisions clearly.
• Changes or policy amendments should also be explained with insured signature acknowledgment.

Policy Replacement

• Agents must compare current and prospective policy benefits, limitations, and exclusions.
• A coverage gap between old and new policies should be avoided.
• Pre-existing conditions are a concern during policy replacement.
• Underwriting is important for replacement policies.

Chapter Recap

• The chapter covers insurance contract elements, information gathering, policy delivery, and policy explanation in conjunction with policy replacement.