Insurance Contracts

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Questions and Answers

What must be present for a contract to be legally valid and binding?

Offer and consideration

Legal purpose and competent parties

Legal purpose and offer acceptance

Offer, acceptance, consideration, legal purpose, and competent parties (correct)

What does it mean if an insurance contract is described as aleatory?

There is a potential for an unequal exchange of value. (correct)

It is a non-negotiable contract.

It always results in a loss for one party.

It involves a high risk of fraud.

Which statement best describes a voidable contract?

It has no legal effect from the beginning.

The first offer was never made.

One party may set it aside for a reason acceptable to a court. (correct)

Both parties must agree to terminate it.

What is required from insurance applicants during the application process?

Full, fair, and honest disclosure of the risk Signup and view all the answers

How does a valued contract differ from an indemnity contract?

A valued contract pays a stated sum regardless of the actual loss incurred. Signup and view all the answers

What happens to an offer when it is answered with a counter-offer?

The original offer is void. Signup and view all the answers

What defines an aleatory contract in insurance?

A contract with a potential for unequal exchange of value Signup and view all the answers

Which of the following best describes a contract of adhesion?

It is prepared by one party without negotiation. Signup and view all the answers

What is the meaning of rescission in the context of insurance contracts?

The contract is made null and void. Signup and view all the answers

What does 'utmost good faith' mean regarding insurance contracts?

Both parties must disclose all relevant facts truthfully. Signup and view all the answers

Who is considered competent to conduct insurance business?

A licensed or authorized insurer Signup and view all the answers

What is the significance of ambiguities or confusing language in a contract of adhesion?

They involve legal interpretations. Signup and view all the answers

Which term describes the insurer’s promise to pay benefits depending on the occurrence of an event?

Conditional Signup and view all the answers

What type of authority is based on the appearance or assumption of authority?

Apparent authority Signup and view all the answers

In insurance, what is a representation?

A statement considered true and accurate by the applicant. Signup and view all the answers

Which term refers to the voluntary giving up of a legal right?

Waiver Signup and view all the answers

What is the main purpose of tort law?

To compensate for proved harm Signup and view all the answers

What kind of negligence involves a reckless disregard for the need to act in a reasonable manner?

Gross negligence Signup and view all the answers

Study Notes

Insurance Contracts

Two parties to an insurance contract: the insured and the insurer
Four essential elements for a legally valid and binding contract:
- Offer and acceptance
- Consideration
- Legal purpose
- Competent parties

Types of Contracts

Aleatory contract: potential for unequal exchange of value or consideration for both parties
Valued contract: pays a stated sum regardless of the actual loss incurred
Indemnity contract: pays an amount equal to the loss
Contract of adhesion: contract prepared by one party with no negotiation between the applicant and the insurer

Elements of Insurance Contracts

Policy: written contract in which one party promises to indemnify another against loss
Insurable interest: financial interest a person must have to possess legally enforceable insurance coverage
Insurance applicants: required to make a full, fair, and honest disclosure of the risk to the agent and insurer
Policy rider/endorsement: legal attachment amending a policy

Contract Essentials

Offer and acceptance: essential elements of a contract
Consideration: applicant gives consideration in exchange for the insurer's promise to pay benefits
Legal purpose: contract must have a legal purpose to be enforceable
Competent parties: essential element for a legally valid and binding contract

Insurance Terminology

Warranty: statement made by the applicant that is guaranteed to be true in every respect
Representation: statement made by the applicant that they consider to be true and accurate
Concealment: failure or neglect to disclose a known material fact when applying for insurance
Agent: person who acts for another person or entity (principal) with regard to contractual arrangements
Express authority: authority a principal deliberately gives to its agent
Implied authority: unwritten authority assumed to have in order to transact the business of the principal
Apparent authority: appearance or assumption of authority based on the actions, words, or deeds of the principal

Negligence and Tort Law

Types of negligence:
- Simple negligence: failure to act in a reasonable or prudent manner
- Gross negligence: reckless disregard for the need to act in a reasonable manner
- Willful and wanton negligence: more severe than gross negligence
Tort law: provides full compensation for proved harm